AI disrupts Chinese online games? JPMorgan: The market has overlooked the real moat
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AI is reshaping the competitive landscape of the global gaming industry, but JPMorgan believes the market is making a directional mistake by applying this logic to major Chinese game operators.
According to Zhuifeng Trading Desk, JPMorgan released a research report on April 8, noting that the market’s recent downward valuation adjustments for top Chinese game operators such as Tencent and NetEase reflect a misinterpretation—namely, indiscriminately applying the global AI disruption narrative to the Chinese market.
Under China’s unique game license regulatory system, AI is not a disruptor for existing large operators, but rather an amplifier of their competitive advantage.
The license system imposes a hard cap on the number of games that can be legally monetized. The large number of new games spawned by AI lowering production barriers cannot bypass this regulatory bottleneck to reach consumers. Large operators already holding licenses, such as Tencent and NetEase, will disproportionately reap the efficiency dividends brought by AI.
GDC 2026: From "Possible" to "Real"
The Game Developers Conference 2026 (GDC 2026), held in San Francisco this March, is the most comprehensive public window to date for observing AI’s practical deployment in the game industry.
Compared to previous years, a marked change in this year’s event was that the vast majority of AI-related sessions featured production systems already in use with measurable value, rather than mere conceptual prospects. Of the hundreds of sessions at GDC, nearly half were related to AI, and the consensus has shifted from "whether to use AI" to "how to use AI effectively".
Chinese companies stood out at this GDC. Tencent alone attended more than 20 sessions covering AI-driven rendering, asset generation, anti-cheat systems, and player experience tools, comprehensively showcasing the deep integration of AI throughout its production and operation stack.
Industry insiders said that, specifically in the AI track, Chinese developers’ sessions accounted for a very large share of the most advanced technology showcases.
License System: Turning AI from a Threat into a Moat
The impact of AI on the Chinese game market is structurally different from its impact on the open markets of Europe and North America. The key variable is the game licensing system.
In the European and North American PC and console markets, any developer can freely publish games on platforms such as Steam. AI-driven production democratization leads directly to content supply surges, increased competition, and margin pressure.
But in China, every game that can be legally monetized must obtain an ISBN license from the National Press and Publication Administration, and this approval process acts as a hard cap on the number of games entering the market within a given period.
Data show that the total number of approvals for domestic game licenses in 2025 is about 1,676, up about 19% year-on-year, but the number of submissions still grows much faster than approval capacity. After AI further lowers production costs, more games will meet submission quality, likely further widening the approval gap.
The complexity of IP and content compliance review introduced by AI-generated assets may in fact slow the approval process, rather than accelerate it.
Tencent has publicly stated that its AI model training is completely based on commercially validated proprietary assets and utilizes a "data closed loop" strategy, directly circumventing the compliance risks most likely to be scrutinized by regulators. Smaller studios that rely on public or open-source training data may face greater regulatory friction.
Four Mechanisms: How AI Reinforces Tencent and NetEase's Competitive Position
AI will cement the advantages of large operators through four mutually reinforcing mechanisms.
First, AI investment returns scale non-linearly with player base size. Operators can continuously use AI to refresh and expand their approved titles without having to apply for new licenses for new games. Remastering a game with 200 million accumulated players will generate incremental revenue per dollar of AI investment an order of magnitude higher than remastering a game with 5 million players.
A Tencent battle-royale game’s new AI companion system has already attracted over 100 million users, with concurrents exceeding 10 million, and has converted users who previously avoided multiplayer gaming into active paying players—directly validating this logic.
Second, orchestration capability is a more durable moat than any single model. The true competitive barrier lies in the institutional ability to orchestrate dozens of AI components into a production pipeline—an organizational, not a technical, capability, whose diffusion is much slower than that of any individual model.
NetEase’s hybrid super-resolution pipeline also demonstrates this: by custom-classifying and routing each texture surface to the optimal upscaling method, it is a system-level design requiring deep domain expertise to build.
Third, the UGC platform model may steer AI content democratization into the existing ecosystem. Several high DAU Chinese games have launched or expanded user-generated content platforms. The key is that UGC created within existing, approved games does not require separate licensing—meaning the democratization of AI-driven content creation will nurture the existing player ecosystem rather than incubate independent competitors.
Fourth, operating AI systems forms a self-reinforcing advantage. AI-powered anti-cheat, personalized monetization, and player retention models all improve with data scale. Operators with tens of millions of concurrent users generate far better training signals for these systems than those with only hundreds of thousands, thus forming a positive flywheel of “bigger player base—better AI models—better player experience—attracting more players.”
Valuation Judgment: Current Downturn Reflects a False Narrative
The recent valuation compression for companies like Tencent and NetEase is due to the market undifferentiatedly applying the “AI disrupts incumbents” narrative—valid in open markets—to a structured market where the opposite dynamic is at play, which is a market misjudgment.
For Tencent, its closed-loop data strategy, AI orchestration capabilities across the production stack, dominant market share in key genres, and B2B monetization path of exporting AI infrastructure via Tencent Cloud Gaming collectively make it the clearest beneficiary of China’s AI gaming transformation, with its technological moat continuing to widen.
For NetEase, its AI capabilities rely more on a combination of open-source and third-party tools rather than proprietary foundational research, so its production-side advantage is relatively more replicable and its AI moat is not as wide as Tencent’s. But NetEase’s deep IP reserves, agile game design, and operational scale still position it favorably under the license-constrained competitive environment.
Once the market narrative shifts from “AI disrupts incumbents” to “AI in a supply-constrained market strengthens incumbents,” the valuations of Tencent’s and NetEase’s gaming businesses could see significant upside.
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The above content is from Zhuifeng Trading Desk.
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