Goldman Sachs Warns AI-Driven Content Explosion Will Reshape China’s Entertainment Value Chain
TREE NEWS reports: AI is fundamentally restructuring the value chain and profit pool of China’s entertainment industry. The core thesis: content supply is approaching infinity while user attention remains finite—a contradiction set to profoundly reshape the industry over the coming years and create sharp divergence across sub-sectors and players.
The report notes that rapid advances in AI multimodal technology have compressed content production costs by an average of 80% to 90% or more, while dramatically shortening production cycles. Short dramas illustrate the trend: production of short dramas and mini-series in the first eight months of 2026 expanded 13-fold compared to all of 2025. New game releases, including mini-games, grew more than 8-fold. Meanwhile, audience acceptance of AI-generated content is rising quickly as quality improves—on leading short-drama platform Hongguo, over 90% of series are already AI-generated.
Supply Explosion, Attention Scarcity
Goldman’s central proposition is that while AI-era content supply approaches infinity, user time and attention have not expanded accordingly. Technologically, AI video generation speed has surpassed human viewing speed—the H3 max model can generate 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 estimates AI can cut production costs for animation, music, advertising videos and short dramas by 80% to 95%; for complex interactive content like games and long-form series, cost reductions reach 30% to 70%. Production cycles have accelerated at least 5 to 10 times—a 2-3 person team can now develop a mini-game in a week, a task that previously took 3 to 6 months.
However, infinite supply is creating new problems. As vast amounts of homogeneous content flood the market at unprecedented speed, content “shelf life” is shortening, user attention is fragmenting further, and new IPs face rising barriers to breaking through.
Value Chain Restructuring: IP Appreciates, Production Depreciates
Goldman summarizes AI’s impact on the entertainment value chain across three layers, with significantly different beneficiary profiles.
- IP and creative layer: Top-tier, evergreen IPs are poised to extend their lifecycles with AI. Tencent’s evergreen games like Honor of Kings and Justice Online continued expanding market share in 2026. But long-tail IPs face greater differentiation pressure, and new IPs struggle to gain user recognition in a highly fragmented attention environment.
- Production and execution layer: Value is being systematically compressed. AI tools dilute the added value of traditional production processes. Physical studios, actors, outsourcing agencies and graphic design are among the hardest hit. Unless content successfully converts into copyright-protected durable IP, competition will continue toward homogenization.
- Distribution platforms: Overall beneficiaries, but with internal divergence. Short-drama producers, despite drastically lower costs, generally struggle to profit because they must buy traffic from platforms. Platforms benefit. In contrast, platforms whose moat is a copyright content library—especially in China where copyright protection is relatively weak—are seeing their competitive barriers eroded by the influx of AI content.
New Formats Emerge, Monetization Still Evolving
Goldman identifies several emerging content formats enabled by AI video technology, noting they have real user demand but monetization remains dynamic.
- Dynamic interactive micro-dramas: Combining mobile vertical short dramas with real-time video generation, dynamically generating narrative based on viewer choices or sentiment analysis, replacing pre-rendered branching storylines.
- Virtual anchors and AI live-stream e-commerce: Virtual idols and AI hosts are evolving from motion-capture-dependent 2D/3D avatars into multimodal agents capable of 24/7 autonomous broadcasting, real-time comment response and dynamic product display.
- Personalized virtual companionship: High-fidelity virtual characters offering one-on-one interaction, monetized via per-minute billing (e.g., $1 per minute video call) and subscriptions.
- AI workflow orchestration platforms: Goldman views “orchestration layer” platforms integrating multi-agent workflows, long-form narrative consistency management and production pipelines as potential high-value capturers. iQIYI’s Nadou Pro is cited as a representative case.
Online Gaming: The Most Resilient Sub-Sector
Goldman considers online gaming the most resilient entertainment vertical. AI dividends in gaming currently flow more to top-tier established publishers, which are better positioned to extend existing IP and evergreen game lifecycles. New game IPs have seen notably fewer success stories since 2026.
Tencent is viewed as a leader in gaming AI, with its Hunyuan Game and Hunyuan 3D models generating high-quality 3D assets from multimodal inputs (text, images, sketches) in minutes and supporting interactive game prototype construction. NetEase focuses deeply on AI-native gameplay mechanics through its Fuxi Lab, advancing LLM-driven autonomous NPCs and generative user-created content (AI-UGC). Its titles Where Winds Meet and Tianxia Mobile have integrated multiple AI elements.
Goldman also upgraded XD Inc. to Buy, believing its TapTap platform will benefit from the massive expansion of game supply, with the narrative shifting from “AI victim” in the first half of 2026—due to rising AI compute costs and TapTap Maker diluting ad traffic—to “AI beneficiary,” particularly in serving long-tail game developers.
Long-Form Video and Music Streaming: Short-Term Gains, Long-Term Pressure
Goldman is cautious on long-form video platforms. Near-term, AIGC can accelerate content output, reduce procurement costs, and regulators are relatively supportive of AI content. But long-term, two core questions remain: whether users will consistently consume AI content on long-form platforms (user time on such platforms has declined about 50% over the past three years), and whether the flood of AI content will gradually erode the competitive advantage of copyrighted series.
Goldman maintains a Sell rating on Mango Excellent Media and Neutral on iQIYI, believing both can benefit from short-term cost cuts but face long-term user competition from short-drama platforms.
In music streaming, Goldman notes China’s music production supply is in a relatively disordered expansion. The protection boundary between copyright libraries and AI-imitation songs, and user preference shifts toward AI music, are core uncertainties. Tencent Music (Buy) faces short-term subscription revenue pressure, with medium-to-long-term growth relying more on non-subscription revenue and competitive landscape improvement.
Two Core Risks: Monetization and Regulation
Goldman highlights two structural challenges for the AI entertainment industry.
- Monetization difficulty: When users can create unlimited content at near-zero cost, their willingness to pay may remain limited. For entertainment products, infinite supply can also trigger “content fatigue”—more AI short dramas, virtual idols and interactive stories do not automatically translate into longer viewing time or higher user spending.
- Regulatory pressure: AIGC businesses may face overlapping constraints from AI regulations, privacy laws, consumer protection laws, advertising laws and copyright rules. Challenges are particularly acute for virtual idols, companion agents, interactive short dramas and AI live-stream hosts, as user stickiness for these products is often built on emotional connection. Goldman notes Chinese regulators have begun strengthening oversight of the short-drama and long-form drama industries.
Key Takeaways for Investors
- Own the IP, not the production: The value is migrating decisively from execution to ownership of durable, copyright-protected IP. Companies with evergreen franchises (Tencent, NetEase) are best positioned.
- Platforms win, but not all: Distribution platforms benefit from supply explosion, but those reliant on copyright libraries face erosion. TapTap’s upgrade reflects the value of aggregating long-tail supply.
- Avoid long-form video: Structural headwinds from short-drama competition and AI content dilution make this a sector to underweight.
- Watch monetization and regulation: These are the two variables that could derail the entire thesis. Content fatigue and regulatory crackdowns on emotionally-driven AI products are the key risks to monitor.
