SVOD – Combinatorial Design and Market Fragmentation


The media industry has been disrupted by the over-the-top (OTT) services provided through the internet. These streaming-video-on-demand (SVOD) services caught the established telecommunications industry by surprise and quickly transformed the market. Companies like Netflix, however, are firmly situated within a wider sociotechnical architecture. Simplistically attributing the disruption to the internet fails to explain how SVOD is both shaped and limited by the design principles responsible for its existence.  Netflix did not “invent” SVOD, but evolved into the company it is today by monitoring changes and developments in technology and modifying its distribution strategy. Brian Arthur describes how technologies “inherit parts from the technologies that proceeded them” (Arthur 2009, 19), which can be seen in the modular design of the service. Bruno Latour also argues in “Technology is Society Made Durable” that a historical review of technology development should be undertaken to understand innovation as well as a comparison of “the different versions given by successive informants of the ‘same’ syntagm” (Latour 2009, 127). Looking at the combinatorial design features present in SVOD platforms as well as a historical review of their evolution, using Netflix as a case study, will help understand what factors can both encourage and challenge industry growth.

Figure 1: Netflix & Co. Surpass DVD & Blue-ray Sales (Richter 2017)

Combinatorial design

In its most basic definition, SVOD platforms are simply television and motion pictures over the internet. A slightly longer and more accurate description might be preexisting media forms such as television and movies designed for viewing on a metamedium device, such as a computer, smartphone, tablet or smart tv device and distributed digitally through the internet. Each of these components, have complex design histories and exist within an established set of practices. When Netflix launched its streaming service in 2007, it did not need to invent any of these components and indeed some of them were not yet invented (“About Netflix” n.d.). However, in bringing different technologies and industries together, Netflix was also ascribing to their design principles and dependencies.

According to a 2016 survey of customers who pay for digital media, 55% of users prefer Netflix over its OTT competitors (PayPal 2016). The euphemism, “Netflix and chill,” has entered the zeitgeist, ensuring it’s cultural cache (Rickett 2015). However the market is becoming increasingly fragmented. Between 2014 and 2016, the number of new SVOD platforms launched more than doubled (L.E.K. and SNL Kagan 2017). The rapid rise in competitors is partially explained by the comparative ease with which the Netflix technologies can be replicated. Netflix’s current business strategy, which is geared toward content development, is an attempt to secure their current market dominance. To that end, Netflix plans to spend $8 billion on content in 2017 (Koblin 2017). While there are some technological investments Netflix is making to ensure it is still the state-of-the art in streaming, such as short-term downloads for offline viewing and investment in server technologies to help ISPs manage Netflix traffic, these investments may not be enough to differentiate the service from competitors in the future (Casella et. al. 2017). Having the highest quality technology has never been a guarantee of success in the media industry. Quality, as Jonathan Sterne points out in his book, MP3: The Meaning of a Format, does not necessary mean that a audio or visual file approaches verisimilitude: “Aesthetic pleasure, attention, contemplation, immersion, and high definition—these terms have no necessary relationship to one another” (5). Moreover, less reliable services that offer greater efficiencies, affordances and at a lower cost have consistently reshaped the media industry. Netflix is particularly vulnerable since so many of the core components of it’s service can be approximated or found in other places. In order to fully understand the current mediascape, it’s useful to look at the early history of Netflix and how it combined existing properties with the technology of the late 1990s.

The original Netflix business model

In 2002, when Netflix filed its initial public offering (IPO), its business model was more in line with a mail-order movie rental business than the media company it is today.

We are the largest online entertainment subscription service in the United States providing more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. Our standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges for $19.95 per month. Subscribers can view as many titles as they want in a month. Subscribers select titles at our Web site ( aided by our proprietary CineMatch technology, receive them on DVD by first-class mail and return them to us at their convenience using our prepaid mailers. Once a title has been returned, we mail the next available title in a subscriber’s queue (Netflix, Inc. Prospectus, May 22, 2002, 41).”

