Did Disney Win or Lose the OpenAI Deal?

0:04We have a new player in artificial intelligence and it's Disney. Motley Fool Money starts now.

0:25Everybody needs money. That's why they call it money. The best things in life are free. But you can give them to the birds and bees. From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. I am Travis Hoyam, joined today by Dan Kaplinger and John Quast. Guys, we have to start with maybe the most fun artificial intelligence story of the year. We don't have to debate, you know, how many billions of dollars are being spent on chips and stuff like that. OpenAI and Disney announced that you can now use Sora, their video creation app, and make short videos with 200 Disney characters.

1:06This seems like the kind of AI use case that at least our family could have a lot of fun with. So is this the kind of thing that is going to be a big deal in AI? And are you more of a Darth Vader or a Baymax kind of character? What are we going to see in your first Disney-related AI video? So I'll tell you, Travis, I'm embarrassed to admit this, but when I was five years old, I was a ballet dancer and we did a really dubious version of the original Star Wars. And I played Obi-Wan Kenobi. So I fully expect somebody to dig back into those archives and figure out a way to bring Dan's ballet back to life after 50 years.

1:51I feel like we can make this happen. I do think, though, it's going to be one of these things. It's going to go viral. You're going to see a whole bunch of stuff. It's going to catch fire for at least a period of time. I don't know how long it's going to last, but I think that probably what you'll see is initial adoption. Everybody's going to try it out, and then maybe somebody's going to start getting ideas for a more lasting trend based on it. Not sure what that looks like right now, but these things iterate really quickly with AI. John, what do you think? Is this the kind of thing that is going to be good for Disney to be able to have their characters in these AI tools?

2:27Or is this a nothing burger? Is it going to be bad? Where's your head at? Yeah, I won't bury the lead here, Travis. I dislike this move for Disney. And the reason is Disney has some of the best intellectual property in the world. And this feels like it cheapens it to a degree. If you can recall back in 2018, when the movie Ready Player One came out, Steven Spielberg directing and couldn't get the rights to the Star Wars characters for that movie, Disney would not budge, even though Spielberg has lots of connections to Lucasfilm and the like. And I think that the reason Disney didn't do it was because it knows the value of its IP and it wants to protect it.

3:08It doesn't want to dilute it. It wants to make sure that its IP is very, very valued. And I don't know that this deal really brings that in. For OpenAI, this is a no-brainer. Of course you want to do this. Of course you want to be the video generation platform that has the Disney IP. That makes a ton of sense. Now, nothing from the press release says the deal is exclusive. So maybe OpenAI isn't the last one to make a deal like this. But if we look at it from a business perspective, one of the things that I find really interesting here is that Disney is investing a billion in OpenAI. So is it going to get a billion dollars back in value?

3:51Yeah, we don't know what the licensing fee looks like. Is there actually money flowing back to Disney? is so is it, you know, I'll give you a billion, you give me a billion back. So we don't know those details yet. Exactly. Which is another reason why I'm not as enthusiastic with this deal. But let's say this, let's, let's turn to the positive. What is so interesting to me about this is it says that these user generated videos could stream on Disney plus. Now you think about what is this competing with? I think it's competing with YouTube shorts. shorts don't have to be necessarily great. They just have to be entertaining enough to keep me watching.

4:29And is this something that we're going to see on Disney plus, is it going to be big enough that it actually matters? Uh, I don't know, but that's an interesting component of this deal. That is one thing that they clearly have an idea of what they're going to do with Disney plus, but that could be a nothing complete, nothing burger. And we never really see anything out of it, or you could start to see this be a real YouTube competitor. John, I wanted to push back because you know, my reaction is much more positive. And I think one of the ways to at least think about this, and we don't know how all of this is going to end up.

