The Surprising Winners of the AI-Enabled Entertainment Economy

0:04This episode is presented by AMC Network. A new chapter in Anne Rice's Immortal Universe begins with AMC's The Vampire Lestat. Get a backstage pass to the iconic frontman who Pace Magazine calls a Bowie-inspired rocker that will have fans screaming. Don't miss the legendary vampire Lestat de Liancourt in his own electrifying rock saga. Experience the glory and darkness. Binge the Vampire Lestat only on AMC+. Learn more at amcplus.com. This episode is brought to you by Accenture. When your advertising operations fall out of sync, campaigns slow down, insights get buried, and opportunities get missed.

0:42That's why Spotify and Accenture are working together to reinvent the rhythm of ad sales. Using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. To learn more, check out Accenture.com slash Spotify.com. It is Friday, July 24th. The average American's leisure time has been stuck at between four and five hours per day for the past 20 years, according to studies. And about half of that is still spent watching some form of television.

1:20But studies are saying that the coming onslaught of AI automation could add 30 to 60 extra minutes a day to that total, and maybe even usher in the rise of the four-day work week. So how will we spend all that time? Likely with some form of entertainment, either digital or in person. And with that shift is going to come a huge business opportunity. But who's going to win that war for all the extra attention? And more importantly, for the purposes of this show, who's going to profit? And how can we predict those shifts now? An analyst with Morgan Stanley recently created a new system for stock picking that attempts to answer that question.

1:57It's called the MS Media Matrix, and it's a ranking of publicly traded entertainment companies based on their position within the upcoming AI-enabled entertainment economy. I put a copy of the list in my Puck newsletter, and on the Puck website, you can go there to find it. But they graded companies based on their audience and engagement. Their, quote, interactivity, meaning stuff you do rather than stuff you passively watch, the so-called urgency of the content, pricing power, IP, and their AI positioning. And then they compare these strengths and weaknesses to the company's relative stock price.

2:29The theory being that if generative AI fully democratizes content, some traditional media companies will benefit. We call them anti-fragile entertainment assets, while others will retreat. And it's probably no surprise that the companies that are likely to benefit will likely own more live competitions, i.e. sports, and out-of-home entertainment assets than their peers. In an increasingly fragmented and distracted world, nothing captures viewer attention more than sports and live events, which carry urgency, unpredictability, and a sense of communal participation that reflect and shape the culture.

3:04That's from the author, Sean Diffley. He's a Morgan Stanley analyst. Profiting off predicting the future of entertainment consumption is fascinating to me, so I asked Sean to come on the show and discuss the MS Media Matrix. Today, it's a new way to rank entertainment companies and who is best positioned for the AI revolution. From The Ringer and Puck, I'm Matt Bellany, and this is The Town.

3:29Okay, we are here with Sean Diffley, who is head of media and entertainment research and cable and telecom at Morgan Stanley. Welcome, Sean. First timer on the show. Thanks so much, Matt. Happy to be here. First time, long time. So we are going to talk about this matrix that you have put out because I think it's a really interesting way to talk about the landscape and it kind of exposes where we are in media and entertainment right now. So first, why don't you just introduce what this MS media matrix is, why you did it, and what it is supposed to measure? Sure. So as you know well, the media ecosystem is super fragmented, and it's really, really hard to break through.

4:15So when I moved from sales and trading over to equity research, I wanted to create a way to frame which companies we thought were best positioned in the ecosystem as the number of things vying for attention is increasing at an increasing rate. So we basically came up with 10 factors that we thought were the most important ones that would say, hey, if you think about, is your audience large and rising? Is your engagement high and growing? Do you have a lot of interactivity? Do you have urgency? I.e., do you need to watch it now? Sports and news are the best examples of this. Do you have pricing power?

4:49That's tied very much to, do you have ownership of your own IP? Obviously, some broadcast networks are renters of intellectual property from the sports leagues. That would be a less favorable score. And then we also thought about AI positioning across the ecosystem. I think a lot of focus is on the competitive dynamics of AI. We also wanted to think about the cost savings from AI and also the revenue generation opportunities from AI. And then we had some financial metrics. We looked at return on invested capital. We looked at our estimates versus consensus and then valuation. but we gave a score to each one of our companies and we stacked them.

