Lyceum Insight Series
We are delighted to introduce the first in a series of short and thought provoking articles, covering topics ranging from technology to the latest developments in business strategy.
The first article in our series is by Victor Basta of Magister Advisors and explores the importance of ‘over-the-top’ technologies that define the battle for supremacy.
Over the top success
Technology breakthroughs often focus on new operating systems, devices, or major semiconductor developments. But one of the most significant, yet under-reported, trends is for technology companies to ‘leapfrog’ each other with ‘over-the-top’ (OTT) technologies. It is this trend that often defines the battle for supremacy in the technology industry.
Technology goes ‘over-the-top’ when deployed on top of existing hardware and software, coming a key step closer to the end user. Because this new technology then controls the user experience, and grabs mind-share, it renders the technologies below it far less valuable, and in time, turns them into mere commodities.
First over-the-top
Modern technology development has largely been driven by this desire, and has turned investors and entrepreneurs into billionaires in the process.
It all started with IBM and Microsoft.
When IBM shipped Microsoft’s DOS with each of its PCs, it effectively paid Microsoft to go over the top of IBM’s huge investment in computers. Over a brief period of time, Microsoft gained so much control over users that it turned IBM’s core technology into a near commodity.
We are still seeing the remnants of this today, with sub-$300 PCs and PC makers having near-zero profit margins.
After trying and failing to kill Windows with OS/2 (remember OS/2?) IBM realized its mistake, and tried to go over the top of Microsoft itself.
It spent over $4bn buying software firm Lotus because it wanted a small but crucial part of the business: Lotus Notes, with a revenue stream then of only $100-200m.
What was IBM’s reasoning? Lotus Notes would become the main user interface, sitting on top of Microsoft’s Windows operating system, and turning Windows into a commodity, just as Microsoft had done to IBM before.
It did not quite work out as planned, but for the potential of going over the top IBM was prepared to pay billions. It illustrated dramatically how valuable OTT can become.
Replacing Google and leapfrogging yourself
The same trend has played out in recent years. Even the prospect of successfully going over the top is enough to drive huge prices for nascent companies, and massive investment by tech majors.
Apple bought Siri – then a tiny development company – for a reported $200m, intending the mobile assistant app to rival search engines (meaning Google).
Users can find what they want on the Internet via Siri’s speech recognition software – instead of using the Google search box. In Apple’s ideal world, users access the web via Siri, not Google, which by definition sinks slowly in value. Even partial success could mean billions in value to Apple, and billions lost by Google, hence why Apple perseveres.
Interestingly Apple’s latest OTT attempted to go ‘over the top’ of…itself, replacing the iPhone with the Apple Watch as the main consumer interface. If Apple didn’t go over the top of itself, someone else would have. In fact, with so many wearable devices flooding the market, Apple had no choice but to push its own device in front of the iPhone, rather than let others capture OTT value.
WhatsApp and Skype, the next wave of OTT
Continuing the same theme, the value of going over the top is amply demonstrated by Facebook’s $22B purchase of WhatsApp, a classic OTT play. By the time of the deal, WhatsApp’s daily traffic had overtaken the entire combined global SMS industry, disrupting this hugely valuable operator revenue stream by literally going ‘over the top.’ With WhatsApp, Facebook could go around operators and mobile vendors instead of having to work entirely in through them. With mobile becoming the dominant source of Facebook engagement, WhatsApp became as important as Instagram in defending Facebook’s strategic position.
Amongst European companies, Skype’s emerging WiFi service is another case of going OTT, this time of mobile operators. When users click the Skype app to access wireless networks, they engage with Skype, not T-Mobile or BT. Skype’s value rises, and the value of billions invested in wireless capacity slowly reduces.
From the online world to the real world we have already seen the rise of apps like Uber take on traditional taxi and delivery services by connecting freelance drivers with the demand for services. The next iteration is likely to see the removal of drivers from the equation altogether with the likes of Tesla enabling the transportation of both people and goods in autonomous vehicles.
Other potential OTT technologies include eye tracking devices (controlling software through eye movement recognition, rather than a mouse and keyboard), and implants, taking wearable devices to their ultimate limit and implanting them in users.
Are these potential developments the ultimate over-the-top technologies?
If history is any guide to the future, almost certainly not.
Author: Victor Basta of Magister Advisors