The only piece of proprietory technology cited in 2002 was CineMatch. Everything else pre-existed Netflix. A full history of each of the technologies and industries Netflix combined would be impossible within the scope of a paper, however below is a brief review of the major components of early Netflix and what conventions they brought with them.

Motion Pictures

The motion picture rose to prominence as a cultural art form in the early 20th century. Originally produced on film and projected onto screens, motion pictures evolved to incorporate color and sound. Conventions such as length, style, and production models also developed to form an industry and a community of practice. The standardized of technical aspects such as frame size, frame rate, and sound levels allowed for an efficient distribution model. Further, a  customer base was created of people who enjoyed narrative forms produced in this style (Library of Congress, Motion Picture, Broadcasting, and Recorded Sound Division n.d.). Movie lovers would soon have new ways of watching filmed narrative with the invention of different video, televised, and digital formats.

DVDs and the Home video market

In 2002, Netflix described the home video market as including “home video rental and retail outlets, cable and satellite television, pay-per-view, video-on-demand, or VOD, and broadcast television” (Netflix, Inc. Prospectus, May 22, 2002, 42). Film, in its original incarnation had been reformatted multiple times since celuloid. Broadcast television was designed to transmit image in sound through radio waves. Transmission could also happen over cable wires, operated by cable television service providers. Film had also been formatted via VHS tape which led to the first boom in video rental organizations. By 1998, digitization had arrived for movies and information was encoded onto DVDs. DVDs were more cost efficient and had a number of affordances unavailable in the VHS format: light weight, smaller size, higher image quality and the elimination of the rewind.  The small size was especially important to Netflix whose initial business model relied on the US Postal Service for delivery (Netflix, Inc. Prospectus, May 22, 2002, 44). 

Word Wide Web

The Netflix business model was also dependent on having a large indexed website where it could keep a constantly updated list of movies available for rental. The Web, “A loose confederation of Internet servers that support documents formatted in a language called HTML (Hypertext Markup Language) that can include links to other servers, documents, graphics, audio, and video,” was developed by Tim Berners-Lee while he was working at CERN (White 2007, 313). The decision by Berners-Lee and CERN to put this technology into the public domain made it possible for people from any personal computer with an internet connect to peruse Netflix’s catalog of content.

Online payment processing

Simultaneous to the digitization of film, business was moving onto the internet, which created a market for point of sale (PoS) software. PoS technology was introduced by VeriFone in the 1980s and the reduction in time and cost of payment acceptance led to a wide role out of PoS terminals and adoption by the major banks (Byrne and Hanson 2014, 38). With the advent of the internet, third party processors designed, purchased, and incorporated encryption technology to ensure the security of online transactions. 


E-commerce, “Commercial activity conducted via electronic media, esp. on the Internet; the sector of the economy engaged in such activity,” was a term first coined by the San Jose Mercury News in 1993 (“E-Commerce, N.” 1993). The internet allowed for business to be conducted without traditional retail offices, in much the same way the Sears catalog had allowed people to order from their extensive inventory without having to visit a brick-and-mortar location. Many companies took advantage of the premise in the 1990s, and most were unsuccessful. 


The CineMatch technology was the only proprietary technology owned by Netflix at the time of its IPO. Netflix described CineMatch as enabling Netflix “ to create a customized store for each subscriber and to generate personalized recommendations which effectively merchandize our comprehensive library of titles” (Netflix, Inc. Prospectus, May 22, 2002, 1). Beyond the marketing language, this technology was simply software that allowed users to create an account – which stored users personal information – and an algorithm to statistically determine what titles a customer was more likely to be interested in based on the preference information customers voluntarily supplied to Netflix as well as their rental history. This information was pattern matched against an internal taxonomy of content titles. Algorithms to monitor user preferences were not unique to Netflix, and were widely used at that time by companies such as Amazon.

The Rise of Video Streaming

The early success of the Netflix’s subscription DvD rental business was proof of concept that the internet had a place in the home video market. Other companies, such as BlockBuster, belatedly tried to follow Netflix’s lead, but by then this model was already quickly becoming outdated in the same way that the DVD had only just replaced the VHS.


