The Pace of Innovation: What It's Doing to Our Economy

 |  Includes: AAPL, BBI, DIS, GE, NFLX, NWS
by: Leigh Drogen

I was about to leave the office yesterday afternoon when I got into a conversation about how Hulu is coming after Netfilx (NASDAQ:NFLX) now with their new $10 per month premium subscription service with an application for the iPhone and iPad. I’ve wanted to write this post for a while and have just never gotten around to it, so I said what the hell, I’ll stick around and get it off my mind now.

I’m going to use the movie rental business as an example here, just because it is so front and center in everyone’s minds right now, but really, what I’m about to talk about can be applied to many other industries.

The pace of innovation in our economy has increased so much, that I don’t believe many understand its impact. I sure as hell don’t fully understand the impact it's having, so I would really like to invite you all to chime in and give your thoughts as to what the repercussions are.

Let’s just take a look at the movie rental business. A few years ago Netflix brought a very disruptive business model to market, the mail order movie rental model. After having to drive down to the movie store for decades, you could now sign up online, put your movies in a que, and receive them in the mail. This was so disruptive that it put Blockbuster (BBI) out of business in only a few years. Think of all the jobs that were lost, the commercial retail space that was left vacant when that happened. It wasn’t overnight, but it was pretty damn quick.

Recently, within the last year or so, investors in Netflix began to worry that the company was in danger of falling behind the times, only a year after crushing Blockbuster. Why? Because everything is moving to online movie streaming. It’s not hard to imagine the day when we watch all of our favorite movies and televisions shows just by streaming them over the internet. Netflix instituted online streaming of some movies, but new releases were not part of that package, along with many popular titles.

It seemed to work, Netflix is growing like a weed and their numbers have never been better.

Technology has not yet caught up to people’s desire to stream all of their media through the interwebs. This is coming though. Yesterday Hulu (which is a joint venture between NBC Universal (NYSE:GE), Fox Entertainment (NASDAQ:NWS) and ABC (NYSE:DIS)) announced their $10 per month plan to stream many popular television shows to computers and Apple (NASDAQ:AAPL) devices. If you own an iPad and used to subscribe to Netflix just for the television shows, you’ll probably think about switching now. Movies can’t be too far off for Hulu.

Not everyone will want to stream their media, but the shift is happening, it will take time. But time these days isn’t what it used to be. I’m talking 1-2 years before the technology is in place and the prices come down enough to the point where not many people will be watching anything with those little disks anymore. When was the last time you bought a music CD? That’s where we’re headed.

Will Netflix shift with the market and provide this service, or will Hulu or some other company yet to be known come out of nowhere like Netflix did and crush them like Blockbuster? I have no clue, but if I were Netflix I would be moving in that direction, and quickly.

The pace at which companies are getting built and destroyed is amazing. If you’re not innovating you’re dying, there’s someone else there the next day to eat your carcase. I’m not sure our country is meant for this though, and this isn’t even taking into consideration what happens when a non US based company takes the jobs of Americans.

For a long time this country has been about allowing capital to work its magic. Companies are created and die in a natural cycle, capital flows to where it is best suited. But I feel that our society is not ready for this pace of innovation and death in our economy. Just look at our car industry and what our government did there. Or even the banking industry. These companies deserved to die, but were kept alive. We can say the same for most of our financial system. It probably would have been better, more painful in the short term, but better if the financial system had melted down and we started over. When you allow companies which should have died based on market principals to live, you place inefficiencies in the system. What will be the next industry to be kept alive, what company will be too important to let die?

I feel that much of the reason why we have not embarked on a new age in energy and transportation technology is because capital which would have poured into these industries went to our banking and automotive sectors, to keep them alive. I can feel the flow of capital is not right. Much of the issue I believe is that our political system and society as a whole just may not be able to handle the pace at which companies in the new world are created and destroyed. Workers are displaced at a high rate, it’s hard for the government to regulate in some instances, there are many problems. We need to figure this out, because I believe it’s becoming a huge drag on innovation. And the only way that we get out of the fiscal mess we’re in, is to grow through innovation.

My generation gets it, we will never have a pension and work for the same company our whole lives. At some point many of us will become entrepreneurs, even if on a small scale on the side. We will probably get fired several times, go to school several times for new skills, and work in different industries. But those before us don’t, they see their parents who worked hard, had a pension, and retired decently. I guess they are are a little sore that this economy has smacked them upside the face, that they won’t get what their parents had. Is our country ready for that?