GET NETFLIXED

The success of Netflix is an excellent example of “creative destruction,” a term originated in the 1940s by economist Joseph Schumpeter, who described it as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new structure. This process of creative destruction is the essential fact about capitalism.” In fact, Netflix has been so disruptive to existing industries, that its impact is now being referred to by some as the “Netflix effect.”

Time Warner, despite beating revenue and earnings expectations for the quarter, closed down 9%. Viacom was down 7.5%; 21st Century Fox fell 7%; and CBS, 4.6%.

Compare that with Netflix, whose stock climbed 2% Wednesday to more than $123 a share. The company’s stock had more than doubled this year before it announced a seven-to-one stock split in June. Netflix stock was rising in Thursday trading.

The contrast with Netflix highlighted investor jitters about the viability of the traditional cable bundle in the face of heightened competition from on-demand video services like Netflix, Hulu and Amazon, which are investing heavily in high-quality programming.

MP: The ultimate winners of creative destruction and the “Netflix effect” are the consumers, who reap the benefits of intense, disruptive, cut-throat market competition in the form of a constantly-evolving, never-ending bonanza of innovative consumer products that get better, faster, and cheaper all the time. Thank you Netflix for the gale of market disruption you have brought to the media industry, and thank you to the yet-to-be-identified disruptive Firm X in the future that will eventually challenge Netflix with something that might be called the “Firm X effect.” We live in a much better world because of the “essential fact about capitalism” known as creative destruction, illustrated in recent years by the “Netflix effect.”

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