I just posted (to our prerelease site) LICEcap 1.25 beta 3, which includes support for using transparency for smaller images. I had some fun debugging this (including some very stupid mistakes on my part that took about an entire day to debug, oops).

I also had some fun writing logic to decide what to do when a pixel could be encoded as transparent, but also could be well-represented by an indexed color. Iniitially I had it only use the indexed value if the previous pixel was indexed, but it ended up being quite a bit better to do track the occurence of transparent pixels and pixels of that index, and use the one that is more common. There is probably a better algorithm to use here, but that saw some good gains. For comparison, I ran 1.24 and 1.25 beta 3 at the same time for a stupid demo video. The 1.24 version was 2.5MB, the 1.25 beta 3 version was 1.5MB. WIN. It ultimately is highly dependent on the content, though, so I might look at trying some other things out...