“What goes up, must come down,” Tyrone Davis mentioned in his 1973 hit song. The funding in the online gaming industry seems to be along similar lines to the song. About $500.2 million was invested in the online gaming space in 2021, according to data by market intelligence platform, Traxcn. Fast forward two years and the number has gone down to a mere $61.1 million in 2023. The investment declined by 52.03% from $500.2 million in 2021 to $239.9 million in 2022. It further declined by 74.53% from $239.9 million in 2022 to $61.1 million in 2023. Moreover, the online real-money gaming industry witnessed funding of over $400 million in 2021. There was an 87.78% decline in investments in online gaming from 2021 to 2023. However, the industry is struggling to gather funds in 2023 with the sector securing just $2.6 million. “Considering the increasing consumerism and digital payments infrastructure in India, Real money gaming was witnessing enhanced investor interest from across the globe. This sector had a significantly high degree of engagement in India across consumer classes and city tiers. The unfortunate developments with respect to the GST revision have led to a lack of clarity regarding this sector’s acceptance within the Indian regulatory framework. This seems to have led to a wait-and-watch approach by global investors, despite still having a high degree of engagement,” Sreedhar Prasad, former head- Internet business, KPMG and Internet business advisor to startups, told BrandWagon Online.
It is believed the drop is on the back of the Goods and Services Tax (GST) council levying 28% GST on full value rather than 18% on gross gaming revenue (GGR). Moreover, it was announced in 2023 that the (Tax deducted at source) TDS threshold of Rs 10,000 was removed and 30% TDS would be levied on winnings either at the time of withdrawal or at the end of the financial year. All these developments were happening parallel to a funding winter, which meant the online gaming companies and the industry had to get creative to survive.
The state of online real-money gaming
Post the announcement of levying 28% GST on the online real-money gaming industry, a few companies laid off staffers to focus on unit economics and profitability while a few chose to shut shop altogether. With a dearth of funds and higher taxation rates, it has been a tumultuous time for the online real-money gaming space. “Undoubtedly, this reduction poses challenges for real-money gaming companies, including ours. The scarcity of funds, coupled with increasingly stringent regulations, has indeed heightened the complexities of our operational environment. To navigate this challenging landscape, we’ve adopted a strategic and agile approach. We are focusing on operational efficiency, exploring alternative funding avenues, and actively engaging with regulatory bodies to ensure compliance while advocating for a balanced and supportive regulatory framework that fosters responsible gaming practices,” Sunil Yadav, CEO, PlayerzPot, said.
As per a Lumikai report, the real-money gaming industry is expected to witness growth, in terms of revenue stream, at a compound annual growth rate of five percent. Despite growth in the real-money gaming industry by approximately $500 million in 2023, growth in the sector is expected to be muted due to recent tax policy changes and consolidation within the space. Moreover, the report suggests that approximately 60% of users believe that new GST and TDS rules would negatively impact the time they spend on the app.
Moreover, the Directorate General of GST Intelligence (DGGI) has sent out tax evasion notices, based on retrospective calculations, worth $8.9 billion to real-money gaming platforms, exceeding the estimated revenue of the sector of approximately $4 billion. “Investors are a little careful about gaming companies after a lot of government regulation on money-based gaming last few months. Clarity issues are creating doubts among the investors. However, other business models like game design, publishing, esports and streaming are going strong,” Neeraj Tyagi, co-founder and CEO, We Founder Circle, said.
According to industry experts, tighter regulations would result in consolidation of the space with companies coming together strategically as well as financially to address the high taxation rates in the country.
Greener pastures elsewhere?
While on the one hand, the real-money gaming space continues to witness difficult times. However, on the other end of the spectrum, casual gaming, e-sports, game development and game streaming continue to be successful. Industry experts believe India’s gaming revenue is larger than its box office with 550 million gamers contributing $3.1 billion of revenue as compared to approximately 900 million cinema footfalls contributing $1.3 billion of revenue in 2023. Consumer spending on games fell two percent globally but in-app purchase spending in India grew by 20%. “We continue to see the market maturing faster than expected across key vectors — propensity to pay, quality of talent, capital inflows, and exits. This represents a meaningful upside for founders and investors in this space over the coming decade,” Salone Sehgal, founding general partner, Lumikai, highlighted.
Investors have attributed the funding pullback to a new normal of a high-interest rate regime in the Western markets and recalibration of overall investor allocations and portfolio constructions while mimicking industry-wide-global trends. India is a country with more than 550 million gamers who are between the ages of 18-30. Streaming platforms have provided Gen-Z or millennial audiences with an alternative, allowing them to consume content and interact with creators, game streamers and the gaming community. Beyond streaming, companies developing tools for game development, interactive media, immersive experiences, and mobile gaming content are witnessing increased investment interest. “The gaming landscape is constantly evolving, with advancements in areas like new emergent interactive platforms, gaming content and studios building in India and for the world, leveraging future-facing technologies like Gen AI and spatial computing. All of this is yielding positive investor momentum,” Sehgal added.