Motley Fool Money - AI Is Not A Person

Episode Date: June 5, 2023

The Directors Guild’s deal shows just how much the entertainment industry sees AI as a theat. (00:21) Jason Moser discusses: - What a potential Directors Guild deal means for entertainment. - The challenges facing streamers as they look for more ways to profit from content. - Whether or not Apple can take headsets out of their gaming niche. (16:36) A simple pack of casino playing cards leads Ricky Mulvey and Asit Sharma on an exploration of how old products can become new again. Companies discussed: SNPS, META, AAPL, NFLX,DIS,WBD, PARA Host: Deidre Woollard Guests: Jason Moser, Asit Sharma Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. directors want you to know AI is not a person and Apple is looking to a mixed reality revolution. You are listening to Motley Full Money. Welcome to Motley Full Money. I'm Deidre Willard and I'm joined in studio by Motley Full analyst, Jason Moser. Hey, Jason. How are you doing? Hey, Deidre, doing fine. How about you?

Doing good. I want to talk entertainment with you today. So the director's guilt, they've reached a tentative deal with the Alliance of Motion Picture and Television Producers. It seems like a pretty good deal. It's got some wage increases, better benefits, higher streaming residuals. The writer's strike is still going on, but seems like we're one step closer to getting back on track. Should those of us who hold entertainment stocks and really like streaming entertainment be breathing a sigh of relief? Well, I think for sure it's a step in the right direction. I would say I think some are going to weather this better than others to be sure. I think we're seeing a lot of damage has already been done here, though, unfortunately, in that a lot of these shows are facing these long delays, right?

And so you look at some of these really popular shows that have recently rolled out. On HBO, it's a good example. You've got The Last of Us and you've got What, House of the Dragon, right? Two very well-received popular shows, and it's looking like this is going to contribute to a much longer span of time that goes between the next season dropping, right? And so that, as a consumer, is not ideal, right? As investors, probably not so ideal because it's not ideal for consumers. So it kind of leads me to the idea here that some of these companies are going to be able to deal with this better than others.

And I think the bigger companies, the companies that have been in the space a little bit longer and have built out these streaming models and these libraries with all of this content, they've got more to sort of fall back on while we wait for all of this to play out. So some of the obvious names, you look at something like a Netflix, of course, because they really were the first to this space. I think you look at Warner Brothers Entertainment, what they have with HBO and with ultimately what it is max now. I mean, that's a tremendous library of content. Disney, another good one that will be able to deal with this. So, yeah, step in the right direction for sure. But it is, as you said, it's not come to a full conclusion yet.

And so a lot of these streaming services are going to have to rely on some of this, their libraries of content, so to speak, to be able to sort of fill the time. Because this content does not live a very long life anymore, right? I mean, it is something that just does not, particularly when these companies drop the whole season at once. I mean, people binge through it, they finish it in like a day or two, and it's over. So you can start to see with a lot of these services are kind of reverting back to we're going to release these more linearly. And so you're seeing episodes coming out every week as opposed to all at once. So it's very interesting to see between that and sort of the advent of advertising in the space, how streaming is evolving.

because it is not like the streaming that we knew from just maybe 10 years ago. Yeah, it's definitely evolving. And one of the things I think you just mentioned is the idea that some of these new hits, if we're waiting a year or so for another show, maybe we forget about them a little bit. And that could also be a concern. Easily. It slips under the radar. You kind of forget it happen.

And then all of a sudden, oh, wait, I forgot about that one. And the longer that time passes, the greater that risk becomes, And again, I think that does speak to the advantages in releasing this content more slowly, does feel like we're seeing more and more streaming services relying on that. And Netflix was the one that really started all of this, right? I mean, they were the ones. They're famous for dropping all the content all at once, and people just binge right through it.

And I think as consumers, we've enjoyed that luxury for a while. The problem is, it's not the most sustainable model, right? don't think it really works out as well for the business in the long run, which is why we're starting to see some of these businesses reverting back to sort of the linear fashion and releasing things sort of on a timely basis as opposed to all at once. Yeah, absolutely. Well, in the proposed deal, there's this language that really struck out to me, which is this idea that they say that we have the agreement that AI is not a person and that generative AI

cannot do a director's job. I think that speaks to our overall fear that AI is coming for our jobs. But is this really necessary at this point? Was this on the table? I think, so I do think we're so early in the actual development of this space, right? When I say space, I'm talking about AI in general, understanding exactly the implications of AI and how it's going to impact our lives, professionally, personally, its capabilities, what it does well, what it doesn't do well.

