📰 The New York Times vs. OpenAI
This copyright infringement lawsuit could redefine media
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After taking over The Washington Post in 2013, Jeff Bezos wrote:
"The Internet is transforming almost every element of the news business: shortening news cycles, eroding long-reliable revenue sources, and enabling new kinds of competition, some of which bear little or no news-gathering costs."
More than a decade later, winners and losers have crystallized.
📰 Media Revolution: The New York Times (NYT) stands out in the fast-evolving world of news media. Once anchored in print, it leads the digital subscription race by a mile.
🖥️ Digital Reign: The transition from traditional print to digital supremacy has reshaped NYT. It's not just surviving; it's thriving in the digital era, with revenue beyond news.
⚖️ Legal Crossroads: Now, NYT finds itself at a legal crossroads, suing Microsoft and OpenAI for the use of copyrighted work. It's a pivotal moment that may redefine the rules of engagement between AI startups and media organizations.
Beyond Copyright: The lawsuit transcends copyright issues. It's about setting precedents in a world where AI intersects with journalism.
The AI Conundrum: How does traditional news media coexist with AI's limitless potential? This lawsuit might offer some answers.
OpenAI’s Answer: Earlier this week, the startup responded to the lawsuit and spilled the beans on ongoing negotiations. So get your popcorn ready. 🍿
Today at a glance:
The rise of The New York Times.
How The New York Times Makes Money.
The OpenAI Lawsuit.
Let’s dive into The New York Times' journey to becoming the largest paywalled website, how the company makes money, and the challenges it faces with the advent of Large Language Models (LLMs) trained on its content.
1. The rise of The New York Times
The NYT commands the global digital media realm as the most extensive paywalled news website. Its impressive subscriber count far exceeds its competitors, marking it the industry's digital subscription titan.
NYT’s rise is attributed to its strategic pivot from advertising to subscription and an array of compelling digital content. By mastering audience engagement through analytics and innovative digital marketing, the Times has set a new standard for media outlets transitioning into the digital age.
Quality over Quantity
Implementing a metered paywall in 2011 was a bold move that paid dividends. It underscored NYT's dedication to quality news, earning the trust and wallets of discerning readers worldwide.
NYT's approach contrasts sharply with the industry's clickbait tendencies. Instead, it upholds journalistic integrity by investing in thorough, reliable reporting.
A Multi-product Strategy
The company offers multiple digital-only subscription products:
📰 News-only: Digital access to NYT's journalistic content, including articles, reports, and editorials.
🏈 The Athletic: In-depth sports reporting and storytelling from local and national perspectives.
🥗 Cooking: Recipe database, cooking guides, and meal-planning tools.
🧩 Games: Various interactive puzzles, including the popular daily crossword and Spelling Bee. In 2022, The NYT acquired Wordle for over $1 million.
🎧 Wirecutter: Product reviews and recommendations across numerous consumer categories.
Visualizing the Lead
NYT's lead in digital subscriber numbers is stark. It highlights the effectiveness of its digital strategy and the gap with The Wall Street Journal, its nearest competitor.
The Competitive Landscape
From institutions like The Washington Post to new entrants like Substack, the competition in the paywalled arena is as varied as it is fierce. Yet, NYT is committed to growth:
🏟️ The Athletic: The NYT acquired The Athletic for $550 million in 2022. It replaced its sports department in 2023. It brought hundreds of reporters with sports expertise. The Athletics had 1.2 million subscribers at the time of the acquisition and more than doubled in the following year, illustrating an effective growth strategy.
🥇 Market Consolidation: The significant lead held by NYT may also imply a consolidation of market power, with a few key players increasingly dominating the digital subscription landscape.
Sustaining Growth and Building a Moat
NYT's burgeoning digital subscriber base is a testament to its current market dominance and a springboard for future growth.
Growth a la Netflix: With the ability to upsell and cross-sell, NYT can improve its lifetime value per user (LTV) and invest more in user acquisition.
Network Effects: The more subscribers it gains, the more it can invest in content, attracting more subscribers and creating a virtuous growth cycle.
2. How The New York Times Makes Money
The NYT counted in Q3 2023:
10.1 million total subscribers.
9.4 million digital-only (including 4.2 million with The Athletic).
0.7 million print subscribers.
Key metrics to watch:
Digital-only Subscribers: 9.4 million (+10% Y/Y, +2% Q/Q).
Digital-only Average Revenue per User (ARPU): $9.28 (+5% Y/Y).
Let’s discuss how The New York Times makes money.
Revenue has three main components:
1. Subscription: ~70% of overall revenue.
💻 Digital: 47% (with double-digit growth).
🗞️ Print: 23% (slowly declining).
2. Advertising: ~20% of overall revenue (relatively flat).
3. Other: ~10% of overall revenue. Including licensing, Wirecutter affiliate referrals, commercial printing, leasing, live events, and more.
Here’s a bird’s-eye view of the income statement in Q3 FY23.
Costs and expenses include:
Cost of Revenue: Expenses related to content creation, including journalist salaries, news gathering costs, and content delivery.
