The winter of our discontent

Good morning, everybody. This is Michael Cembalest with the November 2025 Eye on the Market podcast. This one’s called the “Winter of Our Discontent,” and the topic is generative AI disrupting the content mode in the entertainment industry. It’s going to be a very visually oriented presentation, so you might want to watch the video version of this podcast instead of just listen to audio one.

As a quick note, on December 2nd, in about a month, the, every two years we write the Eye on the Market Alternative Investments, which covers buyout venture, hedge funds, private credit and private real estate secondary funds, evergreen funds. So that comes out in the first week of December.

So the cover art for this piece is a picture of Richard the Third sitting on top of a crumbling content moat. Richard the Third was the one who uttered the phrase in Shakespeare’s play about him, “the winter of our discontent.” And actually, Richard, who died in the 1400s, was found his, there were his remains were found in a parking lot in Leicester, England, and in 2012. And they dug him up and gave him a proper burial at Leicester Cathedral. And that was interesting to note.

Anyway, let’s get started. So the prior decade was defined by disruption in content distribution. And the next decade is going to be defined by disruption in content creation, which creates a combination of risks and opportunities, maybe more risks for some of the legacy media companies. So the, the, originally, the content distribution business was a moat because cable fiber, satellites, all those things, were very expensive, and once they become, came unbundled from the infrastructure, that distribution moat fell, and the impacts were seismic.

Believe it or not, back in 2007, Netflix offered streaming as a free add-on, and has since become the most powerful company in Hollywood, and while the video-related profits of the big media companies fell by almost 40% after 2018. And what we’re going to be talking about is the impact of generative AI on the content production moat because parts of that are crumbling as well.

So, and here you can see the impact of the disruption in content distribution for the major studios. The five of them, suffering major direct consumer streaming earnings losses from 2019 to 2023, while Netflix is booking billions in profits. And here you can see, I thought this was interesting, if you look at the top 100 streaming titles in 2023, the Netflix share of originals went down, but Netflix’s overall market share and streaming in these titles stayed the same because other legacy studios were willing to license their best content to Netflix. It’s another sign of just how powerful Netflix has become.

Now, while the Netflix share of TV viewing time, you know, which includes streaming and then legacy TV plus broadcast cable. So while the Netflix share is growing, other kinds of streaming are now growing faster, and that would be obviously things like YouTube, and streaming as a whole now exceeds legacy broadcast plus cable for the very first time as a share of overall viewing. And the, the reason why the competition and the stakes are so high is the overall video pie is not growing. If you look at the revenue that comes from all of traditional TV box office, home entertainment and streaming, that pie has really not changed at all since year 2018. All that’s happened is that streaming is taking a larger share of it. And, you know, the, the disturbing signs for legacy film and TV, some of you may have seen this already. I’m an old person, I’m 63, but for people under the age of 50, just in the last 10 years, their viewing of legacy TV programing has, excluding sports, as absolutely collapsed. And for the for the 2-to-age-17 bracket, age 2 to 17, it’s down over 80%. Legacy TV, which again is referring to broadcast cable exports since 2015. And then, with respect to the box office, obviously the film industry was a pandemic-affected sector, but box office receipts and tickets sold, while they’ve rebounded, are still way below 2019 levels.

And so I put this chart together because I thought it was notable. These are all the recovery rates since 2019 of pandemic-affected sectors, and the film industry is at the bottom, they’ve been exceeded by theme park attendance, recovery, hotel occupancy, museum attendance, Broadway box office receipts in attendance. Airline passenger miles. Top 100 concert tour tickets. Restaurant revenues. So the film industry is at the bottom of the stack here in terms of a post-2019 recovery.

And all the factors that we’ve just talked about partially explains why most of the media stocks, with the exception of Netflix and Fox, but when you look at the stocks for Disney, Warner Brothers, Comcast and Paramount, they’re kind of flat or over the last three years, if not down. So there’s a lot of things working against some of these companies right now.

Now, I think we talked about the distribution moat having collapsed. It looks like the content moat is still pretty steep, right? I mean, we have some data here that shows the top grossing films at the box office still cost you somewhere between $100 and $250 million to produce, and that’s been the case for several years. And then TV shows like, I haven’t seen any of these, but WandaVision and Hawkeye and The Rings of Power and Stranger Things—I don’t even know if I’m pronouncing it right because I’ve never watched them. These routinely cost like $25 million an episode, so the traditional content moat looks pretty steep using this traditional lens. The issue is that there are new platforms that are competing for viewer attention that don’t require anywhere near that kind of investment, and the democratization of being able to produce high-quality content is growing.

So if you look now at, at the latest data from August of this year, of, of media companies’ share of television screen time, that includes streaming, cable and broadcast TV, this is just TVs. This isn’t even mobile. YouTube is already, YouTube is already ahead of Disney and Netflix and the rest of the studios. So again, this isn’t even mobile. This is just on your physical TV set in your home. YouTube’s already number one. Just kind of amazing. And then, even in news, I mean, this, this, this unfortunately explains a lot about why the country’s in a position it’s in, in my opinion. But even in news, more respondents to this Nieman survey said they get their news from social media and video networks rather than from, God forbid, print, online news sites or traditional TV. So that’s kind of amazing and shows you how much things have changed.

