Why Disney Struck a Deal with OpenAI - DTNS Weekend

0:02Welcome to the DTNS Weekend Edition, where we try to dig a little deeper into one of the topics kicking around these days. And as we reported on Thursday, Disney has sunk a billion dollar investment into OpenAI and come to an agreement with OpenAI to license their technology for use with Disney environments to have Disney employees use it and likewise license some of Disney's intellectual property to open AI for use on their models. There are a lot of questions I'm sure you have, even if you've heard this story. So we thought we would investigate it a little more. And who better to do it than the author of Agents of Change, or Engines of Change?

0:54Engines of Change. I got agents on the mind, Andy. I understand. Engines of Change. Andy Beach, welcome back. Good to have you, man. Hey, Tom. I love that we have a Christmas gift from Disney, which is lots of content to talk about right here at the end of the year. Normally, it's quiet. It's funny. When I was talking to Justin Brabber Young about stuff, the Netflix Warner Brothers merger and all of that, he was like, yeah, in the politics world, everybody's just shutting down, phoning it in. I'm like, yeah, it must be nice. Not this year. Well, let's talk about this deal a little bit, because I think it's easy to misunderstand what's going on here.

1:37And I don't know that we have all the visibility into the deal that the people who are participating have. But from where you sit and what you know, because you have experience working inside of the industry previously, what do you make of this arrangement with Disney and OpenAI? So in many ways, like when I first read this, I thought classic Hollywood deal like that immediately jumped to mind. And because on paper and if you're looking at it from sort of purely an AI and tech side, you're thinking, oh, my God, did like open AI just landed a whale? They're doing an amazing job. The reality is this deal is so good for Disney that you can't help but just look at all the pieces.

2:20So I did a little digging and I read through as many things as I could find. And here's the biggest pieces. You called out the first one. There's a billion dollar investment that Disney is making into OpenAI. Keep in mind that this is technically a pre-IPO investment that they are making. So they are getting equity in the company in the form of about 1 % that they will own. They will also have warrants, meaning they have options that they can buy more equity later at a set price. So right now, that right there is a sweetheart deal because the reality is that if OpenAI were to go public next year, it would probably be in the trillion dollar range, which immediately means that that billion dollar investment has massive upside because it's immediately worth a lot more than Disney put in.

3:16Yeah, I think it's when we hear these dollar amounts, especially, you know, folks like you and I who don't make a billion dollars, maybe in our lifetime, it sounds like a lot, but it's less about the amount of money. They're getting a small port. It's not like Disney's buying open AI, but there's a tremendous upside there. This is not just free money that Disney's given away. Absolutely. I think if anything, what makes this a crazy sounding thing for all of us to wrap our heads around is the three to four extra zeros on the end of it. That is the part of this. And that's sort of almost maybe the AI nature of the speculation that goes on with this.

3:55Now, Disney is certainly not the only one making out. So you were quite right. There is a three-year license deal that Disney is going to allow up to 200 or more animated mask and creature characters across the portfolio. So Disney, Pixar, Marvel, Star Wars. And it's not just the characters themselves. It's also costumes, props, vehicles, and environments that all go into that. All of that can now, there is a license by OpenAI to say, yes, we are legally using this to create content inside of our large language models. The parts that are sort of cut out of it are, there will be no ability to do long form content with it.

4:43And there'll be no ability to use actor voices that are associated with it. So the pieces are almost, you could think of them as the characters and the elements around the characters that are being licensed to them. What I think is very interesting about this relationship, and to me, this is almost the most Disney-esque part of it, is that there are two additional pieces. They reserve the right to pull out any select fan-made Sora shorts and publish them on Disney Plus in some way. and anything that includes their, their characters and material, they still retain a permanent license to. In other words, anything you create inside of Sora, if it has a Disney property or character in it, congratulations, you just made a thing for free for Disney.

5:36Yeah. So if I, if I make a Iron Man, uh, dances with Darth Vader and it goes viral, that's Disney's. I might benefit from it i might not uh but disney gets to keep it and disney owns it absolutely there was a great case and and a couple of people have pointed back but there was a sort of almost a documentary on tiktok about uh star wars and disney that was created a while back and mark hamill was involved in as a voiceover in in part of it and they sort of it sort of came to disney too late for them to do anything to kill it so they didn't kill it they let it happen because they knew it would be good press, but they also didn't make any money off of it.

6:15This is them ensuring upfront anything that happens inside of, uh, Sora that involves their property. They own it right from the beginning. Yeah. Uh, and I, the first thing I thought of was that Bob Iger had talked about Disney plus incorporating, uh, generated video into Disney plus in the future. It was him absolutely alluding to this deal, uh, without being able to say more about it at that time, but this solves sort of a number of different problems in many ways for Disney. It kind of solves problems for both. It gives a big name property for OpenAI. And they also now, you said this and we'll just sort of call it out, but Disney now has, is now a customer of OpenAI in a major way.

