The overseas short drama market is undergoing explosive growth, with in-app purchase revenue skyrocketing from under $100 million in 2023 to $1.5 billion in 2024. Projections indicate this figure will reach $3.8 billion by 2025, potentially surpassing overseas box office revenues ($24.2 billion in 2024) and challenging traditional streaming platforms. To overcome current high payment thresholds of $20-50 per series, platforms are aggressively promoting the IAA (free+advertising) model. In China, IAA's revenue share surged from 11% to 50% within one year, overtaking paid models. Though overseas IAA contribution remains modest (10-20%), its rapid growth positions it as the key engine for expanding user reach and boosting DAU.

Soochow Securities contends that the short drama phenomenon represents the natural evolution and video adaptation of China's decade-old online literature industry. By disrupting traditional production economics and precisely targeting audience gratification points, these brief narratives have successfully penetrated global markets. Rather than replacing long-form content, short dramas constitute an algorithm-driven, impulse-payment content category. Their core business model functions as a high-efficiency flywheel: ROI-optimized user acquisition fuels addictive pay-per-episode monetization, recycling capital into exponential content reproduction.

As a story-driven medium native to short-video ecosystems, short dramas possess inherent versatility beyond current tropes like dominance fantasies. Their innovation lies in mobile-first viewing convenience, algorithmic distribution, and novel monetization – forming a distinct content ecosystem rather than being compressed long videos.

Compared to Netflix-style streaming, overseas short dramas demonstrate multiple advantages: 1) Lightweight consumption lowers attention barriers, enabling broader user reach than Netflix 2) Impulse-driven payments create elastic ARPU potential exceeding subscription models 3) Agile production cycles (2-3 months per series at $100k-$300k) significantly reduce financial risk while improving ROI.

Three demand-side growth vectors are emerging: • Audience diversification beyond female-centric content into male-oriented genres like fantasy and sci-fi • Geographical expansion from North America to high-growth Southeast Asian and Latin American markets • Monetization innovation through IAA adoption, following China's trajectory where ad-supported models rapidly dominated.

Supply-side constraints stem from scarce "effective capacity" amid massive demand. Homogeneous content causes audience fatigue due to three structural bottlenecks: shortage of cross-cultural creative talent, Hollywood's economic barriers, and lack of foundational IP libraries. The industry addresses these through dual approaches: recruiting Hollywood talent/students for local production, and developing lower-cost "domestically produced overseas dramas." Ultimately, resolving capacity issues will drive content diversification beyond current female demographic dominance.

Competitively, the overseas landscape favors Chinese developers in a less saturated market. Leading platforms exemplify divergent strategies: • ReelShort (CHINA LIT subsidiary) focuses on premium original IP with localized North American production, emphasizing IAP monetization • DramaBox (Dianzhong Tech) rapidly captures emerging markets via translated content and IAA-driven scaling New entrants like TikTok and Kunlun Tech signal intensifying competition. Long-term winners will require standardized global content systems solving production scalability, not mere capital advantages.

Profitability currently suffers from heavy user acquisition costs (~50% of revenue), supplemented by content production and platform fees, resulting in thin margins. However, stabilizing market dynamics will reduce dependence on paid acquisition as brands strengthen and organic retention improves. Ultimately, the sector should achieve Netflix-like 15%-20% net profit margins post-scale.

Stock recommendations: • CHINA LIT (300364.SZ): Holds 49.2% of Crazy Maple Studio (CMS), whose ReelShort generated ¥2.9 billion revenue in 2024. ReelShort's H1 2025 net revenue ($207M) nearly matched full-year 2024 ($209M) • Kunlun Tech (300418.SZ): Launched DramaWave and AI content platform SkyReels, evolving from content competition to tech enablement • Chizicheng Technology: Strong Q1 performance with short dramas expected to drive incremental growth • Watchlist: Zhangyue Tech (603533.SH) (overseas platform iDrama), CHINA LIT (00772) (opening premium IP library)

Risk factors: Intensifying overseas competition, potential new platform underperformance, third-party data variances.