5:02I think some of the concerns are correct. Are our creators going to be using content in the way that Disney wants? Maybe not. You kind of lose that control. But if you think about a movie launch like Zootopia, so that just came out, it's been a hit. But if there's suddenly videos of my kids, you know, hanging out with the Zootopia characters. There was a video that was going around with a bunch of, you know, famous movies and somebody doing selfies with them. That's the kind of thing that you could potentially create. And if you're Disney, that's creating buzz. It's also meaning that you get that buzz instead of someone else.

5:38You make the deal first so that your characters are used in these user generated videos. So is that at least a potential upside? And then it's going to be in the details of can open AI actually figure out how to contain these characters so that we don't have a bunch of maybe content that Disney doesn't want floating around. Yeah, it's a good question, Travis. Is it the right kind of attention to its brand? Is it the kind of thing you can just recall years ago with Star Wars, right? A new Star Wars release comes out. I mean, the fans were just ready to go. It had this incredible following and movies rarely came out.

6:22And so it was a big deal when something happened. Yes. It keeps the characters in the minds of consumers. Is it the right kind of attention? Does it actually create long-term excitement or is it just kind of a novelty in the short run that actually just kind of feels like we're, yeah, I get what you're saying. And I still maintain my original thing. I don't like this for Disney. You know, what you mentioned about Disney potentially using this content for its own purposes reminds me of what we saw with GoPro early on when it started releasing. That's not a great comparison. Well, that's my point is it's kind of like, look, there was talk at that point that, you know, GoPro was hosting.

7:06It was like a cloud-based platform for people to share their videos. I think that some investors in GoPro would kind of hope that that would turn viral and turn into a money stream for GoPro. If Disney is going to do something, it needs to do a much better job, obviously, than GoPro did on that. I think the intellectual property of much higher quality, of much higher value. But still, I think it's going to be a slog for it to find ways to monetize this kind of user-generated content enough to justify the potential dilution of that quality by kind of opening up the creative process. Dan, I wanted to bring in the recent deal between Netflix and Warner Brothers Discovery into this, because one of the reasons that I think a lot of people don't necessarily think that's going to get blocked is because the real threat to Netflix and Warner Brothers Discovery is not Disney, it's YouTube.

8:03And one of the things on YouTube is if this is going to be user generated content, YouTube is primarily user generated content. Is this sort of a backdoor way for Disney Disney to become relevant, whether it's shorts or, you know, eventually more traditional looking videos, maybe higher production. You know, if they're pulling stuff onto Disney Plus, you would think that eventually that's going to be a full screen view. Maybe it's going to be longer than eight seconds. So to be a bunch of these pieces clipped together. I have to think that Disney, even though they're a streamer, even though they're a content company, they're thinking about YouTube too.

8:40And this is at least a way that they can kind of play in that user generated game that YouTube just dominates today. I agree. It's a way. I think that if it were a big part of their intention in making the move that they would have been louder about making that the point. Now, granted, Disney has to always balance because its existing content, its existing content distribution has so much value. They don't want to poach away from that. They want to prevent poaching as much as they can. Obviously, that didn't stop them from doing Disney Plus. At some point, people were sort of like, why would Disney go the streaming route?

9:20They can just keep on doing the limited theater releases and they have pricing power there. But Disney did look forward there. So I do think it's in the realm of possibility that Disney is looking even further forward here with this user-generated content. But I think if that, I guess we'll see, right? Because this is still early on. We'll see how it progresses. They probably don't want to take too big of a stand up front because they don't know how it's going to play out. But if it plays out well, then they can say, well, yeah, we're going to take this step broader strategy wise towards more of a direct YouTube competition scenario.

9:59I will say this. It will be interesting to see if any of the major owners of intellectual property take a different route. I think that's really where the rubber is going to meet the road here. If everyone does this. I think the ones to watch would be like Nintendo. Exactly. But you've got some of the other players like you've got Universal. You have the studios that are owned by Netflix. So there's a lot of players here. And Disney is at least saying, hey, we're open for business when it comes to AI. They are. And if they all do it and it's all a bad move, then it's a wash, right? If another player in the industry, such as Nintendo, takes a different position saying, we're not going to do this, then you're going to have a scenario where one of them is going to be right and one of them is going to be wrong.

