 "online gaming gst")
At a time when the margins of Indian real-money gaming (RMG) companies have hit the skids due to the new goods and services tax (GST) norms on online gaming, investor interest in RMG has soured. Investors say that they are now looking to take measured bets in non-cash categories like casual and mid-core games.
“In RMG, the regulatory environment today is not the best. Therefore, as an investor, it is easier to wait it out and not pour additional capital into the sector today,” said Kshitij Sheth, managing director (MD), ChrysCapital, a late-stage investment firm, at the Indian Gaming Conference (IGC) on Tuesday.
Sheth said that the lack of clarity and uncertainty in taxation has hurt investor interest in RMG. ChrysCapital has made investments in companies like Dream11.
India currently has three companies valued at over $1 billion, including Games24x7, Mobile Premier League, and Dream11.
With RMG firms in hot water, investors are now looking towards other gaming categories like casual and mid-core games, according to Salone Sehgal, founding general partner, Lumikai, a gaming-focused venture capital fund.
Also Read
“We are seeing breakouts happen with young companies in other forms of gaming such as advertising (ad)-based, eSports, etc, which for us is very interesting. As an investor, that is where the opportunity lies,” Sehgal said.
Girish Punjabi, MD, The Raine Group, is of the view that regulatory clarity from the government has been a welcome move. However, the tax uncertainty remains an overhang on attracting more capital to the sector.
Punjabi said that capital allocation in the Indian gaming sector has, until recently, largely been concentrated on RMG due to the high margins.
“In the past six months, there has been a distinction in how investors are approaching RMG and non-RMG investment opportunities,” Punjabi said, adding, “But there are a lot of green shoots in other gaming segments, where we are seeing opportunities now.”
The GST Council, in July this year, decided to impose a blanket tax of 28 per cent on online gaming.
Skill gaming platforms earlier paid 18 per cent GST on platform fees, also known as gross gaming revenue (GGR).
The new rules, which do not make a distinction between games of skill or chance, came into effect on October 1.
As of 2022-23, the RMG segment has a market share of 84 per cent in the online gaming industry. This is expected to go down to 75 per cent by 2027-28 (FY28) as a consequence of the new tax regime, according to a report by consulting firm EY, which was unveiled at the IGC.
RMG as a category is expected to generate between Rs 6,500 crore and Rs 6,800 crore in direct taxes and between Rs 75,000 crore and Rs 76,000 crore in indirect taxes by FY28, the report said.
According to industry watchers, segments like RMG tend to find initial success in nascent gaming markets, like that of India, as consumers get acclimatised to digital transactions.
As markets mature, gamers migrate towards other segments like casual or mid-core games. This is bolstering investor sentiment in these categories.
“RMG has become a very mature industry. We have large incumbents with very large cash reserves. Rising customer acquisition costs and brand equity have already been established, so innovation has become difficult and upstarts are finding it difficult to disrupt the industry,” Sehgal said.
Meanwhile, as RMG margins have taken a big hit, companies are looking to diversify their offerings to look for new avenues to increase their incomes.
Trivikraman Thampy, chief executive officer and co-founder of gaming unicorn Games24x7, says that the company has been looking at newer business models following the new GST decision.
“We are not seeing any impact on our top line numbers, but from a net revenue perspective, the industry is going to be set back for a couple of years. We are experimenting at a very rapid pace in terms of new business models to see how to operate sustainably in the new GST environment,” he told Business Standard.
Regardless, the company is taking a measured approach in terms of its new offerings.
“Over the next five years, we are probably going to launch around two or three games, based on hardcore, ground-level research in terms of understanding user behaviour,” Thampy added.
Where some gaming firms are clamouring to find newer channels of revenue growth, companies like Nazara Technologies have been able to navigate well through the new tax norms on the back of a diversified portfolio.
“If you look at the (Nazara) group, it is fairly diversified both geographically and by business model. For us, RMG is just 4 per cent of our business,” said Sudhir Kamath, chief operating officer, Nazara Technologies.
Aside from its real-money offerings, Nazara operates in sectors like ad tech via Datawrkz, eSports via Nodwin Gaming and Sportskeeda, and kids' games with offerings like Kiddopia.
“Since our initial public offering three years ago, we have had significant growth year-on-year every quarter. So far, this year has also been very good. Profitability has increased quite dramatically,” Kamath added.
To circumvent the impact on their margins due to the new GST, RMG companies have shifted focus away from expanding their business towards cost-cutting. Companies are now increasingly working towards reducing overheads and streamlining cost structures to improve their revenues.