5:25And the thing that we found were sports and live events score the best. And as you know, well, as we've seen with the world cup, as we've seen with the Knicks win, you know, there's nothing like sports in terms of getting people together in terms of having surprises in terms of having community. And it creates this urgency in a world where, you know, social media is grabbing for our attention. AI is grabbing for our attention. And so we've come up with this thing that we call the live five, which are the five companies that scored best across all of these metrics. Yeah, let's go into that because it's interesting here because you're essentially quantifying what we talk about a lot, which is the attention economy and how in this completely fractured ecosystem, these entertainment companies can best capture attention.

6:10And these are the five companies you say do it best or at least best relative to what they're being valued that. That's a key metric here. These are not the biggest companies. They're not the ones with the furthest reach. They're not the most profitable. They're the companies that you've identified as being the best positioned for this new AI enabled economy. Number one, Formula One. Why did you pick Formula One? Sure. So when we think about the audience, it's huge. There's over 800 million fans globally. It's growing 10 % every year. And interestingly, as you know well, like soccer and Formula One are the only two sports that are huge everywhere except for the US.

6:51And as you know, the US is the biggest, most lucrative sports market in the world. So we think that's a huge opportunity. They obviously did a deal with Apple. We think that underscores the interest that large tech companies who are trying to enter the media business and understand how important sports are as an acquisition funnel. They did a deal with Formula One because they thought that that would beef up Apple TV+. I think there's other interesting things in terms of you think about partnerships and sponsorships, great global brands that want to be affiliated with this company. You think about licensing opportunities where they're going to do more in apparel.

7:24You think about all the young fans. When we hear what the worship of the Apple audience looks like relative to ESPN a year ago, it's younger and it's more female. That's a cohort that most of media is missing. So we think this has a really unique perspective. and owning a team is cool. Owning a league, owning a sport, being at the top of the stack is even cooler. Yeah, that seems to be the distinguisher here. Yes. Because obviously there are tons of bigger sports leagues that command a lot bigger audiences. Formula One owns its IP and is a publicly traded company. Don't you worry a little that this deal they did with Apple is going to make them disappear in this country, much like MLS soccer has disappeared behind the Apple TV paywall?

8:13Yeah, it's a great question. And that was certainly a fear when they announced the deal. While they haven't been that explicit on what ratings and viewership it looks like, our best sense is that ratings are actually up versus what they were on ESPN, which given the smaller audience size and number of subscribers on Apple TV versus ESPN, it's probably tracking to over a million viewers per race in the US, which we think is pretty solid and impressive. And we think that can grow over time. And as you know well, with like Amazon getting Thursday Night Football, it started slow and then it built up over time.

8:45So I think there's a lot of things around marketing that Apple can do that can bring in new viewers. Obviously, Drive to Survive was kind of the huge wake up moment for the U.S. and paying attention to this sport. You know, there's young 19-year-old Italian driver, Kimi Antonelli, who's won six races, bringing in a lot of young fans that never would have looked at the sport before. Obviously, the Brad Pitt F1 movie was certainly the test case for Apple to see how this works. I think we're in like inning two of the U.S. kind of getting excited about this sport. And Apple is really putting the full heft and support with over a billion iPhone users.

9:20Obviously, very U.S. focused today. We think there's more they can do globally over time. Okay. So two through five on your list are TKO Group, owner of WWE and UFC. Disney interesting TKO is above Disney Live Nation obviously the dominant force in concert promotion and Netflix so why is TKO above Disney and Netflix sure so it's actually to your point on the league and the ownership of the sport just ownership right they control their destiny it's ownership it's ownership and so you have this trophy asset both Formula One and TKO are trophy assets. UFC itself, as you know, Paramount Plus did a$7.7 billion deal to get UFC.

