Nomura: ByteDance dominates China's AI short drama value chain, but low switching costs leave room for challengers.

Nomura released a research report stating that after recent exchanges with two short drama producers on industry trends, it found that AI-generated short dramas (AGSD) are evolving from a low-cost content production model into a more professional and quality-oriented ecosystem. AGSD has significantly lower per-title production costs and capital thresholds, and is accelerating its replacement of low-end live-action short dramas. It expects that structural cost advantages, combined with continuous improvements in AI video quality, should continue to support the rapid growth of the AGSD industry. Nomura noted that over the past year, the surge in AGSD supply has prompted major platforms such as Hongguo to raise quality thresholds and crack down on low-quality content, with industry competition increasingly shifting toward higher-quality IP, talent, and production. Industry experts currently believe that ByteDance occupies a dominant position in China's AISD value chain, covering upstream AI video generation tool Seedance and downstream distribution through Douyin and Hongguo. Seedance is estimated to be used in 80% to 90% of the AISD production process. Its main drawback is its higher price, carrying a premium compared with Kling and BABA-W (09988)'s Wanxiang. Due to low switching costs, challengers still have room. The bank pointed out that as supply surges, platforms such as Hongguo have raised quality thresholds. In high-quality AGSD, IP or script costs have risen to about 30% of total production costs, while computing power and production account for another more than 20%. IP mainly comes from ByteDance's "Fanqie Novel" ecosystem, BIDU-W (09888)'s "Qimao Novel," and scripts originally developed for live-action short dramas. On distribution, Douyin and Hongguo remain the most important monetization channels, but producers also distribute to platforms such as KUAISHOU-W (01024), iQIYI, Inc. Sponsored ADR Class A (IQ.US), BILIBILI-W (09626), and TENCENT (00700).