Start-up is a common term for new technology intensive companies. Recently the media describes digital start-ups ‘over the top’ or OTT, reflecting the realities of the digital world. This term describes how digital newcomers use incumbents as platforms to create disruption.
‘Over the top’ describes how digital start-ups position themselves relative to the rest of the world. They literally work ‘over the top’ of pre-existing often commercial and public infrastructure. An OTT company leases rather than buys or builds these capabilities from the marketplace. Adopting this position accelerates OTT time to market, giving them a ready for scale operation and concentrating capital on the high value aspects of their offering.
The graphic below compares over the top with incumbent companies. Both start with an identified customer need. Incumbents deliver value against that need using their operations as shown in the green chevrons below. These operations were the only way customers could have their needs met before the advent of digital technologies. Over the top companies create channels and experiences that deliver value by partially leveraging incumbent and other capabilities.
Digital density allows start-ups to climb over incumbents. That would be impossible without an increasing density of digital information, interactions and intermediaries. . The world is dense in that more customers, businesses, transactions and operations are now online than ever before, creating a digital market with the deep information that makes an OTT business model possible.
Standing on the shoulders of incumbents
Over the top companies create services where e-commerce predecessors created sales channels. Working over the top enables digital companies to build the essential elements of their business and lease the rest from incumbents, intermediaries or the public infrastructure. Consider Uber, an OTT service that allows individuals to order private cars and taxis from their mobile phone. Uber does not hire drivers, owns no limos, or provides dispatching services. Uber members simply request a car from driver members. The company could not exist without the investment others have made in transportation, payments and mobile communications.
Digital technology gives over the top companies the ability to create new connections between consumers and providers, earning a fee and capturing information in the process. These connections leverage consumer and supplier markets that already exist but are either uneconomical or underserved by incumbent players.
In the digital world, companies can compete and be customers at the same time. Netflix and its relationship with Amazon Cloud Services is a good example of how the over the top model works. In 2010, Netflix started leveraging Amazon’s EC2 infrastructure services turning infrastructure expenditure into an operational cost and into an access to scale strategy. Amazon, which has its own media streaming service, directly supports one of its major competitors. Amazon benefits from the revenues and traffic that further leverages its investment in cloud services. Why would Amazon do this? Well, in part it benefits either way, growing its own business as well as growing with Netflix and its other cloud customers.
New terms for new types of competition
Over the top describes a new form of competition and digital disruption. Unlike the channel disintermediation of e-commerce web stores of a decade ago, these digital competitors provide services that compete with incumbents by selectively co-opting capabilities. That combination gives over the top entrants a faster start and path to scale. The result is different forms of big bang disruption described by Larry Downes and Paul Nunes and in their HBR article and forthcoming book.
Executives must recognize both their vulnerability to over the top competition as well as the value in formulating a strategic response. Taking an outside-in view of the customer value chain is a start. Finding the tasks that can be easily carved out to create new connections, glean information and use it to attract others represents areas for over the top disruption. Formulating a competitive response to these situations requires a new way of looking at competition and will be the subject of a future blog post.