Disney and OpenAI Are Teaming Up. Here's What It Means for Investors.

Less than a week after the Warner Bros. Discovery-Netflix deal sent shockwaves through Hollywood, another deal is threatening to upend the entertainment industry.

Walt Disney Co (NYSE: DIS) said it would invest $1 billion in OpenAI, the AI juggernaut whose generative AI tools could disrupt a host of industries, including entertainment.

Central to that agreement is that Disney is bringing its classic characters to Sora, OpenAI's text-to-video platform that could change the way TV and movies get made.

Image source: Disney.

What's happening with Disney and OpenAI

As part of a three-year licensing deal, Sora will be able to generate "short, user-prompted social videos that can be viewed and shared by fans, drawing on more than 200 Disney, Marvel, Pixar and Star Wars characters," some of which will be selected to stream on Disney+.

Disney and OpenAI also committed to the responsible use of AI to protect the rights of creators and the safety of users.

As part of the deal, Disney will become a major customer of OpenAI, using its APIs internally and deploying ChatGPT for its employees. In addition to the $1 billion equity investment, Disney will also receive warrants to buy additional shares of OpenAI.

What Disney gets

For Disney, the move seems like a clever way to test the generative AI waters, give fans a valuable outlet for creativity, and even come up with new programming for Disney+. The move also ties its future to OpenAI, the company that has led the AI era since the launch of ChatGPT.

As long as the deal doesn't upset Disney's creative workforce, it looks like a clever, low-risk move for the entertainment giant. Movies are notoriously expensive to produce, and experimenting with Sora both as a way to cut costs and make production easier makes sense.

CEO Bob Iger explained, "Technological innovation has continually shaped the evolution of entertainment, bringing with it new ways to create and share stories with the world."

What OpenAI gets

For OpenAI, the deal gives its technology the opportunity to play with some of the world's best-known characters and build further awareness.

Sora thus far seems to be struggling to be more than a novelty, and making content that could stream on Disney+ allows it to demonstrate that it could be used to make professional-level video entertainment.

A win-win

The deal looks likes a smart move for both companies. While it's not necessarily a game-changer, it gives both companies the opportunity to push the envelope and experiment with a new technology or new intellectual property.

While the deal is likely to sound some alarm bells in Hollywood, Iger is right that the company needs to experiment with new technology, rather than reject it. Disney stock rose 2.4% on the news on Thursday, a sign that investors agree with the move, applauding the long-term thinking behind the deal.

Jeremy Bowman has positions in Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy.