Investing.com - Generative artificial intelligence is likely to have a "profound" impact on the entertainment industry, possibly sparking both cost savings and an uptick in the supply of content, according to analysts at Morgan Stanley.

Hollywood has been wrestling to come to grips with AI as it has risen in prominence in recent years, with artists looking to protect the integrity of their work and studios pushing to harness tech that could greatly slash expenses.

In one of the most recent developments to this ongoing debate, video game voice and motion capture actors signed a new contract with studios earlier this week that was heavily focused on securing AI consent and disclosure requirements. The new protections aim to allow performers to provide permission before studios can use an AI digital replica.

The deal comes after the SAG-AFTRA actors union and studios also reached an agreement in 2023 that included protection around the usage of AI in filmmaking.

Intellectual property owners, such as studios and music labels, have also faced a number of lawsuits related to AI training models.

Despite these pacts and legal battles, the Morgan Stanley analysts said in a note to clients that the nascent technology could still have potentialy "irreversible" effects on the entertainment business.

While television and film production costs are seen falling by as much as 30% thanks to AI, the advent of new tools for creators could upend what consumers watch, with the viewership of user-generated content eating into the output of traditional professionals, the analysts said.

"Gen AI tools are coming to the entertainment industry," the strategists added, flagging that these have "the potential to be more than just another innovation, but rather fundamentally disrupt and transform the production and distribution of content."

With these trends in mind, the brokerage raised its price targets for Netflix (NASDAQ: NFLX ) and Spotify (NYSE: SPOT ) shares to $1,450 and $850, respectively, arguing that AI could help these businesses reach their "longer-term growth ambitions."

At Netflix, they predicted that AI could allow the streaming giant to take its already-advanced recommendation engine "to the next level" and fuel an uptick in user engagement beyond the current rate of two hours per day. Netflix could also harness AI to bring advertisers "the best of brand advertising with targeting and attribution."

"Together, these kinds of innovations could help the company sustain double-digit top line growth for a decade with margins approaching 50% in 2030," the analysts said.

Meanwhile, AI can give music streaming service Spotify (NYSE: SPOT ) the ability to improve the personalization, curation and discovery of content, while also enhancing the value of its marketplace products for artists and labels, the analysts said.

They noted that the technology may bolster the pace of Spotify’s product development as well, taking the company into new ventures beyond music, podcasts and audiobooks and helping grow its geographic scope.

Alphabet (NASDAQ: GOOGL )-owned Google, through its YouTube offering, is also tipped to be a key beneficiary of AI’s possible transformation of entertainment, along with Facebook-parent Meta Platforms (NASDAQ: META ).

"[B]oth have released and/or are testing various image/video generation tools for creators and advertisers that could increase engagement and monetization," the Morgan Stanley analysts said.

They estimated that, for every 1% increase in each of these factors, 2027 revenues at YouTube and Meta would go up by about $1 billion and $5 billion, respectively.