Zima Red ep 140: Doug Shapiro - How AI will impact and change media forever
Primer: How has the media landscape changed over the years? What’s in store for the industry with AI-generated content? Let’s find out from Doug Shapiro in this episode of Zima Red.
Background
Spent 15 years as a sell-side equity analyst at Deutsche Bank and Bank of America, covering media businesses
Went over to Time Warner and subsequently, Turner Broadcasting
All in all, he has been around the media business for 30 years, both inside and outside
The Media Landscape
When he first started, cable was emerging
A lot of demand for consumer verticals
At some point, it shifted to internet media
From the TV side, the most interesting is the emergence of Netflix and other streaming services
Streaming is a textbook example of Clayton Christensen’s low-end disruption where new players keep getting better, picking up more of the incumbent’s customer base
A few years ago, the incumbents jumped into streaming but realized that the market is neither as large nor as profitable as they hoped
The Large Margins For Cable
Cable companies are capital intensive, such that they become natural monopolies (e.g. installing cables, launching satellites)
They are not government-granted monopolies, so new players could come in
There’s a difference between cable systems and cable networks (e.g. CNN, MTV, ESPN, etc.)
At some point, telcos got into video distribution but their lower bandwidth copper cabling hamstrings their infrastructure
Consumers did not have a choice as to who they went to
Cable networks and their distributors had annual price escalations that they passed on to consumers
Based on Nielsen data, people were watching less than 10% of the networks they paid for, making cable an industry ripe for disruption
Thoughts On Netflix When They First Launched
Thought that Netflix did not seem relevant
The big catalyst was when they licensed the entire Starz library
Was a better product on Netflix because it was on-demand
A lot of operators were dismissive of Netflix
What’s Happening Now And What The Future Holds
In the last few years, all of the big entertainment companies have launched their own streaming services
Wall Street loved it, encouraging companies to invest in content and chase Netflix’s valuation
In Q4 2021, Netflix reported disappointing subscriber numbers. Investors realized that the industry is not as large as many hoped for
Compared to cable TV, streaming services have lower switching costs/higher churn rate
Will The Industry Consolidate Into An Oligopoly?
The market can support 6-8 vertically integrated streaming services
Have written a piece on it recently:
One version sees consolidation
The other version sees the industry shifting to a more horizontal organization where streamers who are subscale in distribution moving towards wholesaling
“What happened was Netflix dug a hole, and everyone else jumped in the hole. And they're like, oh crap, we're in a hole like, oh, yeah, you're in a hole. Who knew? Right? So everyone's trying to claw themselves out of the hole.”
- Doug Shapiro
AI Content Generation
In video, the barriers to entry to create content are still high
There’s still a deep moat around content creation
Content creation is expensive and risky. Hence, only companies with a large balance sheet can absorb the risk
Consumers are preferring short-form content, so the barrier to entry is falling
Virtual production (i.e. creating video content with gaming engines) and AI tools are democratizing high production value tools
Web3 has the potential to break Hollywood's stranglehold on financing
Over the next 5-10 years, the quality distinction between professionally produced content and creator content is going to blur
Smaller teams will be able to make high quality content with a smaller budget and a shorter time frame
Cool Stuff
Corridor Digital — Have awesome stuff on their YouTube channel
Runwayml — A new service where you can apply the style of a photograph to your video
How Much Of It Is Really Automated?
In one of his pieces, he described a completely automated content creator generating an infinite amount of content for viewers
Would not be a very pleasant world to live in
Ben Thompson’s Stratechery framework for thinking about the content value chain consists of creation, substantiation, duplication, distribution, and consumption
AI is unbundling ideation (the idea) from substantiation (making it)
You still need a creative director to understand how to mold, push, and refine prompts
How Can People Compete In This Environment?
The internet causes power law/popularity distributions
Don’t think anybody really has an advantage
Are We At The Period Where Hollywood Is Disrupted?
People in Hollywood would say that Netflix is the “Internet moment” for them
Bullish And Bearish On?
Bearish
The profit pools in the entertainment industry
Bullish
The pick and shovel providers
It’s early and we do not know who they are yet
Best Advice He Received
Put your head down and do the work
What Traits Most Define Him?
Pattern recognition, synthesis, implications, call-to-action
What Motivates Him?
Really enjoy it when the learning curve is steep
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