I think that a little caution is warranted. I mean, it's something that can be changed down the road if it's deep. to be unnecessary. But I absolutely understand from an individual perspective wanting that protection, right? There is this narrative out there right now that AI is coming for everyone's jobs. That's scary, right? And I don't think it's going to be to that effect, right? But AI is going to change the landscape, much as technology does, probably will make some jobs redundant. And it will sort of change how we do things. Now, I think on the flip side, do you do, Do we get to a point where AI can actually do these jobs and do them even better?

Because we could get to that point, right? Entertainment may be a space where AI has dramatic implications. I mean, we just don't know yet. We're going to find out here over time. I do think at the end of the day, one thing to keep in mind, and I feel this way, right, this content at the end of the day is art. I mean, it is art. And for many, art and the human element are just inextricably linked.

And so there is something to that, where I don't know that consumers necessarily will feel the same level of respect if they know that their content is coming from AI-generated sources, right? I mean, there's an artistic component to this that I think does matter, not only to the creators, but to us as the consumers as well. Yeah. Yeah, I think that is an interesting concern as we go forward. Part of the other piece of this puzzle is you've got the writers.

Writers Guild, their strike is ongoing. We've also now got to worry about a SAG-AFTRA. That's the big actors union. They're headed to the bargaining table this week. I'm assuming AI is going to become even more of a factor there, too, because now we have the ability to sort of generate versions of actors. We've got ability to generate writing that sounds like a particular writer. So I'm thinking about that. I'm also thinking about how these streamers figure things out going forward. If they cut a lucrative deal with all of these unions, does that mean that they're going to have to slow down their production or make other decisions going forward. Well, I think we are seeing a trend towards less content and higher quality content.

I think going back to Netflix is the obvious example here, because it really is the company that got the ball rolling in the space. I mean, Netflix has been known for having a ton of content. They're trying to scratch an itch for everyone out there, right? not targeting one specific kind of consumer. I mean, they want a little bit of a lot for everyone, right? And so the flip side of that is, you end up with a library of a lot of less than compelling content. I mean, I would say that's not just with Netflix. I mean, I look at a lot of these services today. A lot of these services have some excellent content. They have a ton

of less than compelling content. And so I think what we're seeing more and more is that these companies are starting to realize that more isn't necessarily always better. Technology, hopefully, will continue to help improve the quality of that content. But we're absolutely seeing these leadership teams really approaching these content budgets now with a little bit more scrutiny, recognizing the fact that it's not always about just having more, but there is a quality dynamic to it that consumers really care about. And also, I think that ultimately speaks to the consolidation in the space, right? We're seeing more and more of these streaming services falling under one corporate umbrella,

so to speak. So some acquisitions, I think, are likely to continue, and we see a few really big entities that kind of dominate the space. We're already seeing that really, I think, shape out with things like you've got Disney, Netflix, I think Warner Brothers with Max. That will be an advantage to these companies, because they have more resources, they have greater distribution. They have these greater audiences in a way to push that content.

out so many different ways. While we're talking Netflix, we got something in the mailbag from Bill in Seattle, and he said, why didn't Netflix put the advertising tier option and notice about sharing passwords? I would have put my kids on that instead of the no-ad tier. And if they're really going to make more money on the ad tier, this would have been the perfect time to offer it. So what do you think, Jason? Is it that Netflix is still more interested in grabbing that subscription revenue than the ad revenue? Well, if you go by what they're saying in their calls, and I mean, Disney and Netflix both

struck a tone here where the ad-supported model is a very attractive one from an economic perspective. And they like the economics of that ad-supported model. And so I think in regard to Netflix, as quickly as they were leaders in the streaming space, they are not so when it comes to ad-supported TV, right? They are really kind of behind the pack there when it comes to ad-supported TV. So I think they are approaching this with a little humility, a very open mind in wanting to learn the dynamics of how this ultimately works, because that's not their specialty. Their claim to fame was we're keeping it simple. It's an easy, cheap subscription model, and it just makes sense. And for a long time, that really worked. What

we're seeing now and now is more of these companies realize the benefits of having an ad-supported model, and they're really rolling those out. So I suspect as time goes on, as Netflix gleaned some lessons from the space, learns what works and what doesn't, I think they'll start to tout this ad-supported model a little bit more because the economics are really very attractive. Yeah, we'll have to keep an eye on that one. Well, speaking of another kind of entertainment, today, we've got Apple's Worldwide Developer Conference. That's the WWDC. In the past, there were a lot of surprises. This year, we know what it's going to be pretty much. It's the reality pro headset. VR headsets,

