Skyfire has been updated to version 2.0 for HTC Magic, Hero, Tatto, Legend, Desire or Nexus One, and now includes support for Flash. But this new medium is only used to watch videos online, as it is quite limited.
The system that uses Skyfire 2.0 for video playback with Flash, is to send that information to their servers that encode in real time, and this is sent back to the mobile phone. Something very similar to what Opera does with your browser.
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