Now what, what’s happening that is really kind of dangerous but also enticing for the average legacy media company, is that acceptance of user-generated content is growing. People are getting more comfortable with less polished stuff. And one way that we look at this is to look at the creators’ share of global media revenue has doubled in in the last few years, from about 7%, 14%. And these were some interesting numbers that I, that I read that I thought were interesting. Hollywood put out about 15,000 hours of TV and film last year. There were 300,000,000 hours of content uploaded to YouTube. The vast majority of that is junk. But even if just 0.0 1% of all of that YouTube content were just as interesting to you as the, as what Hollywood put out, that’s twice as much content as Hollywood’s annual output. So it, it only takes a very tiny sliver of all this slop that’s put on YouTube to create a video competitor challenge for, for Hollywood.

And the same thing is happening in the music industry. Over the last few years, the share of Spotify music streams from people that were either independent creators or not signed to a major label doubled from like 13 to over 26%. So people are getting more comfortable with user-generated content. And here’s another one: Roblox again, another thing I don’t have much experience with, but Roblox users in the U.S. continue to grow even as the gamer, overall gaming is flat. So gamer shares can be measured in hours played or as a percentage of population. U.S. gaming is basically flat to a few years ago and is down since COVID, but Roblox you, you’re going up. Why is that important? Roblox is made up of mostly millions of lower-fidelity user-designed games. So another example of how people are getting comfortable, very comfortable with user-designed stuff alongside more polished stuff.

So then before we get into, this text to video, we have this image here. This is from Midjourney, and they are a text-to-image program, and just look at the progress they made from 2002 to 2004, in, in, in around two years. These are all pictures of somebody you’ll recognize if you’ve seen the, the movies. The first picture here is barely recognizable and reminds me of David Lynch’s Eraserhead. And then by the time you get to the picture from July 2024, you know exactly who you’re looking at. And what’s happened since then is our text-to-video programs that are remarkably faithful to life. So yeah, I’m interested to see how many of you that are watching this podcast recognize the face of that person I just put up. That is not a real young woman. That thing is an AI-generated actress named Tilly Norwood. And she’s currently actually seeking talent representation. It was, she was, she, it, I don’t know, it was created by Particle6, which is an AI firm, and is an example of text to video. And so these new tools like peak and runway stable diffusion, AI obviously with Sora are making it easier for new entrants to create really high-quality content for digital and TV platforms. And in 2024, these models were first able to match human capabilities in visual commonsense reasoning. And they, and they’ve been, you know, obviously getting better ever since.

And the same way that you see scoring benchmarks for language models like Gemini versus GPT versus Grok or whatever, there are now benchmarks for scoring the accuracy of text-to-video generation models. And one of them is called VBench. And we have this polar chart here. What’s interesting about the polar chart is just to look at all the different ways that they measure the quality of these programs. This one is measuring OpenAI’s Sora 1.0 against three different Chinese versions. And there’s motion rationality, camera motion, complex landscaping, understanding human interactions, multi-view consistency, clothing, human anatomy. These are all things that matter if you’re scoring the, the accuracy of a video generation program. And of course, there are closed-source versions of this, like OpenAI’s Sora, but there’s also open-source versions of these text-to-video programs, some of which now claim that they can create videos at comparable quality to OpenAI at 10% of the training cost.

Now the changes that are taking place here are very rapid. There are. And now there’s OpenAI Sora 2.0, LTX, VEO3.1, and these programs are eclipsing the capabilities of what were the leading-edge video generation models just a few months ago. And we include here from October a, the latest leaderboard, from users, of the of the best text-to-video program. So you can see that OpenAI and Google are on top.

Now, one of the things I was interested in as I was doing some research on this one, was do these text-to-video models actually understand physical principles, or they’re just engaging in simple prediction? And so the, the guys at Google DeepMind unsurprisingly decided to dig into this one and see how good are these models at really understanding physics, the physical world, like fluid dynamics, optics, engineering mechanics, magnetism, thermodynamics. And so they created a bunch of tasks for them to do, dropping, in video, like just text prompt, hey, let me see a claw dropping items of different weights into a pillow. Let me see what happens when you drop a match into a glass of water. Let me see what happens if you put a paintbrush against the glass and keep going eventually. How does that paint, the ability for the brush to put paint on the glass dissipate? And as you can see, the scores here are still low there. The, these models scored only a 10 to 30% in terms of their understanding of physical principles. But they’re optimistic about the future. And they think that as these models get trained on larger and more diverse video sets, their understanding of real-world physics will continue to get better.