10:05Why did they do that? Because UFC has a huge fan base. They brought it away from the paywall. They're giving access to everyone. Unfortunately, the McGregor fight wasn't very good or fun to watch. But I think it underscores that was a moment where everyone had to tune in. You had to see what happened with Conor McGregor. And I think the margins on this business are incredible. They have 40 % EBITDA margins. They're able to run the business really effectively. They obviously have WWE and UFC. Do you think there's a lot of partnership and sponsorship opportunities? There's also a lot of site fee opportunities where cities and countries say, we'll do anything.

10:40We'll pay you guys hundreds of millions of dollars to have you host your events in our cities. Yeah, you can say the Saudis. The Saudis will pay hundreds of millions of dollars for events. Yes. Yeah, no, that's right. I mean, there's definitely a Middle East connection between both of these companies, Liberty Formula One, NTKO. They obviously, we estimate Middle East is less than 10 % of revenue for both companies. But the Middle East has been very supportive of live sports and events. I think the live golf situation, some people have asked if that's an indication that they could be moving away.

11:11In many ways, I think real sports that have structural advantages that are not challenger leagues. Wait, wait, wait. Right. Real sports like the WWE? WWE. Oh, you're going to tell me Santa Claus isn't real next, Matt. Sorry. Listen, wait, people listen to this show in their cars. So cover your kids ears. Fair enough. But aren't they vulnerable at TKO? This is what I've always wondered. They don't have an antitrust exemption for mixed martial arts or for professional wrestling. and there is a you know real chance that if the creative sucks at wwe for a while or if fighters get pissed off about being exploited by dana white or something or the saudis or someone else backs up a dump truck of money that both of these owned and operated leagues could be vulnerable to competitors i think live is a cautionary tale on that happening i think we clear proof points that, you know, it's very rare for a challenger league to come anywhere close to the incumbent.

12:13And you've seen AEW try to make some inroads, the scale, you know, it's not even close. And then same for PFL, you know, these are the premier global brands and franchises. They have the viewership, they have the capital and they have the best fighters. There's always going to be moments where, you know, someone might try to challenge that, but I think the incumbent advantage is pretty strong here and the moat's pretty deep. Well, and they're locked into these deals right now. So at least in the short term, the money is going to keep coming in. That's right. Exactly. I mean, I think the most interesting thing about the companies is that they are these amazing trophy assets, but they also have really long-term, highly contracted, highly visible revenue streams, which in a world of a lot of fragmentation, a lot of uncertainty, I think there should be a premium paid for the visibility and certainty that you have with these multi-year media deals.

13:03Right. And by the way, we should say this is not investment advice. This is, we are discussing these for news purposes and, uh, don't go buy TKO stock and then email me in six months when it tanks, email you, your clients can email you. They do. Don't worry. I'm sure that, yes, I'm sure they do. Uh, all right. So, you know, Disney versus Netflix here. Why is Disney above Netflix? Is it just because on your matrix, the interactivity and engagement of the parks is what sets them apart? Because in your report, you said it was not just that. You said it was a lot of what their AI plans are. Yeah. So I think the parks are very unique.

13:45And if you look at the composition of Disney, 70 % plus of the EBIT is coming from parks and streaming. So those are the two big bets that you're making. And if you look at what Netflix showed us when they showed interest in WBD, they cared very much about intellectual property. So when you think about the arsenal that you want to attack the media marketplace, you would like to have really strong characters, really strong intellectual property, and be able to leverage that across your franchise. I think Zootopia 2 was a pretty good example last year, where they had almost$2 billion global box office.

14:18They had over a billion hours streamed on Disney+. And then that reverberated across the entire company. that fed into consumer products and selling toys. And that also generates excitement around the parks. Obviously, we just had a handful of new releases in the box office. Toy Story 5 was the good one. Moana was a little disappointing. Mandalorian Grogu, as you know, also a little disappointing. But they have this incredible intellectual property, this treasure trove that they're really just tapping into. And I'm hopeful that new CEO Josh DiMauro is going to unlock new ways to interact with those characters that's going to really spread across the entire company.

14:53Yeah, you write about this, about the promise of AI-enabled interactivity with the Disney characters. How confident are you that they can figure that out? Because I think that's the holy grail of Disney and Disney Plus, is creating an interactive service where these properties come to life for kids, and they can increase time on Disney Plus and money spent in the parks and all through their flywheel simply by activating an interactivity element of their characters? Yeah, so a very simple framework and heuristic that we like to use is there's a really strong correlation between how interactive a piece of content is and how well it monetizes.

