OK, I like Mike Mearls and I like his work, I'm a big fan of Iron Heroes. But I gotta say he's not just off base, he's out in the bleachers.
The Marketplace is excellent for innovation and the more people participating the more innovation you get. You also get a lot of crap, but that's the way of things.
I can envision several scenarios, but none of them point to a lack of innovation
a) Biggus Geekus PDF publishes Llamaworld d20. It's a hit. Magnificent sales. Soon after, White Wolf paper publishes Llama: The Quadrepeding. Biggus doesn't get the White Wolf money, publicity, or groupies, but that's OK. The White Wolf book may be seen to be derivative (and thus lacking innovation), but the WW people are going to take their own view of Llamas and bring it to their game. Just like there are a million movies made that are buddy-cop movies, but that doesn't mean the next one can't make it's own stamp on the genre.
b) Biggus Geekus PDF publishes Llamaworld d20. It's a hit. Magnificent sales. WotC was thinking about paper publishing The Complete Llama but now they are afraid of losing sales due to the awesomeness of Llamaworld d20. But no PDF publisher outside of Malhavoc (and maybe not even them) is going to scare WotC from doing anything. No big time paper publisher is going to scare WotC from doing anything. No big time paper publisher is going to scare each other from doing antyhing. Shadowrun and Gurps Cyberpunk were published within, like, five minutes of each other. Shadowrun sold a lot better but that had more to do with the GURPS version being kinda bland and Shadowrun having magic elves with assult rifles, which was new at the time. There never has been a lack of innovation in the past from this scenario and I'm hard pressed to see how it could happen now or in the future.
c) Biggus Geekus PDF publishes Llamaworld d20. It sucks. Biggus goes bankrupt and spends the remainder of his days in an alley behind a Korean deli. Is there a loss of inovation as Steve Jackson Games panics and aborts GURPS Lamaworld. Maybe, but PDFs bomb all the time for all different reasons. Steve Jackson could invest the $10 and figure out why the PDF sucked and use that knowledge to improve his own product.
Is there something I'm missing? Because I can't even envision a scenario where a lack of innovation would occur, much less understand how this is a problem with the industry.