AI is fundamentally reshaping the value chain and profit pools of China's entertainment industry.
According to a recent Goldman Sachs research report, content supply is approaching infinity while user attention remains limited, a core contradiction that will profoundly alter the industry landscape over the coming years and create significant divergence across different sectors and players.
Goldman Sachs reports that the rapid evolution of multimodal AI technology has compressed content production costs by an average of 80% to 90% or more, with production timelines drastically shortened. Taking short dramas as an example, output of short dramas and mini-dramas in the first eight months of 2026 expanded 13-fold compared to the full year of 2025, while new game releases (including mini-games) grew more than 8-fold. Meanwhile, audience acceptance of AI-generated content is rising quickly alongside quality improvements, with over 90% of dramas on leading short-drama platform Hongguo now AI-generated.
Goldman Sachs believes the explosive growth in content supply does not mean all segments of the industry chain will benefit equally. The report clearly states that value at the production and execution level will be compressed, while the scarcity of top-tier IP and creative assets becomes even more pronounced.
Supply explosion makes attention the scarce resource
The core thesis of the Goldman Sachs report is that in the AI era, content supply approaches infinity, but users' time and attention have not expanded correspondingly.
On the technical front, AI video generation speed has already surpassed human viewing speed, with the H3 max model generating a 5-second video in just 3 seconds. This breakthrough shifts content production from a "scarcity-driven studio model" to an "infinite dynamic generation model." Goldman Sachs estimates AI can cut production costs for animation, music, advertising videos, and short dramas by 80% to 95%, while complex interactive content like games and long-form dramas sees cost reductions of 30% to 70%. In terms of production cycles, AI accelerates content output by at least 5 to 10 times, with a small 2-to-3-person team now capable of developing a mini-game within one week, whereas the same task previously required 3 to 6 months.
However, the unlimited expansion of supply is creating new problems. Goldman Sachs points out that when large volumes of homogenized content flood the market at unprecedented speed, the "shelf life" of content actually shortens, user attention becomes increasingly fragmented, and the difficulty of breakout success for new IP rises.
Value chain restructuring: IP appreciates, production depreciates
Goldman Sachs categorizes AI's impact on the entertainment industry value chain into three levels, each with significantly different levels of benefit.
The IP and creativity layer shows a divergent landscape. Top-tier, evergreen IP can leverage AI to extend their lifecycles, as evidenced by Tencent Holdings Ltd (HKG: 0700) games like Honor of Kings and Justice Mobile continuing to expand market share in 2026. However, long-tail IP faces greater differentiation pressure, and new IP finds it increasingly difficult to gain user recognition in a highly fragmented attention environment.
The value of the production and execution layer is being systematically compressed. The proliferation of AI tools has substantially diluted the added value of traditional production processes, with physical studios, actors, outsourcing agencies, and graphic design being the most deeply impacted groups. Goldman Sachs notes that unless content successfully transforms into durable IP protected by copyright, competition will continue toward homogenization.
Content distribution platforms benefit overall, though with internal divergence. Short-drama producers, despite dramatically lower costs, generally struggle to profit because they must purchase traffic from platforms, from which the platforms themselves benefit. In contrast, platforms whose moat relies on copyright content libraries, especially in China's relatively weak copyright protection environment, are seeing their competitive barriers eroded by the influx of AI-generated content.
New business formats emerge while monetization paths remain exploratory
The Goldman Sachs report outlines several emerging content formats enabled by AI video technology, believing these models have genuine user demand, though monetization methods remain in dynamic evolution.
Dynamic interactive micro-dramas combine mobile vertical short dramas with real-time video generation, dynamically generating narrative content based on audience real-time choices or emotional analysis, replacing traditional pre-rendered branching storylines.
Virtual anchors and AI livestream e-commerce: Virtual idols and AI anchors are evolving from 2D/3D avatars dependent on manual motion capture into multimodal agents capable of 24/7 autonomous broadcasting, responding to viewer comments in real time and dynamically displaying products.
Personalized virtual companionship: High-fidelity virtual characters provide one-on-one interactive experiences, with monetization models including per-minute billing (such as $1 per minute for video calls) and subscription plans.
AI workflow orchestration platforms: Goldman Sachs views "orchestration layer" platforms that integrate multi-agent workflows, long-form narrative consistency management, and production pipelines as potentially high-value captures, with iQIYI Inc (NASDAQ: IQ) Nadou Pro serving as a representative case.
Online games: the most resilient track
Goldman Sachs believes online games represent the most resilient segment among current entertainment verticals. The AI dividend in gaming currently flows primarily to leading mature publishers, as they are better positioned to leverage AI tools to extend the lifecycle of existing IP and evergreen games. In contrast, new game IP has seen notably fewer success cases since 2026.
Tencent Holdings Ltd (HKG: 0700) is viewed by Goldman Sachs as the frontrunner in gaming AI adoption, with its Hunyuan Game and Hunyuan 3D models capable of generating high-quality 3D assets from multimodal inputs (text, images, sketches) within minutes, while also supporting the construction of interactive game prototypes.
NetEase Inc (NASDAQ: NTES) focuses deeply on AI-native gameplay mechanics, advancing large language model-driven autonomous NPCs and generative user-generated content (AI-UGC) through its Fuxi Lab, with titles like Where Winds Meet and Voyage Online already integrating multiple AI elements.
Goldman Sachs simultaneously upgraded XD Inc (HKG: 2400) to Buy, believing its TapTap platform will benefit from the massive expansion of game supply, with the narrative potentially shifting from "AI loser" in the first half of 2026 (due to rising AI computing costs and TapTap Maker's dilution of ad traffic) to "AI winner," particularly in serving long-tail game developers.
Long-form video and music streaming: short-term benefits, long-term pressure
Goldman Sachs takes a cautious stance on long-form video platforms. In the near term, AIGC can accelerate content output and reduce procurement costs, with regulators relatively supportive of AI content. However, two core questions remain unresolved in the long run: first, whether users will continue consuming AI content on long-form video platforms (user time on such platforms has declined roughly 50% over the past three years); and second, whether the proliferation of AI content will gradually erode the competitive advantage of copyrighted dramas.
Goldman Sachs maintains a Sell rating on Mango Excellent Media (SHE: 300413) and a Neutral rating on iQIYI Inc (NASDAQ: IQ), viewing both as beneficiaries of short-term cost reductions but facing long-term user competition pressure from short-drama platforms.
Regarding music streaming, Goldman Sachs notes that China's music production supply is currently in a relatively disordered expansion state. The protective boundary between copyrighted music libraries and AI-imitating songs, along with user preference shifts toward AI music, represent core uncertainties. Tencent Music Entertainment Group (NYSE: TME) (Buy) faces near-term subscription revenue pressure, with mid-to-long-term growth relying more on non-subscription revenue and improved competitive dynamics.
Two core risks: monetization and regulation
Goldman Sachs highlights two structural challenges facing the AI entertainment industry.
Monetization difficulties: When users can create unlimited content at near-zero cost, their willingness to pay may remain limited. For entertainment products, unlimited supply may also trigger "content fatigue," as more AI short dramas, virtual idols, and interactive stories do not automatically translate into longer viewing times or higher user spending.
Regulatory pressure: AIGC businesses may face overlapping constraints from AI regulations, privacy laws, consumer protection laws, advertising laws, and copyright regulations. Regulatory challenges are particularly acute for virtual idols, companion agents, interactive short dramas, and AI livestream anchors, as user stickiness for these products often relies on emotional connections. Goldman Sachs notes that Chinese regulators have already begun strengthening oversight of the short-drama and long-drama industries.
Comments