A recent research report from Essence Securities highlights that the short drama and animated drama industry is shifting from pure scale expansion to a new stage where content quality and monetization efficiency are equally prioritized. Within the domestic market, the trend toward premium, high-quality production is deepening, with AI technologies driving efficiency gains in intellectual property (IP) adaptation and content generation. Overseas, significant room for expansion remains, positioning localized content supply and platform operational capabilities as critical growth drivers. The report suggests investors focus on: 1) IP owners; 2) platform operators; 3) leading companies that combine production strength with overseas platform deployment.

Having evolved from short-form video snippets since 2019, the industry has progressed through a distinct pathway: platform aggregation, IP-driven professionalization, mini-program in-app purchase expansion, and the shift toward free standalone apps. This trajectory has fueled rapid growth in user numbers, viewing time, and content availability. As domestic supply increases and the competitive landscape stabilizes, platforms have moved to strengthen review governance and tiered support mechanisms, pushing the industry from scale growth toward a premium-content competition phase. Concurrently, overseas expansion and AI-generated content continue to unlock incremental market opportunities.

Platforms and IP holders now command significant pricing power: platforms dominate resource allocation through their control of traffic entry points, rule-setting capabilities, and monetization strategies, while IP owners hold the creative source, extending their influence into production, platform operations, and international distribution. Production resources, meanwhile, are consolidating among leading entities that demonstrate both superior production quality and integrated production-distribution synergies. With AI tools evolving from point-specific efficiency gains to full-process collaboration, simple production capacity advantages are diminishing, moving industry rivalry toward IP reserves, aesthetic judgment, workflow management, and distribution operations.

In the domestic arena, the Hongguo short drama platform has established an unassailable lead, signaling a stabilizing industrial structure. Following rapid content supply expansion between 2023 and 2025, the sector's value chain is now maturing; as of May 2026, Hongguo's monthly active users have surpassed 350 million, placing it far ahead of other platforms and marking a preliminary consolidation of the competitive environment. Within this Hongguo-dominated structure, industry revenue streams are primarily generated through user-paid episode unlocks, membership fees, and advertising income. Revenue is allocated based on how effectively upstream content providers drive platform performance, enabling the platform to deftly regulate both the volume and quality of content supply through adjustments in its revenue-sharing ratios. Currently, AI-generated episodes already account for more than half of upstream content provision, while live-action series are experiencing a notable uptick; overall, the market is pursuing a clear path toward higher-quality production values.

The international market is undergoing accelerated expansion, with overseas short drama application download volumes and in-app purchase revenues sustaining a strong growth phase throughout 2025, with the market projected to exceed $6 billion in 2026. On the demand side, Asia and Latin America are driving user growth, while North America remains the primary revenue hub. On the supply side, the share of locally produced, higher-monetizing content is progressively increasing. Future platform competition will pivot decisively toward mastering the end-to-end operational chain: localizing content, achieving low-cost supply, executing precise distribution, and maximizing user monetization. Key risks outlined in the report include regulatory and review policy changes, the diversion of users by emerging entertainment formats, the potential underperformance of AI technology applications alongside copyright compliance challenges, and the risk of inadequate localization adaptation in overseas markets.