General & Administrative: Corporate expenses, including building operations, finance, accounting, legal and human resources.
Sales & Marketing: Costs of acquiring and retaining subscribers, including advertising campaigns, promotions, and brand marketing.
Product Development: Investment in technology to improve the digital experience for readers and develop new products.
Depreciation & Amortization: Gradual expense recognition of physical assets and software vital for content delivery and maintaining their digital platform's infrastructure.
The gross margin has been around 50% in the past three years.
The operating margin has been around 10% for most of the past decade.
Cash flow in the first nine months of FY23:
Operating cash flow was $224 million (13% margin, +8pp Y/Y).
Free cash flow was $208 million (12% margin, +9pp Y/Y).
Balance sheet as of September 2023:
Cash, cash equivalent, and short-term investments: $398 million.
Long-term debt: $189 million.
So what to make of all this?
📱 Digital Growth: NYT's digital growth trajectory underscores its successful pivot from an ad-based model to subscription-founded journalism, capturing the changing consumer media consumption patterns.
📰 Print’s Persistence: Despite the digital surge, print remains a resilient contributor, suggesting that longstanding consumer habits may evolve but don’t disappear overnight.
🌐 Holistic Expansion: The company’s expansion into various digital-only products illustrates a strategy to survive and thrive in the digital age by diversifying beyond news.
💡 Investing in Future Growth: Continued investment in product development and technology underpins NYT’s commitment to enhancing user experience and fostering long-term growth.
3. The OpenAI Lawsuit
A New Frontier in Copyright Law
NYT's lawsuit against OpenAI and Microsoft marks a pivotal moment in the evolving relationship between AI and copyright law. It's not just about the use of copyrighted material. It's about the future of content creation and distribution.
The Lawsuit at a Glance
The crux of the lawsuit is twofold. It challenges:
🎓 The use of copyrighted material to train AI models.
📝 The capability of these models to generate outputs that closely mimic original copyrighted works.
Key Legal Arguments
Input vs. Output: The Times' legal argument hinges on the premise that while AI models may consume copyrighted content (the input), it's the generation of identical or near-identical content (the output) that constitutes infringement.
Transformative Use and Fair Use: Drawing parallels to previous cases like Google Books, OpenAI could argue for transformative use of the content. However, the Times points out specific instances where outputs directly competed with their services.
The Hallucination Issue: The lawsuit also addresses instances where AI 'hallucinates' or generates incorrect information, potentially damaging the Times' reputation for reliable information.
The Implications for AI and Journalism
A Test Case: This lawsuit could set a precedent for how AI companies use copyrighted content to train their models, impacting the entire AI and tech industry.
The Question of Liability: Determining who is responsible when AI outputs infringing content is complex. Is it the AI developer, the platform hosting it, or the user prompting the output?
The Balance of Innovation and Protection: The outcome could influence how AI and content creators balance the need for innovation with the protection of intellectual property rights.
What to Watch
Court's Interpretation: How the court interprets the fair use doctrine in this context will be critical. It will consider factors such as the purpose of AI's use, the nature of the copyrighted work, and the effect on the potential market.
Precedent-Setting Decisions: Any ruling will be scrutinized for its potential to become a benchmark for future cases involving AI and copyright.
OpenAI was taken aback by the lawsuit, first hearing about it through the very source of the dispute — a New York Times article! Let's dive into the quirky details:
👩💻 Fair Use or Foul Play? OpenAI argues that their use of news content for training is fair use, but they still offer an opt-out as a goodwill gesture.
🐞 A Rare Bug: The company admits to occasional 'regurgitation' of content but labels it a rare bug that they're squashing aggressively.
Negotiations Gone Sour:
💬 Not the Whole Story: Discussions between the two companies in December seemed promising, focusing on displaying NYT content with proper attribution in ChatGPT.
🚪 Negotiations Stalled: The negotiations hit a wall with the unexpected lawsuit, leaving OpenAI in a state of surprise and disappointment.
Generative AI's Legal Labyrinth:
📚 Not Just An NYT Problem: From John Grisham to George R.R. Martin, authors are lining up with their own copyright claims against AI-generated content.
🖼️ Image Generation Challenges: Companies like Getty Images and Stability AI are wrestling over similar issues in courtrooms.
💻 Even AI-generated code isn't immune: Microsoft, GitHub, and OpenAI are entangled in lawsuits over training methodologies for coding.
As we await the court's decision, this lawsuit underscores the challenges at the intersection of emerging technologies and established legal frameworks. The outcome will likely ripple through the media, tech, and legal landscapes, potentially redefining what constitutes fair use in the age of AI-driven content creation.
While OpenAI works to iron out the bugs, the legal battles are just heating up. Will these lawsuits redefine how AI uses existing content, or will they be footnotes in the grand saga of AI evolution? Stay tuned!
That’s it for today,
Stay healthy and invest on!
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Disclosure: I am long GOOG in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members.
Author's Note (Bertrand here 👋): The views and opinions expressed in this newsletter and across our social channels are solely our own and should not be considered financial advice or any other organization's views.