The transition to streaming was far from inevitable. Digitization was pursing various formats in the early twenty-first century including the more traditional object based formats of HD DVD and Blu-ray, as well as digital downloads. These formats afforded higher quality picture and uninterrupted play.  However, for a low monthly rate, streaming offered customers the opportunity to access an extensive (though still limited) catalog of movies and tv shows for much less than the cost of renting or purchasing the same amount of content. Digital distribution also afforded instant access without having to travel to a brick and mortar location, or having to wait a few business days for the DvD to arrive via the post. Customers were willing to accept trade-offs in quality for these affordances. And the best news for Netflix, the infrastructure to put this new distribution platform in place was already accessible in most homes. Netflix users already had access to personal computers as well as accounts, so it was simple to convert existing customers while also lowering the barriers to entry for new subscribers.

Content Delivery Networks

The transition to viewing content on pixelated computer screens in addition to television sets had been accomplished before Netflix released its streaming service in 2007. Companies such as RealNetworks, Microsoft and Adobe had all rolled out different ways to stream media over the internet. However, early streaming protocols had to contend with constraints such as “bandwidth, scalability and reach” (Zambelli 2013). Streaming video was assisted by the widespread adoption of HTTP as well as the use of Content Delivery Networks (CDN), or “professionally managed and geographically distributed” servers which increased reliability.” CDNs were “engineered to provide a high quality of service, often governed by service-level agreements (SLAs) between the CDN provider and the content owners whose content is being distributed by the CDN” (Anjum et al. 2017).

HTTP-based Adaptive Streaming

HTTP and CDNS helped combat scalability, and in 2007, a company called Move Networks “used the dominant HTTP protocol to deliver media in small file chunks while utilising the player application to monitor download speeds and request chunks of varying quality,” which helped solve the bandwidth problem (Zambelli 2013). A version of this technology, called “adaptive streaming,” was what was rolled out by Netflix in their initial streaming subscription-as-a-service (SaaS) model. Adaptive streaming was further refined through standardization procedures which led to the roll out of Dynamic Adaptive Streaming over HTTP in 2012, also known as MPEG-DASH (Ibid. 2013). Netflix was a champion of digital format standardization because it made it much simpler to lease and distribute new content (McEntee 2012).

Hardware Devices

Rapid adoption in the consumer electronics space of a variety of personal computing devices was also foundational in the success of the Netflix model. Screen technology continued to improve at a rapid pace and by 2009 devices that could support steaming included:

“PCs, Macs, Internet connected Blu-ray players, such as those manufactured by LG Electronics and Samsung, set-top boxes, such as TiVo and the Netflix Player by Roku, game consoles, such as Microsoft’s Xbox 360, and planned for later this year, TVs from Vizio and LG Electronics” (Netflix, Inc. Annual Report, February 25, 2009, 1)

SmartPhones would soon be added to this list. The scalability of the Netflix platform to multiple devices was another affordance, home video was no longer tied to the television set but could be taken on the move.


Figure 2: “Number of mobile phone video viewers in the United States from 2014 to 2020 (“Mobile Video in the United States” 2017)

How Netflix Works Today

(Video 1: Bisla 2012)

Scalable and Extensible

Today, Netflix has its own proprietary CDN called OpenConnect and is capable of handling a variety of source formats such as Interoperable Master Format (IMF) which relies on an “an emerging [Society of Motion Picture and Television Engineers] (SMPTE) specification governing file formats and metadata for digital media archiving and B2B exchange” as well as ProRes, DPX, and MPEG (McEntee 2014). Netflix can also support “a number of codec profiles: VC1, H.264/AVC Baseline, H.264/AVC Main and HEVC” (Aaron and Ronca 2015).

Digital Supply Chain

Netflix operates within a wider media environment. As a distributor, Netflix accesses a variety of videos, in a variety of versions, and has to use the agreed upon digital rights management software (DRM) so that the content plays on their customers devices. It was designed to be scalable and accommodate content providers. However, Netflix has continued to promote standardized formats to cut down on “versionitis” (McEntee 2012).

