Is AI disrupting Chinese online gaming? JPMorgan: The market has overlooked the true moat

AI is reshaping the global gaming industry’s competitive landscape, but JPMorgan Chase believes that when the market applies this logic indiscriminately to China’s large game operators, it makes a directional mistake.

According to the Chasing the Wind Trading Board, on April 8, JPMorgan Chase released a research report, showing that the recent valuation cuts for China’s leading game operators such as Tencent and NetEase reflect a misunderstanding that applies the global AI disruption narrative to the Chinese market without distinction.

Under China’s unique game ISBN approval and regulatory system, AI is not a disruptor of existing large operators; it is a force that amplifies their competitive advantages.

The licensing system sets a hard cap on the number of games that can be monetized legally. The many new games spawned by AI lowering production barriers cannot bypass this regulatory bottleneck to reach consumers. Large operators such as Tencent and NetEase, which already hold game licenses, will enjoy efficiency dividends from AI on a disproportionate basis.

GDC 2026: AI implementation has moved from “possible” to “real”

The 2026 Game Developers Conference (GDC 2026) held this March in San Francisco is the most comprehensive public window to date for observing how AI is being deployed in the gaming industry in practice.

Compared with prior editions, a notable change this year is that: the vast majority of AI-related conference sessions are now presenting production systems that have already been deployed and are generating measurable value, rather than remaining at the level of conceptual technical outlooks. Among hundreds of sessions at GDC, nearly half are related to AI; the consensus has shifted from “whether to use AI” to “how to use AI effectively.”

Chinese companies stand out particularly in this year’s GDC. Tencent alone attended more than 20 sessions, covering AI-driven rendering, asset generation, anti-cheat systems, and player-experience tools—demonstrating a deep integration of AI across its entire production and operations stack.

Industry insiders say that, specifically in AI tracks, Chinese developers’ conference presentations account for a very large share of showcasing the most advanced technologies.

Licensing: Turning AI from a threat into a moat

The impact of AI on China’s game market differs structurally from its impact on open markets in Europe and the U.S.; the key variable is the game licensing system.

In the Western PC and console markets, any developer can freely publish games on platforms such as Steam. The mass adoption of AI-driven production directly leads to a surge in content supply, intensifying competition and putting pressure on profit margins.

But in China, every game that can be monetized legally must obtain an ISBN game license issued by the National Press and Publication Administration. This approval process creates a hard cap on the number of games that can enter the market within a given period.

Data shows that in 2025, the total number of approved ISBN game licenses for domestically produced games was about 1,676, up around 19% year over year, but the growth rate in the number of submitted games still far outpaces approval capacity. After AI further drives down production costs, more games will reach submission-eligible quality, and the approval gap may widen further.

The intellectual property and content compliance scrutiny complexity introduced by AI-generated assets may actually delay the approval process, rather than speed it up.

Tencent has publicly stated that its AI model training is based entirely on commercially validated proprietary assets and uses a “data closed loop,” a strategy that directly avoids the compliance risks that regulators are most likely to audit. Small studios relying on publicly available or open-source training data may face greater regulatory friction.

Four-layer mechanism: How AI strengthens the competitive position of Tencent and NetEase

AI will consolidate the advantage of large operators through four mutually reinforcing mechanisms.

First, the return on AI investment has a non-linear relationship with the player base. Operators can continuously refresh and expand existing approved games with AI, without needing to apply for new licenses for new games. Remaking a game with a cumulative player base of 200 million means the incremental revenue produced per dollar of AI investment is an order of magnitude higher than remaking a game with 5 million players.

An AI companion system added to one of Tencent’s major battle royale games has attracted over 100 million users, while concurrent users have surpassed 10 million. It also converts users who previously avoided multiplayer games into active paying users, serving as the most direct validation of this logic.

Second, orchestration capability forms a more durable moat rather than a single model. The real competitive barrier lies in the organizational capability to orchestrate dozens of AI components into production-grade pipelines—this is an organizational capability rather than a purely technical one, and its dissemination speed is far slower than any single model.

NetEase’s mixed super-resolution pipeline also reflects this: by using a custom classifier to route each texture surface to the best magnification method, it is a system-level design that requires deep domain knowledge to build.

Third, the UGC platform model is expected to guide AI content democratization into existing ecosystems. Multiple Chinese games with relatively high daily active usage have launched or expanded user-generated content platforms. The key is that UGC content created within existing approved games does not require a separate license application. This means that AI-driven content creation democratization will nourish existing player ecosystems rather than incubate independent competing rivals.

Fourth, operational AI creates a self-reinforcing advantage. AI-driven anti-cheat, personalized monetization, and player retention models all expand as data volumes grow. Operators with tens of millions of parallel users generate training signals for these systems far superior to those of peers with only tens of thousands of users, thereby forming a positive flywheel of “larger player base—better AI models—better player experience—attracting more players.”

Valuation judgment: The current downgrades reflect the wrong narrative

The valuation compression that companies such as Tencent and NetEase have recently suffered stems from a market misconception: applying the “AI disrupts existing incumbents” narrative, which is established in open markets, indiscriminately to a structural context pointing in the opposite direction.

For Tencent, its closed-loop data strategy, its AI orchestration capability across the entire production stack, its dominant market share in key game genres, and its B2B path of monetizing AI infrastructure externally through Tencent Cloud gaming solutions collectively make it the most clearly benefited party in China’s AI gaming transformation. Its technology moat continues to widen.

For NetEase, its AI capability relies more on the combination of open-source and third-party tools rather than proprietary fundamental research, and the replicability of its production-side advantages is relatively higher. While NetEase’s AI moat width is not as great as Tencent’s, NetEase’s deep IP reserves, agility in game design, and operational scale still place it in a favorable position within a competitive environment where game licensing supply is constrained.

Once the market narrative evolves from “AI disrupts existing incumbents” to “AI strengthens existing incumbents in a supply-constrained market,” there remains significant room for upward valuation of Tencent’s and NetEase’s game businesses.

The above精彩 content comes from the Chasing the Wind Trading Board.

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