10:44The other thing to bring into this is the exact same day that this announcement came out, Disney also sent a cease and desist to Google related to Gemini and said, you know what, we got this deal with OpenAI. They're going to theoretically pay us something to use the characters in these videos. So, John, is that the approach? Is that going to put kind of these chatbots against each other? Is that the right move to say, you know what, we're protecting our IP and we have to have this framework? Because I have noticed that on Gemini, you can get logos, you can get all kinds of stuff that Google used to kind of put the clamp down on.

11:21It seems like they've really opened up. But that's kind of the other side of this coin is that they make a deal with OpenAI and they say, you know what, Google, we don't like what you're doing. So it seems like they're kind of trying to do both things. Well, for sure, because in open AI, it's now an investor. And so it does have a vested interest in seeing the success of one versus the other. So there's so much ambiguity here in what's allowed and what's not allowed. IP laws are going to, there's going to be tests over the course of coming quarters and years. So it'll be interesting to see. But yeah, it makes sense that it would send a cease and desist to one when it's an investor and the other now.

11:59When we come back, we're going to stay in artificial intelligence to talk about what we learned from Oracle this week. You're listening to Motley Fool Money.

12:10When Johann Rahl received the letter on Christmas Day, 1776, he put it away to read later. Maybe he thought it was a season's greeting and wanted to save it for the fireside. But what it actually was, was a warning delivered to the Hessian colonel, letting him know that General George Washington was crossing the Delaware and would soon attack his forces. The next day, when Raw lost the Battle of Trenton and died from two Colonial Boxing Day musket balls, the letter was found, unopened, in his vest pocket. As someone with 15 ,000 unread emails in his inbox, I feel like there's a lesson there. Oh well, this is The Constant, a history of getting things wrong.

12:49I'm Mark Chrysler. Every episode, we look at the bad ideas, mistakes, and accidents that misshaped our world. Find us at ConstantPodcast.com or wherever you get your podcasts.

13:14Welcome back to Motley Fool Money. We did get some earnings this week. Oracle announced earnings, and this was one of the hottest stocks in AI just three months ago. That was when the stock jumped about 40 % after earnings in September. That was after they signed a$300 billion deal with OpenAI. But the stock fell 10 % on Thursday and is now down 41 % from its peak since that OpenAI deal was announced. So Dan, what is going on here? Yeah, Travis, I think we're starting to see a pattern here. When a big tech company announces an AI investment up front, investors get excited. They bid up the shares.

13:53But then as time goes by and companies actually start paying out the cash for making those investments, investors now start to seem like they're getting a little bit worried. They worry the capital expenditures are high. I mean, the argument for big tech, for investing in big tech companies for years has been their cash cows. They generate huge amounts of free cash flow. They're able to divert some of that towards internal investment, some of it for buybacks and dividends. But now a lot of companies, including Oracle, they're using all of that cash flow and potentially more just to fund these big artificial intelligence investments.

14:31And we're early enough in that adoption. We don't know how that's going to pay off, when it's going to pay off, how much it's going to pay off. And I think investors are starting to get impatient by that. So we're in buy the news, sell the reality territory. Is that instead of buy the rumor, sell the news? You're actually buying the news, but then when it becomes real, people are going, ah, maybe not. I think you buy the news, you sell the worries. And then whatever the third step is, is when we actually get the reality because we have half the reality money is going out. We don't have the other half.

15:03What will AI generate to compensate the companies? John, looking at the report, the market's reaction is always interesting because I didn't think the September news should have necessarily driven the stock 40 % higher. I also didn't think there was a lot of bad things. The things that they said that we should be looking at, like remaining performance obligations, were up significantly in the quarter. So what did you think? Yeah, remaining performance obligations is unlike anything I've ever seen. $523 billion in remaining performance obligations for Oracle. Granted, it's up 438%. A lot of that came from the last quarter, the deal with OpenAI, but still up 15 % sequentially.

