“AI companies are either in a position where they need to aggressively filter user prompts and model outputs to make sure that they don’t accidentally show Darth Vader, or strike deals with the rights holders to get permission to make videos and images of Darth Vader,” Sag told Fortune. “The licensing strategy is much more of a win-win.” 

The three-year agreement gives OpenAI the right to ingest hundreds of Disney-owned characters into Sora and ChatGPT Image. Disney will also receive equity warrants and become a major OpenAI customer, while deploying ChatGPT internally.

Sag said the deal itself will be a kind of “revenue-sharing.”

“OpenAI hasn’t figured out the revenue model,” Sag said. “So I think making this just an investment deal, in some ways, simplifies it. For Disney … [OpenAI] will figure out a way to make this profitable at some point, and [Disney will] get a cut of that.”

Why this deal matters: The ‘Snoopy problem’

For more than a year, the biggest legal threat to large-scale generative AI has centered on what Sag calls the “Snoopy problem”: It is extremely difficult to train powerful generative models without some degree of memorization, and copyrightable characters are uniquely vulnerable because copyright protects them in the abstract.

Sag was careful to outline a key distinction. AI companies aren’t licensing the right to train on copyrighted works; they’re licensing the right to create outputs that would otherwise be infringing.

That’s because the case for AI companies training their models on unlicensed content is “very strong,” Sag said. Two recent court rulings involving Anthropic and Meta have strengthened those arguments.  

The real stumbling block, Sag said, has always been outputs, not training. If a model can accidentally produce a frame that looks too much like Darth Vader, Homer Simpson, Snoopy, or Elsa, the fair use defense begins to fray.

“If you do get too much memorization, if that memorization finds its way into outputs, then your fair use case begins to just crumble,” Sag said.

While it’s impossible to license enough text to train an LLM (“that would take a billion” deals, Sag said), it is possible to build image or video models entirely from licensed data if you have the right partners. This is why deals like Disney’s are crucial: They turn previously illegal outputs into legal ones, regardless of whether the training process itself qualifies as fair use.

“The limiting principle is going to be essentially about whether—in their everyday operation—these models reproduce substantial portions of works from their training data,” Sag said.

The deal, Sag says, is also a hedge against Hollywood’s lawsuits. This announcement is “very bad” for Midjourney, whom Disney is suing for copyright infringement because it upholds OpenAI’s licensing deal as the “responsible” benchmark for AI firms. 

This is also a signal about the future of AI data

Beyond copyright risk, the deal exposes another trend: the drying up of high-quality, unlicensed data on the public internet.

In a blog post, Sag wrote:

“The low-hanging fruit of the public internet has been picked,” he wrote. “To get better, companies like OpenAI are going to need access to data that no one else has. Google has YouTube; OpenAI now has the Magic Kingdom.”

This is the core of what he calls the “data scarcity thesis.” OpenAI’s next leap in model quality may require exclusive content partnerships, as opposed to more scraping. 

“By entangling itself with the world’s premier IP holder, OpenAI makes itself indispensable to the very industry that threatened to sue it out of existence,” Sag wrote. 

AI and Hollywood have spent three years locked in a cold war over training data, likeness rights, and infringement. With Disney’s $1 billion investment, that era appears to be ending.

“This is the template for the future,” Sag wrote. “We are moving away from total war between AI and content, toward a negotiated partition of the world.”