6:58All their employees will have access to use a sort of Disney blessed version of ChatGPT internally for the work that they are doing across all different lines of business. But it also now gives Disney a way to point back and say, oh, yeah, no, we have an AI initiative. It's a partnership that we're doing with our investment in OpenAI. And here's the sandbox that we have blessed. They don't have to run the sandbox. They don't have to go build it, maintain it. They are getting all of that effectively for free in a way because it'll be on OpenAI to make sure that happens. but they get the right to take any of the output from it and use it in any way they choose, which is a fantastic deal for them.

7:40At no additional cost. Yeah. Yeah. Yeah. I think it's interesting that they are taking a toe, putting in the toe with saying it's creatures, it's masked characters, no faces. We're not going to get SAG-AFTRA on us about this because we have to license actors' faces because of this and that, and therefore no voices. I wonder how that plays out in practice when you want Iron Man and Darth Vader to have a conversation. Are they just going to sound like different versions of them? And how does OpenAI do that? Because you're going to want to have audio in there, or is it just going to be like, yeah, these characters can't talk.

8:24You can do anything else you want with them, but they can't say anything. I mean, we'll have to see where that goes. I want to believe they'll have to have some way for them to be voiced and it'll have to be a generic hero sounding voice. It's like the animation version where you're getting a different voice actor and you're like, that's kind of close, but it's not the same voice. The bigger part here is that OpenAI has been getting sued for alleged copyright infringements. They have also been striking deals with publishers to avoid getting sued for alleged copyright infringements. This is a big one.

9:03When you talk about copyright, you talk about Disney. The fact that the United States has such a long copyright period is because Disney spearheaded extending it for so long. So this, like you said earlier, is landing a whale. And interestingly, from Disney's point of view, it has struck a one year exclusive with OpenAI for this particular deal. And then the next day sent a cease and desist to Google saying you are infringing because you trained on our intellectual property without our permission. And Google now doesn't have the option of doing the same deal as OpenAI to resolve it. What did you make of that move?

9:49It was, again, it was almost part of the classic play here. It was sort of give with one hand, slap with the other. Like we saw this, this was not carrot and stick. It was like carrot and baseball bat in many ways. Because yeah, you're absolutely right. Like the very next day, there was a variety piece and a bunch of different areas where Disney lawyers, the mouse has amazing lawyers, accused Google of copyright infringement on a massive scale. That's the way that it was framed in everything. And they called Google a virtual vending machine for Disney content that included examples of Darth Vader, Frozen, and Lion King across a variety of properties being able to be represented inside of Gemini -trained models.

10:37So this is absolutely them sort of putting out there a strategy that says, we will absolutely make deals and we know how to work with AI. It comes at a cost. Here are the costs that are associated with it. And by the way, if you don't, here is the reaction you will get from our legal teams to shut you down. So it is completely negotiation in many ways on Disney's part to say, we now have this deal. It has upside for both us and OpenAI, and we will absolutely protect our IP across any other AI model that doesn't have an existing deal with us. Do you think that Disney just plays this out for a year until the exclusivity is gone and then tries to strike the same deal with Google and says, pray we don't alter it further?

11:31Or do you think they could come to an agreement before that? I am sure they will be talking during the year and during the exclusivity window because exclusivity only says you can't move forward and announce anything. It doesn't mean you can't be planning. And so they probably have an exact date and time that they know that the deal is open to further negotiations. And they can talk and make plans in any run up to that that they want. So I'm absolutely sure they will rent and repeat a version of this deal. What we'll be telling is how well the deal performs this year. In other words, who got the real upside out of this?

12:10Did OpenAI really get it? And there's nothing other than some cheaper deals on GPT licenses and some equity in the company that they get out of it? Or do they actually get meaningful content and other new ideas that they want to go pursue? And is that something that they want to bring into the mix with other properties? So it'll be driven by how well this performs. But you do have to suspect when, again, the numbers are sort of this big, that there's going to be a lot of effort made on both sides, on both parties' part, to make it a well-received deal at the end of the day. which leaves Disney the room to go rinse, repeat, and do this again.

12:57Yeah. So if you had to guess, in two years, Disney's not suing people for this. They've come to an agreement. So I think what - In most cases, maybe. I think what we are seeing and what we have seen sort of time and time again in the age of media, tech and AI is legal suits be used as a weapon as part of the overall negotiation of a deal. I will bring a lawsuit to bring a lot of splash to and a lot of eyeballs to the case. And then I will quietly negotiate on the back end with you so that I'm not suing you. We come to a partnership agreement at the end of the day. I feel like that is how this will play out.

13:41Maybe we see less of the legal haranguing up front in a year or two from now because we move straight into the partnership negotiations. But I think in these early days where we've seen AI properties be bad actors in many cases about how they train or at least not disclosing how they train across things, the content companies are absolutely using legality as a sort of early opening gambit in the chess game of negotiating a deal. And I'm right that they sent a cease and desist. They didn't file a lawsuit yet. Right. So yeah, that makes a difference. That's an important distinction of like, they're not dragging this through the courts with Google yet.