15:44And it's not just deals with OpenAI that Oracle is making, also deals with NVIDIA and meta platforms. And so this growth on the RPO is absolutely mind-blowing. And then you look at it, it breaks down the numbers. Only 10 % of this expected within the next year, but an additional 30 % between years two and three, you look at that, that's about$160 billion in a two-year span of revenue expected just from the RPO. And for perspective, trailing 12-month revenue is at an all-time high right now at$61 billion. And so maybe two years from now, we could see a$80 billion year for Oracle. I mean, that's substantial growth from a legacy tech company.

16:32Dan, one of the challenges with Oracle, as I look at them, they do have a lot of debt, over$100 billion worth of debt. Now you have the stock dropping from all-time highs. How do you think about paying for these investments? Because John talked about it. they do have a lot of revenue that's going to be coming in over the next five years, if all of these remaining performance obligations are actually served. But they got to pay for them. They have to build the data centers. They have to buy the GPUs. They have to get them all running. And that is upfront investment that thus far they paid for primarily with debt, issuing$18 billion in September and probably more coming in the near future.

17:12Yeah, it's funny. We used to look at tech raising debt as just kind of for fun because they've had huge amounts of cash on their balance sheet still. And so for them to keep cash overseas in a lot of ways, the rates were just so low to that. It just made sense for them to keep that cash. And like you say, some of the some of the international trading type stuff did play a role there. But now I think that AI is testing the limits and it's testing the limits in many places in the credit markets. It's making investors really rethink the relationships between different asset classes within the capital structure.

17:50We saw Oracle's credit default swap rates rise to 1.41 percentage points. It's not super high. It's not a big number in the absolute scale, but it is the highest for Oracle since the financial crisis in 2009. nine. Oracle so far still has an investment grade debt rating, but at triple B with a negative outlook from S &P, it's kind of on the fringe of where you start to worry, is it going to lose its investment grade status? Is it going to turn into a junk bond? Their costs of capital could rise quite a bit. So what happens then? If the cost of capital, which is sort of this, it's not a number that you can necessarily look at.

18:35You can look at what that costs, what the interest rate is. But when you think about cost of capital and what the future for Oracle looks like, what are the implications of that cost of capital going up or going down? The question is how quickly AI can pay off with actual positive cash flow to help Oracle and other companies maintain this debt. If the cash flow comes in quickly enough, then it should be fine and Oracle should be able to maintain, refinance this debt at reasonable terms. But if the cash flow is slow, Oracle is going to have a hard time convincing bond investors, hey, you should let us get a little bit further extended.

19:15That's where it heads. It's not going to be necessarily a quick near-term thing. It starts to come into play when it comes time to refinance this debt. So is this sort of a frog boiling in water kind of situation where we look back and we go, oh my gosh, the stock is down, the debt costs are up. Yeah, we have a bunch of remaining performance obligations, but that once 15 % return on invested capital, now my capital costs have gone up and now we may even be underwater. I mean, I've seen that with, going back to the solar days, SunEdison fell into that category. It's a slow boil until something breaks.

19:51And when something breaks, everybody's going to look at everybody else and say, oh boy, that's starting to show cracks as well. When we come back, we are going to play free agency with some CEOs. You're listening to Motley Fool Money.

20:15Welcome back to Motley Fool Money. We like to have a little fun on the Friday show. So I'm taking a page out of Bill Simmons' book. Instead of doing a trade machine for executives with an investing theme, I want to do a little free agency. I'm going to give you a company that could use a little bit of a boost. I want you to give me an executive that you want to join them as a free agent. And then what are you going to offer them to convince them to come to the company? So we're going to start with Nike. I think Nike maybe lost its way a little bit over the past five years or so. So Dan, if they're going to be recruiting a new CEO, anybody in the world, who do you want and what are you going to give them to convince them to come to Nike?

