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.
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.
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.
Apple Watch and WhatsApp, 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.
The latest OTT example is in our view the Apple Watch. In this case interestingly enough Apple is going ‘over the top’ of…itself, replacing the iPhone with the Watch as the main consumer interface (interestingly, early evidence is Watch users spend far less time engaged on their iPhones). 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.
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.
Skype, incidentally, is owned by Microsoft.
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.
A version of this post appeared previously on the BBC News website here
Posted by Victor Basta @MaExits