02/25/2011 06:11 pm ET Updated May 25, 2011

Sequel Mania: Is Sustaining Innovation Too Much of a Good Thing in Hollywood?

What's the greenest town in American? Hollywood, where recycling has literally become an art form.

The joke has more than a ring of truth given the film industry's dependence on sequels. In 2011, movie goers are likely to have plenty of déjà-vu moments when the latest installments of Mission: Impossible, Pirates of the Caribbean, Scream, Spy Kids and The Twilight Saga hit the screen. As if these weren't enough, Hollywood is also expected to release sequels to Final Destination, X-Men, Winnie-the-Pooh and Shrek this year, according to the Wall Street Journal.

Next year, it will be the same story as follow-ups to Batman, Monsters Inc., Transformers, G.I. Joe and James Bond are planned. What's with all the sequels? Money, of course. It's the real "green" that sparks Hollywood's imagination.

In case you haven't driven past a local cineplex lately, recycling characters, themes and plot lines has become big business in Hollywood. Though not always from a creative standpoint, sequels are no-brainers when it comes to economics. They are easier to produce, distribute and promote than films without a built-in fan base. Beyond the cinema, sequels are easier to turn into "franchises," which are platforms that companies leverage to create new money-making ventures. Consider the 2010 blockbuster film, Toy Story 3. According the film's producer, Walt Disney Co., the film raked in more than $1 billion at the box office worldwide. But outside theaters, Disney made far more money -- nearly $9 billion more -- from the sale of DVDs, toys, clothes and other ancillary items.

With all the lucrative sequels in the pipeline, you might think that another golden age of Hollywood is at hand. But this isn't the case. Last year, for example, individual box office ticket sales declined seven percent while DVD sales fell by more than 15 percent. Piracy, the Internet and cable TV are partly to blame for Hollywood's woes. But they don't fully explain why the industry isn't doing better, especially as it touches hundreds of millions of new customers in emerging markets for the first time.

Like other industries under siege, Hollywood is challenged to innovate. Its growing reliance on sequels is just one manifestation of it. Film distribution is another. Today, technology companies such as Apple and Netflix are redefining how people view movies, not film studios. This isn't the first time that Hollywood's traditional powers been upended by disruptive upstarts. Over the years, major studios have struggled to hold onto control of creative development, talent management and more. Their response to these challenges has been to redouble their efforts in sustaining innovation, such as leveraging previous hit products the way that consumer products companies, technology developers and car makers have.

This is why "franchises" have become so critical to major Hollywood studios. The Wall Street Journal notes, for example, that Disney Studios will spend "80 percent of its production budget this year on franchise films, compared with 40 percent in 2010." People who saw Toy Story 3 won't have an issue with such thinking. But what about those who paid good money to sit through Tron Legacy or The Lion King II? They might conclude otherwise.

The truth is, no organization can thrive on sustaining innovation alone -- no matter how lucrative it may be. Take Warner Bros., which broke the all-time industry worldwide box office record with a 2010 gross of $4.8 billion. Few companies have leveraged franchises as well as Warner Bros. in Hollywood. Its Batman and the Harry Potter franchises have spawned toys, games, DVDs and even attractions at theme parks. Building a franchise around these products was a stroke of genius. But even Warner Bros. and other studios sense the industry is becoming too dependent on sustaining innovation. While it continues to leverage its franchises, it also pushes the envelope in terms of creativity and disruptive movie making. This year, for example, Warner Bros.' Inception is one of the nominees for Best Picture at the 83rd Academy Awards ceremony. It's also nominated for awards for music, art design, cinematography, sound editing, sound mixing and visual effects.

While the film is not likely to win the award for best film, the movie is nonetheless one that will leave a lasting impact. Its groundbreaking use of computer-generated imagery (CGI), for example, will no doubt inspire other film makers to push the boundaries of creativity in their projects. Could this help Warner Brothers as it prepares the next installments of Superman, Sherlock Holmes and other projects?

It's elementary that it will.

While others struggle, some companies in Hollywood are demonstrating what it takes to stay ahead in today's rapidly changing world of entertainment. That's a healthy dose of sustaining innovation, and plenty of disruptive creativity, too. Together, they produce the stuff that dreams are made of.

Inder Sidhu is the Senior Vice President of Strategy & Planning for Worldwide Operations at Cisco, and the author of Doing Both: How Cisco Captures Today's Profits and Drives Tomorrow's Growth. Author proceeds from sales of Doing Both go to charity. Follow Inder on Twitter at @indersidhu.