15:37So a very simple example would be streaming audio using Spotify as the proxy monetizes at about$0.10 an hour. Streaming video using Netflix as a proxy is$0.25 an hour because you're fully engaged. It's not in the background. You're looking at it. And you can charge higher ad rates. Exactly. Yes. Because you're fully engaged. You're present. That's why everyone wonders, why is my favorite podcast on video now? It's because they can charge more for ads. They can see it. They want to see your face. Yeah. That's the reason. So video games are kind of the next step in this evolution. And Take-Two is kind of the best example of this.

16:11Obviously, GTA coming out. And if you look at how well those guys monetize, it's well over a dollar an hour. The next big step, the holy grail, as we talked about, are live events like sports, like concerts, and Live Nation is kind of the best example of this, which monetizes at$50 an hour. So think, you know, concerts, two hours, 100 bucks. That's how we get the 50 bucks. So every single media company that we're talking about wants to slide further to the right on this scale, get more interactive, drive more pricing power, drive more connection to their audience. And so I think that's what Disney is trying to do.

16:45I mean, how much per hour does it cost to go to Disney Park? Yeah. Seems like they're monetizing me pretty damn well when I go there with$500 in my pocket and I leave with zero. That's right. Although I think you could get into the park for like$100 and spend the whole day. So they would say it's actually good value. It's like$200 now. And don't get me started on the parks. But that is the pinnacle is what you're saying of a media company. That's right. The ability to extract more money from their customers per hour. and the top of that interactivity pyramid is the people that can get you to leave your home and go to some place to pay to watch something or interact with it.

17:25That's exactly right. And I think somewhere in between in that scale between video and video games is where Disney is trying to play right now. And they have this epic Fortnite partnership. They've talked about what they're doing with The Simpsons, but they're trying to figure out how do they get young people to interact with their content, their characters. and I think ultimately they want that to live on Disney Plus. So they talk about Disney Plus being the hub and they're going to have lots of spokes around it. But I think ultimately their goal would be to get you to Disney Plus where you have every single character, every Disney franchise and you could interact with it in a very unique way.

18:00We're not there yet to your point, but I think that's kind of where we're going. Yeah, how long? I think it's a couple of years away. Yeah, they've been talking about this for years now. this is kind of the josh demaro thesis for his you know being the ceo of disney is but how long is this going to take yeah well i think that you have the power and speed of ai is is very present and real and i think we're seeing every day the leaps that we're making you know the debate is does that lower the barriers to entry does that make existing ip less interesting as everyone can kind of spin up you know new impressive content pretty quickly i would take the other side of them say those companies that have really good IP that can nurture that IP and bring it to life and make it increasingly relevant in this fragmenting world are best positioned.

18:46I think no better company is positioned to capitalize on this than Disney. And I think it's less far away than consensus things. I totally agree with you. I think that in a world where anyone can make anything for nothing, we're going to be flooded with garbage. And what is going to be a distinguisher? It's stuff we know. Now, it doesn't mean that this, you know, AI won't get out of control and Homer Simpson will launch nuclear warheads at Russia or something. But I think that these AI enabled characters are going to be super meaningful in the ecosystem in not that long. That's right. And Sarandos has often said, if you flood the zone with AI slop, you're likely to see a reversion back to quality.

19:27And I think the other learning from things like Sora, you know, when you could turn yourself into Superman and IP was not protected, it was fun and it was easy. What a week that was. Yeah, that was an amazing one week. I made lots of cool videos and then it got a lot less interesting. And then you never went to Sora again. Exactly. Yeah, I agree. This episode is brought to you by Accenture. When your advertising operations fall out of sync, campaigns slow down, insights get buried, and opportunities get missed. That's why Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business.

