AI Short Dramas Don't Burn Viewers, They Burn Short-Drama Companies' Money

Two years ago, critics mocked the low quality of short dramas, but today most people are hooked on them. Jia Zhangke, Yu Hua and Mo Yan have all said they watch them. QuestMobile data shows the short-drama industry had 718 million monthly active users in February 2026, and the app Hongguo alone exceeded 300 million. In July, Hongguo's daily active users reached 168 million, up 107% year on year, surpassing the combined daily active users of iQIYI, Tencent Video, Youku and Mango TV. Overseas users are also enthusiastic. ByteDance's overseas short-drama app PineDrama has passed 100 million cumulative downloads within nine months of launch, with about 7 million daily active users. According to DataEye, driven by AI short dramas, the overseas short-drama market is expected to grow from about 4 billion dollars in 2025 to 6 billion dollars in 2026, a 50% increase. Yet the money side tells a different story. Seedance 2.0 and similar tools have cut generation costs sharply. AI animated short dramas now cost 800 to 1,200 yuan per minute, about one-fifth of live-action short dramas, and an AI live-action series can cost 60,000 to 100,000 yuan versus more than 500,000 yuan for a comparable live-action series. But supply has exploded without bringing profits to most producers. In the first eight months of this year, 430,000 micro-dramas went online, 13 times the total for all of last year, with AI productions making up over 90%. However, using 50 million views as the break-even benchmark, only about 1.3% of AI dramas recouped their costs in the first half of the year, roughly one hit for every 77 new titles. Demand is not the problem. Micro-drama users reached 851 million in May 2026, 66.7% of all internet users, with about 133 million new users added over four months. The problem is oversupply and homogenization. Revenge, in-law conflicts and rich-family romance are endlessly remade with minor changes. Production is not the main cost. User acquisition advertising accounts for 70% to 90% of recharge revenue. A hit that has generated over 100 million yuan in recharges may have spent 60 to 80 million yuan on ads, leaving only a few million yuan of profit after production costs and revenue sharing. Industry sources say AI dramas typically have an advertising ROI of only 1.03 to 1.07, and revenue per 10,000 views has dropped from 30 to 100 yuan a year ago to 5 to 10 yuan now. Overseas expansion is seen as the next opportunity. Overseas, the distribution model centers on standalone apps, letting companies control user, pricing and operating data and earn through subscriptions, per-episode payments and ads. But competition there is intensifying. DramaBox, ReelShort and NetShort were the top three by in-app purchase revenue in the first half of 2026, with roughly 195 million, 188 million and 128 million dollars, and all top five are Chinese companies. Revenue growth is strong, but profitability is weak. China Literature's selling expenses in the first half of 2026 reached 254 million yuan, about 44% of revenue. Its 2025 loss was 671 million yuan, with selling expenses at 57.54% of revenue. Frame Interactive's ReelShort had 2025 revenue of 5.721 billion yuan but a net loss of 85.84 million yuan. DramaBox's parent Dianzhong Technology reportedly has an overall gross margin of about 10%, with a net margin below 1% in short dramas. Competition is also growing. Overseas short-drama platforms increased from about 100 to about 400 within a year, and local platforms are rising. In Q3 2025, the share of Chinese-language apps among the top 30 short-drama apps by downloads fell from 95% to 67%. The growth dividend remains, but it comes with rising advertising costs. To keep growing, short-drama companies must spend more on user acquisition, meaning the problems seen at home are repeating overseas.