Tuesday, May 24, 2011

Time to innovate the business model in films and pharma

In a number of industries, large firms have created the concept of a "blockbuster".  The blockbuster is the big "make or break" product or service that creates such a bow-wave of profits that it sustains all the other development projects.  You are familiar with blockbusters if you take medications like Lipitor, which is one of the most profitable drugs ever created. Unfortunately for its manufacturer, Lipitor's patent will run out shortly, and there don't appear to be too many new blockbusters in the hopper. For years the pharmaceutical industry has focused on finding and protecting the next blockbuster, while placing less emphasis on drugs that solve problems but don't drive as much revenue.  This strategy, which drove up pharmaceutical stock prices in the 80s and 90s, is beginning to look a bit thin, as the costs and risks associated with developing a "blockbuster" and the increasing difficulty of identifying molecules or compounds that have the potential to be blockbusters is growing smaller day by day.

Hollywood does blockbusters as well.  They bet the farm on big, action-packed movies that release in the summer, and near Christmas.  A good gate from a big film means lots of revenue and profits.  Miss on your big blockbuster and your year is sunk. Increasingly, it is becoming more and more difficult for "big" blockbuster movies to make money, as the costs rise and consumers turn to other forms of entertainment.

Hollywood and the pharmaceutical industry have become servants to a creature they created.  At one time, new blockbuster drugs or big summer movies seemed easy, so rather than create a lot of moderately successful drugs or movies, many of the firms placed one or two big bets.  This made sense if the blockbuster was relatively easy to define and achieve, but now the investment in a new movie or a new drug is so large, and the risks so great, that few firms will do anything outside a proven formula.  However, those proven formulas are beginning to unravel.  What will Hollywood do if small, independent film producers can go STY - Straight to Youtube?  How will large pharmaceutical firms sustain themselves as it gets harder and harder to generate the big blockbuster drug?

Increasingly the old formulas don't seem to be working anymore, and we may see the need for a big shift in the business model of these industries and others that have grown lazy, and have become more and more reliant on a few blockbusters to cover up a lot of mistakes.  The "formulas" that they've followed have become ingrained as business models, and that's perhaps the first thing that needs to change, otherwise we're likely to have Rocky VIII or Star Wars prequels thrust upon us in years to come.

For films, the industry needs to realize that many people have in their homes projection systems and sound systems that rival what movie theaters can provide.  Further, as the Blair Witch Project and other "small" movies have demonstrated, many good, profitable movies can be made for far less cost and far fewer special effects than most Hollywood productions.  In fact, Hollywood is at risk of forgetting that movies are just a way of telling good stories. The studios risk losing the actors and the stories at the expense of computer animation.  Perhaps it's time to re-innovate the business model, and become an evaluator and distributor of excellent stories created by far more people, or return to finding stories and actors that matter.  Hollywood needs to recognize as well that in today's demanding attention culture, people have many other outlets for their attention.  When I was a kid, we saw Star Wars (the first one) at least a dozen times in the theaters.  Movies would remain in a theater for weeks.  Now, most films are fortunate to remain in a first run theater for days.  Again, Hollywood needs to adapt to that reality or change it.  All of these impacts demand changes to the business model.

Pharmaceutical firms are in worst shape, if that is possible.  For too long they've grown addicted to the blockbuster drug, the treatment not the cure, which is expensive, can be protected by a patent, and serves a large base of customers.  As the wealthy first world countries become more healthy and many of the large scale illnesses are addressed with medication, it becomes more and more difficult to find a blockbuster.  Yes, there are large scale illnesses to be treated, but often in countries where the patients can't afford medication.  And yes, there are still acute illnesses to treat in relatively healthy countries, but often the population suffering the illness is small.  Pharmaceutical firms are increasingly faced with a choice - continue to chase ever more elusive blockbusters or rework their business models to attack niches (as PA describes in the link above) or work to find less expensive ways of creating and testing drugs that serve the needs of larger but poorer populations.  Even if market realities don't begin to force this, government regulations and costs will force pharmaceutical firms to find new and less expensive ways to produce drugs, due to the rapidly rising costs of health care and the burden it places on government budgets, in the US, Europe and Japan.

There's nothing wrong with a focus on the "blockbuster" product or service from an innovation point of view, but when the pursuit of blockbusters defines and limits your business model and the kinds of products and services you can innovate, then it's time to innovate the business model.
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posted by Jeffrey Phillips at 5:57 AM


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