As the fear of goods and services taxes (GST) looms, the online gaming industry has started to fight the big change with layoffs. It all started this week with online gaming companies including MPL and Hike-owned Rush Gaming Universe, a Web3 gaming platform, laying off as many 350 (MPL) and 55 staffers. “The new rules will increase our burden by as much as 350-400%. As a business, one can prepare for a 50% or even a 100% increase, but adjusting to a sudden increase we need to make some tough decisions. Regrettably, we will have to let go around 350 of you,” Sai Srinivas and Shubh Malhotra, co-founders, MPL, said in an email communication to their employees. BrandWagon Online has access to the official document. The owners in the letter also claimed that its variable costs involved people, servers and office infrastructure and have taken steps to bring expenses down to survive.
MPL’s revenue from operations grew 37.46% to Rs 600.68 crore in FY22 from Rs 436.96 crore in FY21 (standalone). The net loss widened 247.2% to Rs 449.48 crore in FY22 from Rs 129.45 crore in FY21, as per regulatory filings accessed by business intelligence platform, Tofler.
Shortlink:
No more a revenue paradise?
It is believed that while many online gaming companies may opt for similar measures, some which are profitable may steer away from them. At the end of the day, it will be about how one is able to manage the cost of running its business versus revenue generation. To put this in perspective, let’s take a look at the performance of online gaming companies in the past couple of years.
Fantasy sports and online casual gaming platform, Gameskraft’s revenue from operations grew 48.76% to Rs 2133.07 crore in FY22 from Rs 1433.81 crore in FY21 (consolidated). The net profit grew 28.94% to Rs 930.49 crore in FY22 from Rs 721.62 crore in FY21, as per regulatory filings accessed by business-intelligence platform Tofler. Meanwhile, fantasy sports and online casual gaming platform, Play Games 24×7’s revenue from operations dropped 24.38% to Rs 1169.27 crore in FY22 from Rs 1546.27 crore in FY21 (consolidated). The company posted a net profit of Rs 110.02 crore in FY21 and posted a net loss of Rs 282.41 crore in FY22.
Shortlink:
Shortlink:
Interestingly, industry analysts feel that GST cannot impact business model, it can however impact the commercial aspect. “GST cannot have an impact on the value of people. The number of employees working in an online gaming company never contributed to revenue, they would look at engagement,” said a senior analyst on the condition of anonymity.
This is not the first time that online gaming companies have shut shop in India. A week earlier, real-money gaming platform Quizy’s founder, Sachin Yadav took to LinkedIn to announce the closure of his company owing to the revision of taxation rates for the online gaming sector. “Recent GST changes have thrown significant challenges our way. The removal of the TDS exemption limit and the adding flat 30% TDS on all winnings, regardless of the amount, hit us hard. This sudden change substantially impacted player earnings and motivation, leading to a decline in user engagement and loyalty,” the post said.
It should be noted that during the 2023-2024 Union Budget, the government levied a 30% tax deducted at source (TDS) on the payment of net winnings in a financial year while the elimination of the Rs 10,000 threshold for levying TDS was the second provision.
The Impact on Online Gaming
According to a FICCI-EY report, new players, marketing efforts, specialised platforms and brand ambassadors, all worked to grow the segment by 34% in 2022 to reach Rs 13,500 crore. Regulatory clarity improved leading to more FDI in the segment. There were over 400 million online gamers in India, of which around 90-100 million played frequently. Real-money gaming comprised 77% of segment revenues. “The nascent but fast-growing casual, quick continuous gameplay model will be hit dearly as approximately 70% of deposits are paid off as winnings in this model,” Saumya Singh Rathore, co-founder, WinZO Games, said.
Shortlink:
On Wednesday, the Cabinet approved revisions in the Central Goods and Services Tax (CGST) Act and Integrated Goods and Services Tax (IGST) Act. The move sets the stage for presenting a bill in Parliament which aims to impose a 28% GST on online money gaming, casinos, and horse racing. The taxation will be applied to the complete initial bet amount for these activities, as sources stated.
As per a joint report by Deloitte and the Federation of Indian Fantasy Sports (FIFS), the fantasy sports sector in India in FY22 witnessed revenues growing threefold from FY20, to reach Rs 6800 crore while the market revenue is expected to grow at 30% compound annual growth rate till FY27. The sector has contributed approximately Rs 4500 crore to the exchequer through taxes between FY18 and FY22. Furthermore, the sector created 12,000 indirect and direct jobs at the end of FY22. The decision to increase taxation would have an impact on the projections.
Companies believe that rate of growth perhaps will slowdown for many. “Elevated tax rates might strain revenues for gaming companies, potentially altering their business strategies and hindering expansion plans. This could dampen the industry’s growth trajectory and innovation,” Rohit Bansal, founder and CEO, Super4, told BrandWagon Online.
It is believed that besides layoffs, online gaming companies would undertake other measures to reduce cost to stay afloat. Costs such as user acquisition budgets, marketing and advertisement budgets, would be brought down. “With a potential of 50 to 60% budget reduction, the challenge of sustaining our marketing initiatives becomes formidable. Our industry stands at a pivotal crossroads, demanding diligent navigation of these obstacles to ensure continued growth and prosperity. The impact of this revised taxation on advertising and marketing spends is both profound and pressing,” Mitesh Gangar, co-founder and director, PlayerzPot, a fantasy sports and casual gaming platform, said.
A potential dearth of Investments?
The industry also attracted steady investments, with foreign and domestic funding for fantasy sports platforms totalling Rs 15,000 crore up until FY22, valuing the industry at about Rs 75,000 crore, as per the Deloitte-FIFS report.
Interestingly, investors believe that higher taxation, may not cause any upheaval and volume should bounce back. “Higher taxes don’t typically deter those passionate about these activities. Although there might be a brief disruption, and the players may need time to readjust their strategies, I expect any suppressed volumes to rebound vigorously as the industry finds its way through these challenges,” Anirudh A Damani, managing partner, Artha Venture Fund, mentioned.