they haven't quite taken off, right? This was going to be the next big thing. Is this going to be the moment where it shifts, do you think? It is really, really difficult to say. I mean, on the one hand, you want to say yes. Apple is just, they have such a reputation for sort of sitting back and watching an opportunity unfold, right? Learning, gleaning the lessons from their competitors and sort of understanding what works and what doesn't work in a particular space, whether it's smartphones, laptops, whatever. And this is the same thing, right? We've got plenty of headsets out there already.

but we've still not seen the traction. I think that some were hoping that we would see at this point in regard to mixed reality, augmented virtual reality. I think a lot of that just boils down to trying to really figure out what the core use cases are. On the consumer side, really, the core use case remains in the gaming space. I think it's most attractive for gamers looking for a new way to interact with their content. I can speak just anecdotally. A couple of years ago, we got one of my daughters' an Oculus headset.

It's sort of the last second birthday gift. We just thought it'd be fun. She'd enjoyed tinkering with it. And she did for a couple of weeks. And now it doesn't get nearly as much attention as you might have thought. And having used it myself, I understand that, right? I mean, it's amazing technology. It's phenomenal what it can do.

I mean, it does put you into a whole other world. world, and to think that we have technology to do that is really impressive. But we haven't really come down to the core use cases to why a consumer needs this stuff yet. And that may just take some time to develop. And I think Apple is very well, very well known for kind of creating those opportunities, finding those killer apps, right? Those core use cases that can really help take their hardware and software to another level. I think the other real challenge with Apple right now is if the price point, if they do indeed announce this, and price point is in that $3,000 range that has been quoted, that's going to be very

prohibitive, right? Because you're talking about Oculus that goes for $500 versus an Apple headset that goes for $3,000. I mean, that's obviously a tremendous delta there. It's going to be very difficult for consumers to justify that, at least in the near term. But you've got to remember, this is Apple. I mean, it's a company that has afforded itself so much brand equity through the years. You just can't ever count them out, right? You can't doubt them because I mean, over time, they do such a wonderful job, again, of learning those lessons, taking those lessons away from what their competitors are doing and ultimately figuring out what works and what people want, and they deliver it in a seamless, elegant package.

Their hardware is just really, really good stuff. So I think in the near term, it's probably going to be a bit of a bumpy ride for this. Longer term, if they can really convince us of those core use cases, then I think they stand a better chance, because folks out there are going to give Apple a shot no matter what. That's the kind of brand equity they've got. What they don't want to do is put a product out there that just starts collecting dust and people forget about. Yeah. Yeah, I think that's really important. If it ends up just being a gaming product, that's not that exciting. And I know when they were originally thinking about doing this,

they were looking to do more of an augmented reality glasses sort of thing. That ended up sort of taking a backseat, maybe long-term, that's where we go. Do you think that that's more, that this is maybe just the start of a whole new revenue stream for them? Yeah, I mean, it definitely, I think it has that potential. I mean, I love the fact that they're looking at this and saying, you know, augmented reality and virtual reality. I mean, I think one of the big challenges with Oculus is that it's straight-up virtual reality. I mean, you're immersing yourself into a digital world that is fully made up. And that's entertaining. It can be fun for a little while.

But there's not as much utility, right? It is more entertainment than anything else. I think if you're talking about a mixed reality headset that would incorporate augmented and virtual, right? If we're overlaying some digital on top of the physical world, there's more utility there. There are more potential use cases there that I think Apple could certainly exploit. And so that could be one of the lessons they've learned from a lot of these headsets that have been released into the market over the last several years is ultimately, while virtual reality is amazing technology, maybe it's not the most useful.

