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Prof. Schumpeter Comes to Hollywood

Posted: 02/19/09 03:32 PM ET

Dr. Joseph Schumpeter, the insightful mid 20th Century Harvard Economics and Political Science Professor, will never be the subject of a Hollywood-style biopic. But his ideas on innovation and the rise and fall of industries form the basis for the script the media business finds itself following today.

Put plainly, Schumpeter's imperative is: the new strikes at the heart of the old. And this is exactly what is happening to our industry as we write. Watching the Academy Awards this Sunday, we will be looking at this annual spectacle mindful of Schumpeter's principle and focusing on the bigger-than-life struggle that the media industry faces to maintain its competitive position beyond the glamour of the Red Carpet and the almost predictable excitement played out inside the Kodak Theater.

We all know that entrepreneurs build, develop and grow industries with new inventions and innovations. These create new products, new means of production, and new business structures. But there is, according to Schumpeter, a critical twist to the process: at some point innovation leads to "creative destruction." The original companies, products and innovations deteriorate and new ones are created once again, often out of the ashes of the old. Schumpeter declared this cycle not only inevitable, but necessary for the healthy growth and regeneration of economies.

The historically high cost of creating content and building distribution systems erected solid barriers to competition. These barriers gave entertainment companies the luxury of control over the supply of valuable goods and products to consumers, and over the availability of advertising inventory for companies wishing to promote their products.

But inventions and innovations like microprocessors, mass storage, networking, and media software catapulting into our world have put today's modern entertainment companies dead in the sights of Schumpeter's "creative destruction." The old mechanisms of control are fast becoming obsolete. Today, virtually anyone is capable of creating, producing, or distributing entertainment content. The entertainment industry is easy prey to new and disruptive technologies and ideas, making these times both daunting and exciting.

There is more than enough evidence that many of the models that have sustained the business for decades are on the verge of collapsing: declining DVD revenues; the scarcity of pay-television dollars; a proliferation of ad-skipping DVRS combined with an over abundance of TV and Web advertising inventory supply; the collapse of local TV station economics; and, 14 billion streams of Internet video during the month of December in the US alone.

While streaming TV shows on the likes of Hulu and YouTube and allowing electronic downloads of theatrical films appear to be reasonable responses to the challenges the media giants are facing, they are simply not radical enough to spark the regeneration that ultimately is necessary to create a highly successful business in this fast-moving media environment.

Soon it will not be enough to create content that can merely be viewed on multiple platforms and devices. Additionally, new forms of content need to be created which behave more like "open-source" software, which is not only used, but can be improved upon by its interaction with consumers and innovators, who may be one and the same. A different kind of creative product must be designed that has a DNA which favors mutation in the face of innovation.

By radically reconceptualizing the form and function of creative products beyond the historical anchors of moving pictures and television, unique new partnerships between content creators and entrepreneurs can be unleashed. Throwing off the shackles of the old and relying on the transformative power of creativity, these partnerships will bring new kinds of entertainment, new content-based services, and, most importantly, new business models to our industry.

Schumpeter's dictum challenges all of us in the entertainment business to define a future which is as innovative as the past, especially when new companies and industries are writing our script. As we have already seen from the new power players arraying against the traditional incumbents, companies that are more focused, better able to differentiate, and willing and able to partner are the ones most capable of delivering sought after new products, services, and business models. "The viewer" has morphed into "the user," and companies need to recognize and utilize this transformation.

To most people sitting inside the Academy Awards auditorium, this might sound like a horror movie. However, recognizing and hastening Schumpeter's "reality show" would likely provide a happy ending, and give our industry a real cause for celebration.