Figure 3: “How Streaming Playback Works” (Casella et. al. 2017)

Cloud Computing

In addition, Amazon Web Services provides the cloud infrastructure that has allowed Netflix to rapidly expand its footprint globally.

“Amazon Web Services (“AWS”) provides a distributed computing infrastructure platform for business operations, or what is commonly referred to as a “cloud” computing service. We have architected our software and computer systems so as to utilize data processing, storage capabilities and other services provided by AWS. Currently, we run the vast majority of our computing on AWS. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business would be adversely impacted. While the retail side of Amazon competes with us, we do not believe that Amazon will use the AWS operation in such a manner as to gain competitive advantage against our service” (Netflix, Inc. Annual Report, February 27, 2017, 7).

All this to say, Netflix is firmly embedded within a complex sociotechnical system of evolving standards, infrastructure, and devices, as well as the content producers. The system is so interlinked that even though Amazon Video is a direct competitor of Netflix, they have committed to a business relationship with their cloud infrastructure division in a way that would be very difficult for them to disentangle.


The evolution of Netflix was far from predetermined. Commitment to the DVD or Blu-ray format s would have steered the company in a very different direction. The aligning of streaming with a SaaS business model was also not predetermined. The second SVoD platform on the market was Hulu whose roots were more firmly entrenched in television as opposed to home video entertainment and began with advertisement supported model. Rapid changes in the device market also helped with the rapid adoption.  Latour, in describing how Kodak came to invent a new product for a new market said, we were”never faced with two repertoires – infrastructure and super- structure, techniques and economics, function and style – but with shifting assemblies of associations and substitutions” (Latour 2009, 113). Netflix did much the same in creating the SVOD product and market.

In paving a new path, many aspects of the sociotechnical environment within which Netflix operates became more established. John Law describes material semiotics as “realities are counterposed, and those realities are heterogeneous, combining and enacting the natural, the social, and the political” (Law 2009, 154). Netflix was an outcome of the juxtapositioning of new technologies and old media practices, creating something that was beholden to both the rules of the internet, such as HTTP, IP, bandwidth, and legal concerns around internet service regulation (net neutrality), as well as,  old media practices such as licensing agreements, the formats of videos for distribution, as well as the length style and other conventions of narrative video content. In interacting with each other, a new way of watching video was created which effected both technology and media.

Today, standards in video formats are more widely adopted, large scale cloud computing and CDNs make it easier to reliably send videos, and smartphone use has only increased. All of these changes have lowered the barriers to entry for Netflix’s competitors. Competition has resulted in increases in licensing fees for existing films and television. To combat this, Netflix and other platforms have begun investing in production in order to own content outright and avoid recurring licensing fees. This has led to increased competition on the production side which has encouraged increased budgets to entice brand-name directors and stars. Consumers have been inundated with new shows, often referred to as “Peak TV,” the idea that there are too many new shows (McHenry 2016). However, even deep pockets may not be able to keep titles on platforms. Disney is expecting to launch a SVOD platform and HBO, CBS and FX have already created platforms for their content (Koblin 2017). .


The current state of the market is extremely fractured and becoming more so each year.  SVOD’s sociotechnical dependencies are incentivized to encourage a competitive media landscape leading SVOD companies to invest more money each year in content production so as to have a competitive advantage. However, the market for scripted media is quickly becoming oversaturated. Maintaining current levels of growth will be impossible organically. The media industry is set for more changes before things stabilize. Possible future solutions include:

  1. SVOD consolidation through mergers and acquisitions
  2. A return to the monopolistic environment of the old studio system where content production and distribution were owned by the same large companies
  3. Telecommunication companies leveraging their infrastructure to negotiate with the distribution channels operating over their networks. Negotiations with these SVOD platforms could result in the bundling of access to multiple SVOD platforms, reproducing cable packages.

There is nothing predetermined about the current way we are able to access content. Changes in legislation, content, technology and the culture of media consumption have the possibility to dramatically shift the media industry again.


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