for the masses. I think that with something like a mixed reality, augmented reality, to me, that seems to be, there seems to be more core use case opportunity there. So, yeah, it's going to be fascinating to see exactly what this product looks like and what it does. And while it will most certainly be early days, Apple has a knack for figuring out ways to get products in a consumer's hands. I mean, it takes me back to, I don't know if you're in like 10 years ago, the Onion article that was titled New Apple Campaign, urges consumers to buy iPhone for Otherhand. And as silly as that sounds, in hindsight, I mean, that's basically what they did with the watch. I don't know that anybody really needs the watch if you have

a phone, but they convinced a lot of people that they should have it. And so they find core use cases for devices. They convince consumers that they want them, that they need them. The brand affords a lot of trust and gives them a huge benefit of the debt there, where consumers will give it a shot because it is Apple. So this is going to be a fun one to watch develop. Yeah, absolutely. Well, thank you so much for your time today, Jason. Great to see you. Thank you. Innovation doesn't always come in the form of something brand new. Ricky Mulvey and Asit Sharma discuss a mainstay tech company that's still improving a decade's old product. Joining us now is a motley Fool analyst who demanded a present in order to

record a segment with me. Welcome, Asset. Ricky, it's good to be here. You make that sound so quid pro quo. Well, it might be a little quid, quid, pro quo because you said, I have this great idea, and it's that you send me a present and then we'll make a podcast segment about it and I thought it might have been nicer to kind of do the other way in reverse you would send me a present and then we'd make a podcast segment about it.

I mean, we'll chat about that later, Ricky, but the real present was the fact that I was barreling down I-40 in North Carolina on a very sunny Sunday afternoon listening to the radio and a thought popped into my head. What was that thought? The desire to discuss something with Ricky Mulf

I mean, that's the present, dude, that I thought of you during my time off. All right. Well, I'm happy to send you something. After about three months, I sent you a deck of playing cards, which is a little bit different from, I think, normal playing cards because they got a QR code design in the back, which I think represented an interesting mix of just a very old product and very new technology, but more than that, the entire endeavor cost me about $5.30. cents. Before we get to that, by the way, when you originally pitch this to me, you mentioned

comic books like three times. So I thought that this whole thing was just like you wanting me to send you a comic book and then we could talk about comic books, which we can do as a segment at some point. Some people have trouble grasping a very obvious message that's right in front of them, but hey, that'll lead to another segment. I think that would have been really fun. Let me describe what you sent me, though, Ricky. So I get this package from you. It's old school because you've handwritten your address, my address, like we used to do back in the day. Inside, I find a packet, yes, of playing cards from the Golden Nugget Casino with the edges crimped. These are authentic casino played cards.

They've been played in a casino before. Now, on the back of these cards, it's a beautiful, deep, burgundy color. It's got minute floral etchings all over the place. So I think there's an interesting reason that there's these QR codes on these playing cards, and it's because I think they're in order to stop something called edge playing, which is when very skilled gamblers, or they wouldn't even be gambling at this point because they have an edge, are able to spot very tiny imperfections in the backs of cards, and then therefore they know what card is under it.

So let's say you have the six of hearts, and you're able to tell that it's the six of hearts because on the back, there's just a slight misprint when they're, doing these sheets of playing cards. The most famous example of this was Phil Ivy and Kelly's son. And Kelly's son basically was this, I would say, addicted gambler and actually got kicked out of MGM properties in Vegas for playing a bad marker, which was asking for $100,000 when you didn't have the cash to back it up. MGM ends up getting her sent to jail because in Vegas, that's the equivalent of writing a bad check. Since then, she's had this.

mission of revenge against MGM, closely studying the backs of playing cards, and is able to team up with Phil Ivy in order in some ways to get bankrolled, and they play together with this very specific rule set, very specific cards in Baccarat, which the casinos are happy to oblige because they're playing such massive hands. You can ask for anything you want when you're playing $100,000 a hand. This goes on for years, and eventually it comes tumbling down casino security in Rockford's casino in England notice kind of what's going on, and they claw back all of the winnings from them. Phil Ivy appeals this. This is a years-long court battle, but eventually the Supreme Court of England sides with the casino saying that Phil Ivy cheated. In America, you have a similar

situation with the Borgata Casino. Ivy and Sun win tens of millions of dollars, and Borgata says, hey, you were cheating there. And they argue that they weren't. They were asking for a specific rule set that you obliged them on, but they weren't touching the cards or anything. They weren't manipulating the game with anything other than their eyes and an edge that they saw. They saw an inefficient market. In the first court case, Borgata won. They were able to claw back their winnings. However, on appeal, there was a settlement for an undisclosed amount. So we don't really know how the story ends, but I think that's why you see these random QR codes, or maybe not so random QR codes, on the backs of a lot of cards now, because, hey, what if we just have

thousands and thousands of designs, good luck finding and spotting the small differences in them when all of them have small differences. I think that's where there's a little bit of a cybersecurity angle as well, because these casinos now are using something called a trapdoor function, which is you have a function that's easy to create, but very difficult to draw how they got there. You could think of a 100-digit number, which means that it's very easy to multiply into a 100-digit number, but it's very difficult to find the two numbers that got you there. And I'll stop there before I keep rambling, Osset. You know, I have several observations.