Now, the, the implications for legacy, legacy film studios, who have to compete with all this new content, are not all negative. The, there was a Bain study last year at the, where the time and cost savings that the legacy studios themselves could achieve from more virtual AI-generated production depends on the kind of thing. For comedies, it was 5 to 10%, family dramas, sci-fi was closer to 15 to 20%. And there are, they can use generative AI and post-production colorization, motion capture, repetitive tasks like rotoscoping and background removal, effects like fires or crowds. And then one of the things I thought was really interesting was the use of these LED volume walls, which are essentially a large wraparound digital wall that you combine with actual physical set elements. And then the background is, is rendered in real time using a generative AI program.  And we have a picture of an example of them. And look how lifelike that background is, set against the, you know, the physical space of the volume wall.

The challenge, though, is maybe the studios are able to shave 10 to 15% from their production costs for film and TV. But if viewers continue to migrate away from these legacy film and TV to alternative forms of content, that’s going to be a challenge. And one of the things that’s already happened is that digital video has overtaken traditional TV attention span of the average adult,

And amazingly social video alone, YouTube, TikTok and Instagram, now represent around 25% of total daily screen time. And I know for a lot of young people, it’s actually much higher than that. In other words, of all the video consumed in a day, how much is legacy TV? How much is, is either free or subscription video on demand? And how much is social media?

In terms of TikTok, I will say I am, I, I have a TikTok account and, you know how your feed gets curated. I have, there’s a picture on the screen here of a sad dog in the rain. I’m a sucker for these videos where people rescue these dogs in the rain, and then they show them getting a new home and they clean them up, and they give them medicine, and they’re playing in the yard. And then you click on it and there’s a link to an Amazon account where you can buy things for dogs. And Rachel is convinced that these are all scams, but I just can’t help myself. And I, I donate lots of money to rescue TikTok dogs.

Now the, the, the challenge again, another way of looking at this is that all these new platforms are deflationary. And this, this isn’t new, right? But this has happened with technology all along. But I just wanted to show you some and, some numbers on what I mean. So Doug Shapiro, who is, is, an excellent media analyst, has done some work on this. And based on his numbers, he calculates monetization rates per hour, whether it’s video gaming or music. So, for example, you make $0.54 an hour off legacy linear video. Netflix brings that number down to $0.37 and then YouTube to $0.19. And then look at music. A CD generates revenue of $0.67 per hour. Spotify cuts that by 90% to $0.06. So all of these things are deflationary as it relates to the amount of money that gets generated.

Now, just to wrap up, I did speak to a couple of people in the film industry and they reiterated that storytelling still matters. And I said, explain how? And they said, well, look at the amount of money that people are paying for these legacy film and TV libraries. Private equity firms have been involved, and there’s been a lot of strategic acquisition. And it’s true. Amazon, when they were acquired MGM, disclosed that it valued MGM’s film and TV library at $3.5 billion. Disney, which has paid over $80 billion for Pixar, Marvel, Lucasfilm and Fox, a lot of that went for the value of the film libraries. Viacom’s purchase of a stake in Miramax library act—was specific library acquisitions by Lantern, by Lionsgate, Raven. And earlier this year, Lionsgate actually reported an operating loss, but at the same time, record-high film library revenues. And now the latest news is that Netflix is, is exploring a potential acquisition of Warner Brothers. And that was libraries including Harry Potter, the DC comics and things like Game of Thrones. So storytelling still matters. And, you know, I was able to find evidence of that. If you look at the movie share of streaming revenues, they’ve gone up, interestingly, from 2022 to 2024.

Let’s use Amazon Prime Video as an example. Movies doubled from 30 to 60% of total streaming revenue. So that was interesting. And then, when you look at TV libraries, what are they worth? One way of thinking about it is what do people watch when they stream TV episodes? And so we have a table in here that shows the top 20 in the U.S., NCIS, Gray’s Anatomy, Squid Game. You know, I, I haven’t seen most of these shows, but Gunsmoke made the list. Little House on the Prairie made the top 20 list last year. So some of these legacy TV shows still have a lot of value in terms of getting eyeballs. And we show another analysis on a global level of, of the most popular streaming shows on a global basis. And I have to admit, I’ve never seen a single one of these shows: Gray’s Anatomy, Prison Break, Lost, Big Bang Theory, Dexter, the Resident, Gilmore Girls, Suits, Supernatural and Friends. Never seen it.

Okay, so just to wrap up, I do hope that the content moat survives a little bit longer. I, I’ve never seen any of those TV shows, but I’m a big, I’m a big film watcher, and I actually have a Letterboxd account, and I put a link to it in the, in the Eye on the Market file, the PDF or the HTML, whichever one you’re looking at. And I included a table of all the films that I ranked at a four-and-a-half or a five in the 21st century. There’s about 30 of them. The most recent one was a film called The Ballad of Wallis Island. Really good movie. And, so anyway, if you want to, if you want a list of, of good films to see in my, you know, following my recommendations, you could look at the table and, and when I looked at the ratio of worldwide box office receipts to the production budgets of these films, they were positive. Now, a lot of those receipts have to get paid to distributors. I understand that, but there does still seem to be a market for this kind of thing.

Anyway, thank you very much for listening. And I will, I will see you all again in early December for the biennial Eye on the Market Alternative Investments. Thanks for listening.