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20:48Exclusion Supply. For licenses, see HomeDepot.com slash license numbers. Tomorrow morning is knocking. Stock your fridge now. How about a creamy mocha frappuccino drink? Or a sweet vanilla? Smooth caramel, maybe. Or a white chocolate mocha. Whichever you choose, delicious coffee awaits. Find Starbucks frappuccino drinks wherever you buy your groceries. Com slash Spotify. Netflix is still pretty high on your list. Number four. Sorry, number five after Live Nation. Yep. And is that just because of their scale and engagement? That's exactly right. So you have well over 300 million members. We think they have a lot of pricing power still.

21:24I think as you've discussed on this show, engagement is the single biggest question for Netflix. And that's a really interesting nuanced conversation we can have. They just reported time spent, just hours growth was up 2 % year on year in the first half of this year. I would actually say, despite the stock reacting negatively, that was better than feared. Going into the print, people thought it could be a negative number. And I know we're getting the disclosure less frequently. We're going to get it once a year instead of twice a year. However, they're still giving us the same amount of information.

21:53But I do think they bring up a really interesting point, which is just ours misses the bigger picture. There are other things like quality and variety that go into the engagement equation, which I think a lot of investors ignore. I would love for Netflix to give us a quality score where they can say, hey, Hunting Wives, while it wasn't the most watched show that we have, the people who watched it were super engaged and they talked about it on social media. They finished every episode. They rewatched episodes. I think there's a lot of nuance in there. That's a good idea. What would the factors be?

22:26Because it's got to be some third-party data, right? Should it be a Metacritic score? I think they have a lot of data that they obviously would not want to share for competitive reasons, i.e. The Walking Dead does really well. AMCX is trying to negotiate those rights, which come off at the end of this year. So you'll probably get some kind of announcement. But they could tell us completion rates. They could tell us the scores when you get the little thumbs up or thumbs down after the show. That's exactly right. My metrics would be completion rates, re-watching rates, thumbs up, thumbs down. And then there's definitely a social media footprint.

23:02There's definitely Metacritic, Rotten Tomatoes scores. You could kind of put that into its own algorithm. I think their fear would be they don't want to give competitive intelligence to other streamers. But I think there's a lot they could do on the quality scoring that could help us dimension and understand that one hour of the NFL is obviously very different than an hour of cartoons or friends. The example that they pointed out that I thought was interesting on the earnings call. So live events and sports, 5 % of their content budget, 1 % of hours. Kids content, same 5%, but 8 % of hours. However, if you look at the signups, so six out of the top 10 signup days in the last five years came from live events and sports.

23:43And that's where your metric captures that. Yes, exactly right. You would put the signup moment under the urgency and pricing power metrics where that's where they're getting you. Even though Miss Rachel might generate hours and hours and hours of content, it's a kid whose family has already signed up for Netflix. That's exactly right. And I think these big live events are good acquisition drivers, good gross ad drivers, and then they want a shoulder program around that to keep the churn down. And you saw that with the World Baseball Classic in Japan. You know, they try to put some of their best stuff behind it, like one piece, even though that wasn't as good as some people had hoped.

24:23I think they're going to try and put some of their best stuff around these big events like NFL coming up. Right. All right, so let's look at the rest of this list. So top five are Formula One, TKO, Disney, Live Nation, Netflix. Then the rest of the top 15 is Spotify. We've talked about them. The New York Times, interesting. Warner Music Group, Sphere, the Atlanta Braves Holding Company. That's the only Major League Baseball team that is publicly traded. MSG Sports, MSG Entertainment, Paramount Skydance, Warner Brothers Discovery, assuming that deal closes, Roku, and Fox Corp. So a lot of sports-oriented entities in this list.

25:08Yeah, that's right. One thing I think that's really interesting, yes, like if you can own, you know, MSGS is a good example. So Cameron Manson Perrone on my team just upgraded MSGS, which owns the Knicks and the Rangers. So that's just the Knicks and the Rangers. I get confused with the state of the Jim Dolan empire. I know. Where does the surveillance system come in? What rules that? Sure. So there's three Dolan entities that are publicly traded today. So there's the Sphere, which is obviously the Vegas venue. Also, the RSNs are in there, but that's been, you know, largely ring-fenced. You have MSGE, which is the garden itself in Radio City.