The first, Ricky, is that there's a thin line between an inefficient market and a game of chance breaking down into something that's not really a game of chance. And that's why there's so much legal ambiguity there. The second is, you know, I used to work in the offset printing industry. I was in the finance department of an offset printer. And you and I had the pleasure to meet for breakfast. You were in town in my town for a wedding. this past weekend and I was relaying to you how it took me a moment to grasp that certain sets of cards could have these imperfections that went from deck to deck to deck.

And then I remembered from being in the printing industry, that's entirely possible. You can have imperfections that go from plates to plate, so the press prints off of a plate. You can have variations in what's called make ready, so that's getting the colors right, right before a run. There's all kinds of potential in older school technology for this to happen. But technology progresses. As I was getting out of that industry, digital printing was all the rage because now you'd be able to print different addresses on a run of envelopes to be mailed.

And that was like variable printing. It was the next big thing. Technology marches on. There are ever new ways created to try to beat the house and get an edge over the house. I want to say one more thing about this idea of the trapdoor function, which you explained to me. I think it's really cool because in this case, the trapdoor was inadvertent, right? And poker itself is informed by encryption. Some data is available to all the players, but your hand is encrypted.

I mean, theoretically, only you know what your hand is. So in games of player versus player and some games of player versus the house, we create these unintentional trap doors to our data. In poker, this is known as the tell. That's the feature that gives away some kind of information inadvertently. For example, Ricky, if you and I play poker a bunch and you notice that my right eyebrow always twitches slightly whenever I have a really good hand, that's the tell. That's the trap door to my data. And in the Phil Ivy case, that trapdoor was also inadvertent. Yeah, I think this was also, the casinos were a little more upset about this because

It was the trapdoor against the casino. They were playing Baccarat and Kelly Sun and Phil Ivy were asking for these very specific sets of cards where I think Sun was able to more easily tell what those tiny little imperfections were and they weren't just taking money from the players, which casinos don't like. We are legally obligated to talk about stocks, Osset. And one of the reasons I sent you this is because it is that mix of innovation with a very old product. And we always associate innovation with something completely.

brand new. I'm guilty of that. That's how I like to think about the future in these bleeding edge technologies. But there's plenty of companies that have been around for tens, maybe even more than 100 years that are still innovating on very old products. So what's a company that you think has shown some interesting innovation on very old products? Well, I am sort of obsessed right now with a company called Synopsis symbol SNPS. This is a company that provides electronic design automation software. So it helps companies automate the process of designing chips. And you know, that's a really old technology.

Ricky, the first iteration of transistors was, I think, introduced in 1947. And since the 50s, we've been trying to really make chips more efficient. In the present day, it's how many billions of transistors can we fit on one chip. We start bumping against something called Moore's Law, which proposes that the number of transistors we can pack on a chip is going to double every so often. We're seeing physical limitations of Moore's Law. So one thing many manufacturers are doing is turning to purpose design chips because if you design a chip for a certain task, in other words, avoid buying off-the-shelf chips, you can get more efficiency out of that silhou. Silicon. Synopsis does only this. It works on providing the software to help companies design

ever-more efficient chips. They are now using artificial intelligence to further this process. The company trades at pretty reasonable multiples. And I think it's going to benefit from this need for ever more computational power and efficiency. Generative AI is only the latest demand factor that's pushing up society's need for computational capacity over the long term. It's like an earnings call. We always come back to generative AI. Asset. I haven't heard of this before we started recording. This was a surprise. Is this profitable? What do you think about the valuation here? Okay. So as per the valuation, lots of great tech companies now who have double digit, high teens, low 20s, revenue growth or trading. Still at some lofty multiples,

say 40, 50 times their forward earnings. Synopsis trades a category below that. Depending on which multiple you're using, they are trading either in, say, the mid-30s against forward earnings and a slightly smaller multiple if you like something like enterprise value to EBITDA. I think they're in the high 20s last eye looked. And final question. What am I getting a present? Well, Ricky, I got a one-up you now, so we know it's going to be less than three months from today. Sounds good. Austin Charma. Always a pleasure. Thanks for joining me. This is a lot of fun. Thanks, Ricky. As always, people on the program may have interest in the stocks they talk about,

and the Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. See you tomorrow.