14:25They're holding that back. Yet maybe doing a lot of work in that sentence. Yeah, yeah, yeah. And as long as they see progress towards an eventual deal, they don't have to do that, but they've got that as a weapon. As long as there's friendly negotiations and agreements and like slow head nodding on both sides that they're going to come to terms when it's up, there's probably not a legal problem. If everybody shuts down, then things may change. Now, let's assume for the sake of argument that Google and Disney keep nodding their heads and this doesn't end up in the courts. There are plenty of lawsuits that are in the courts.

15:01And they are going to eventually, one of them, I don't know which one of them, is probably going to end up at the Supreme Court. Maybe several of them get packaged together, which happens sometimes. And we're going to get the Supreme Court of the U.S. weigh in on this. That doesn't affect other countries, but often what the U.S. Supreme Court decides, especially in intellectual property, tends to carry weight and inform other decisions in other jurisdictions. So that'll be a big deal on this question of whether training is a transformative use or not, or whether output can be seen as infringing or not.

15:37But it does seem like, I'm curious if you agree with me on this, that we are going to get that decision after a period in which most companies have figured out how to come to agreements that make the decision, not exactly moot, but make it where it's like, yeah, but we already have an agreement, so we don't need to invoke that, whatever that decision is. So this definitely doesn't, this is a case of sort of business, like being ahead of courts in many ways. There is no way that we have settled or solved copyright as a legal issue. That will still move through the courts and we will have conversations about whether training on copyright, copyright rights without permission is going to be legal or not.

16:25In practice, what we are seeing, though, is that deals will always move faster than legal and judges and courts. So if we get to a model where big IP owners, similar to Disney, know that a license is required for the valuable IP that they have, it will accelerate the conversations and it will basically be something that tech companies that are training models know has to be part of the plan from the beginning for what they are doing. So it slows, it gives them a, like a speed bump in the process because they know they have to do some monetary negotiations versus what they've done to date, which is we're just going to go use it and we'll wait for the courts to decide.

17:12Yeah. It reminds me of things like advertisers not saying Super Bowl, even though they might have a legal leg to stand on. It's not a trademark infringement to refer to the Super Bowl, but they don't want to get dragged into court to decide whether their use was infringing on a trademark or not. Or an older one, you used to never see liquor ads on TV. There was no law against it. It was just one of those things where people didn't want to run afoul and get dragged in front of the FCC or somebody else. So you just didn't do it. And yet there was never a law against it. It feels like we're headed there with this sort of thing where the industry is kind of figuring out, well, this is the best practice where the rights holders are cool as long as you do this and then we don't have to get dragged into court.

18:04Yeah, it's almost like we sort of know where the guardrail is now in many ways and what the number associated with that guardrail might look like, particularly if you're a company like a Disney. Yeah. Do you think we would ever get to a place where enough companies are doing this that there will always be a smaller company that tries to get around it causes all of the industry, both the technology companies and the intellectual property rights holders to come together and say, you know what, maybe it's regulatory capture, maybe it's not. But we would like this to be the law because that's what we're doing.

18:43And it would make it easier for us to go after the ne 'er-do-wells. I think so. It's probably too early to say for sure. But I do feel like the fact that this is the like part of why this was such news in the industry was not just the names that are associated. It is the first big deal on scale for intellectual property like this. We've seen deals about newspapers and their archives and Reddit and their but it was also So it was always text-based, more or less, for where it was going. Even the stock image deals that have been done didn't quite touch this because there is something special about the IP property of a studio.

19:22And this is the first one of those. So I feel like we will now, over the next year, we will see others exploring, at least in conversation publicly, what their similar IP property is worth and valued by the AI models and the AI model makers that are out there. So we will likely see more of these deals now that we have one as sort of a gold standard to go by. And it very well could be that by the time if enough of those deals exist or have been talked about, by the time legal catches up to it, they may become the framework of the judge just looking at and going, yeah, that's the right way this should be dealt with.

20:04It shouldn't be something a court has to decide. Yeah, yeah. Well, whatever way you look at it, the Wild West is over. We have the sheriffs arriving. They brought their checkbooks. Yeah, exactly. Andy, thank you so much for talking through this with us. It's extremely helpful. No, it's super fascinating. Oh, yeah. No, it really is. And I know you've worked inside of this business enough to kind of know this tends to be. You can't predict the future, but it tends to go this way. Or if it's going to go, it's going to go one of these two ways. I appreciate you taking the time to share that with us.

20:37Absolutely. If folks want to get that kind of insight directly, where should they go? So I have a sub stack where I write about the exactly things like this, sort of the convergence of media technology and AI that's called engines of change and it's engines of change.ai. Fantastic. Thank you, Andy. Thanks, Tom. And thank you everybody for supporting the show. Patreon.com slash DTNS. The reason we do these weekend episodes is we know you're interested in these topics. We hear you talking about them. We find people like Andy who can explain them. So thanks for keeping us in business. Talk to you soon.

21:14The DTNS family of podcasts. Helping each other understand. Diamond Club hopes you have enjoyed this program.