A Secure Method of Profit-Making Often Prevents Innovation

As baseball and swimming are two of my favorite summer diversions, I spent some poolside time last weekend browsing David Surdam's new book, Wins, Losses and Empty Seats: How Baseball Outlasted the Great Depression.  Surdam teaches economics at the University of Northern Iowa and, while his book is an interesting read about the business of baseball, it also conveys a useful message for the pharmaceutical industry.

Between 1929 and 1933, the early years of the Great Depression, baseball attendance declined by more than 33% and revenue fell by over 40%.  What did the game's leading owners and executives do to raise it out of the financial doldrums?  Surdam makes the point that they did next to nothing.  This was not due to any lack of ideas presented for their consideration.  To the contrary, many elements that are now standard parts of contemporary baseball -- night games, live broadcasts, interleague play and even the designated hitter -- were first suggested as moneymakers to owners and executives in New York, Philadelphia and other cities during those early Depression years.  Brewery baron Jacob Ruppert, who owned the Yankees, thought radio broadcasts would depress ticket sales; other owners rejected night games and interleague play as "bush league" stunts.

Baseball eventually adopted night games and live radio broadcasts, but it did so in the later 1930s, after  the economy had improved enough to drive a rise in attendance and revenues. The New Deal recovery efforts that reduced unemployment from 25% to 14% did more to save baseball than any ingenuity on the part of the owners.

So why was baseball reluctant to innovate -- and what does it matter to pharma?

The lesson for pharma is the old one of the buggy whip maker who continues perfecting his product after the advent of automobiles, only to wonder why business keeps declining.  In fact,  Depression-era baseball and pharma represent more extreme versions of buggy whips.  Both businesses established profitable grooves for themselves by creating barriers to competitive entry and by successfully meeting the demands of an indulgent public.  When the larger economic circumstances that permitted both industries to thrive started to change, the barriers they had erected dulled their capacity and willingness to innovate.  As baseball did during the early Depression, pharma today embraces outmoded business strategies, fears change and disdains novel ideas from other industries as minor league gimmicks.

Baseball was able to make a financial recovery from the early Depression years because its low price points allowed 15-cent tickets that attracted a public with few low-cost alternatives for entertainment. The movie industry recovered for the same reason. Branded pharmaceuticals, by contrast, have become bitingly expensive, and the public eagerly seeks alternatives in the form of generics, medications from other countries, the bargaining power of Medicare, or by simply refusing to fill prescriptions.

Just toughing out the hard times appears to be a poorer prospect for pharma today than it was for baseball during the Depression.  Pharma must eagerly pursue both scientific and business innovation and shun many timeworn practices because neither economic factors nor public attitudes will come to the rescue.

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