20:56Travis, I think that we need someone, an individual who has his feet in the sports world, but also has executive prowess, has a little bit of shine. I'm going with Mark Cuban here. Ooh, well known. Well known. The shark is definitely somebody that I think could add some spice to Nike's business. And, you know, his experience with the Dallas Mavericks, he's a savvy. He understands how the sports industry works. I just think he's a natural choice to push Nike forward. John, who would you like as Nike CEO? Well, let me be clear up front. I'd actually hate to see Nike make a trade. I'm not overly bullish about Nike from here, but I do think it made a great move in bringing back Elliott Hill.

21:44If you are a brand that consumers kind of, it's kind of fallen out of favor a little bit with, bring in somebody who absolutely loves your brand. And Elliot Hill really does, I believe, love Nike. And it's, and it's somewhat inspiring reading and listening to him talk. But if we have to make a move here, how about Shaquille O 'Neal? He's a hall of fame athlete. He's a good businessman. And, you know, he signed deals with other athletic apparel companies in the past. So you might need to offer him a good pay package, but bring him into the Nike family and let him cook. And I think he just brings that, that name recognition, but he's also a good businessman.

22:23Shaq has a fascinating investing history. We should talk about him at some point. It made what he called an accidental investment in Google in 1999. Uh, so what a great accident. Yeah. He's, he's phenomenal investor. Uh, like you said, executive, he knows the sports world. I like either of those. What are you offering? I want to ask that Dan first. What are you offering to Mark Cuban? Mark sold off his majority stake in the Dallas Mavs. I think Nike should just buy it back and give it to him. That seems like. So he regrets it so much. He would go to Nike to get it back. There you go. John, what are you giving Shaq to convince him to come to Nike?

23:01Hey, he's just going to, he's going to want to have control of the company, especially when it comes to inspiring the next generation of athletes and you're just going to have to give them a good pay package. He's got enough money, but, uh, yeah, I assume they would have, he would take a little more cash, uh, for, for moving out to Oregon. Let's talk about the trade desk, trade decks, desk stock. Their drawdown is absolutely crazy. 73 % from its high. John, I want to start with you. If you were picking a new CEO, getting a free agent, Who are you attracting to the trade desk? Well, my idea, it's a little late for it.

23:37I would say Rick Smith. This is the former technology officer at Sentinel One. He's now the new CEO of Okta. He just made that move over. But let me explain what I'm talking about here. I believe that digital advertising is being changed for better or for worse by AI. And really, I'm not sure that the trade desk fully understands where it's at and where it needs to go. I think that you need to bring in an AI expert and somebody with technology experience. And Sentinel-1, you know, I don't really like it in the cybersecurity space, but I will admit that it is a leader in artificial intelligence.

24:12And so I think that's the kind of person that you need to bring in, somebody who understands what AI is all about and who can really form a technology roadmap. Dan? I think Jeff Green has already been thinking about this, and I think it was part of the motivation for bringing on Chief Strategy Officer Samantha Jacobson. I think that Jacobson is an obvious choice to be the next CEO at the Trade Desk. She won Adweek's Digital Technology Executive of the Year Award in 2022 when she joined the Trade Desk. She has previous experience at Oracle. She's been able to work with tech giants to help advance the Trade Desk's Unified ID 2.0 initiative.

24:55She's made smart strategic investments. And I think really Jeff Green as CEO needs to make a move that inspires confidence. Trade Desk has had a bunch of other executives, including recently CFO Laura Schenkine, leave the company. And so promoting from within, I think, makes a lot of sense. Jeff's got plenty of shares. he can afford to give Jacobson whatever compensation package she needs to take the deal. All right. Those are some pretty realistic picks. So let's go a little bit off the deep end here. Disney does need a new CEO. Bob Iger is on his way out. Is it by the end of the year? It's pretty soon.