Real Money Gaming’s Real Problems

India’s real money gaming industry is on a precipice. The recently proposed changes for GST have thrown a major curveball for players such as Dream11, MPL, Zupee, WinZO, Rush by Hike, and a host of other startups that fear the worst.

While the rules will only go into effect from October, the new GST rate could be applied retrospectively which has clearly created panic among many startups. We have already seen this in the case of MPL, Hike and Spartan Poker which have laid off employees, but more severe steps are likely to come.

Besides revenue panic, there’s a fear that VCs might walk away from RMG and invest in other gaming models, denting the fortunes of some large companies. Let’s jump into these problems, but after these must-read stories from our newsroom this week:

• Skill-Lync’s Debt Trap For Students: Fake loan applications, personal loans masquerading as educational loans, no placements and a debt trap. The story of why hundreds of students are outraged at edtech platform Skill-Lync
• Unicorns As Job Creators? Inc42 data shows that Flipkart is the biggest employer among Indian unicorns, with 47,859 employees on its payroll. Where do the other unicorns stand?
• The Zyber 365 Mystery: Ahmedabad-based web3 & AI startup ZYBER 365 recently claimed to have become India’s 109th unicorn. But Inc42’s exclusive investigation shows this is a smoke and mirrors game

RMG Vs The Tax Boss

Let’s get one thing out of the way. The changes in the GST structure impact those online games that include wagering or an entry fee to play with a real-money payout. It covers “games of skill” as well as “games of chance”, but for the purposes of the startup ecosystem, it’s largely going to disrupt those gaming platforms that have fantasy sports, rummy, poker, card games and similar real money casual games as their primary models.

The revenue models of each of these different games will be impacted distinctly by the new changes. Here’s a look at how things change in the two most popular categories:

As we can see, the new GST rules make it more complicated for the latter category to be appealing to users who are chasing real money rewards. Players will need to consistently make 40% or higher profits on their entry amount to get any real outcomes from these games.

The impact is slightly lower on the fantasy sports platforms, which typically involve a one-time entry fee that can be spread across multiple pooled competitions. In pooled competitions, the prize money is distributed to multiple players.

With the new GST rules, the winners of pools might continue to get the same prize money, whereas second or third place players might not get the same payouts as they do now.

So even within the real money gaming ecosystem — which accounted for 77% of the total gaming sector revenue of INR 13,500 Cr as per a FICCI-EY report — there is a clear disparity in terms of the impact. And the higher tax burden is set to hurt smaller companies more.

VCs believe that even though the tax burden has risen, companies such as Dream11 have the revenue safety net to continue scaling up despite the disruption. With INR 142 Cr in profits in FY22 and being a market leader, Dream11 in particular, is in a better position than others to navigate this market. Other companies will have to not only bear the tax burden, but also compete with Dream11 which can count on high brand recall and a legacy in the fantasy sports arena.

“It is the smaller companies that have to worry. They neither have the scale to justify a fund infusion to navigate the new GST world nor do they have the revenue to pay the taxes and also absorb the lower potential revenue,” according to a Delhi NCR-based gaming investor.

Gaming Startups Stare At Layoffs 

So what kind of impact can one expect? MPL has laid off 350 employees, Hike (Rush) has also let go of more than 100 employees and Spartan Poker has let go of 40% of its workforce. And this is just the beginning, according to many of those in the industry.

Founders in the space tell us that cost-cutting has become necessary for many because if they want to survive, they need to solve the unit economics problem created by the potential slowdown in RMG adoption.

This is particularly true for poker, rummy and other card games, where players are smart enough to see that they either have to be ready for higher losses or invest more and balance the tax burden vs the potential for winning.

“In the initial few days of the GST changes going into effect, there will be a drop-off of the casual players who typically put in like INR 200-INR 300 per month. This is about 90% of the user base. It’s only a small percentage that pay fees in excess of INR 10,000 per month,” says the cofounder of a Delhi NCR-based RMG startup.

The cofounder added that most startups are more or less writing off casual users. They expect to retain only a handful of the high value players.

“RMG players were hiring multiple product managers and focussing on expanding on formats, but all of that has to be revisited now. As it is many of these companies were bloated and some of them needed to cut costs anyway. The GST disruption means they have no recourse now,” according to an exec from a game development company.

VCs Are Walking Away

The new unit economics battle in light of 28% GST is not only for creating sustainable models but also to attract investors.

Any unit economics disruption in the current funding winter means delays of months in funding talks and investors are already walking away. Sources within the ecosystem tell us that investors are now exclusively looking at gaming startups that don’t have any real money component. The tax nightmare for real money gaming companies means startups are possibly looking at an additional tax liability of nearly INR 45,000 Cr, as per reports.

In recent weeks, we have also seen instances of unscrupulous online gaming companies syphoning away money from India and even defrauding users.

“We just don’t think the tax exposure risk is worth it. There are problems such as collection on a retrospective basis. A lot of their books will go through audits. It’s likely to create a lot of regulatory friction,” added the Delhi NCR-based investor quoted above.

The investor added that the real money space is saturated with several big players. Now, it makes no sense to invest in a new platform that can hope to take on the big names such as Dream11 in the fantasy sports arena, or MPL, WinZO and others in casual games.

There are also concerns about companies moving abroad, similar to what was seen with the taxation clarity in crypto. Even under that circumstance, operating in India would require companies to be compliant with the local tax laws, if they want to cater to Indian users.

What Next For Gaming Startups?

So where’s the focus turning for gaming investors? The obvious answer is game development. These models are typically multi-year investments and currently many Indian game development startups are starting off with titles in popular genres — battle royale, casual titles, puzzles and more — that involve in-app transactions, which do not come under the new GST rules.

Game development company Yudiz Solutions listed on the NSE SME platform at a 12% premium this week.

Sources also told us that Bengaluru-based gaming unicorn MPL is likely to focus heavily on Mayhem, its game development studio, and is looking to reduce its reliance on RMG revenue in the future. Mayhem raised $20 Mn in April this year from Peak XV and Steadview.

Backed by AET Fund and others, Pune-based SuperGaming is another startup looking at developing mobile games such as Indus (set to launch later this year), MaskGun, Silly Royale, and Tower Conquest. It is also building its own gaming engine for real-time multiplayer games.

Mumbai-based Nazara too is likely to ease off the accelerator when it comes to HalaPlay, its fantasy gaming vertical, given the dominance of Dream11, which will continue to have a sizable market share even in the new regime. The company has multiple other revenue streams in non RMG segments.

Nazara claimed that the GST changes will have minimal impact on its revenue, but will the company continue to carry HalaPlay along if the revenue potential is dented? It remains to be seen whether investors and Nazara’s shareholders will entertain that prospect.

Nevertheless, it’s looking more and more like the future of gaming in India will be driven by game development, studios and publishing rather than by real money gaming, as it has been for so long. Real money gaming’s rise overshadowed other aspects of this industry.

“Worldwide, the value in gaming is unlocked by game development and studios. The major companies such as Microsoft and Sony largely invest only in game development. India needs to get on this track too, and not just rely on fantasy cricket or rummy,” said the gaming startup executive quoted earlier.

In many ways, the flipping of the GST switch has led to a big reset for the online gaming ecosystem. Will it set the sector on the right track?

Startup Spotlight: Exponent Locks Horns With Tesla

Most commercial battery charging technologies worldwide take 30 minutes to 10 hours to fully charge EVs, depending on battery capacity and vehicle types. But Bengaluru-based Exponent Energy claims to have broken all records and has eyes on competing with the likes of Tesla in the global EV charging market.

Founded in 2020 by former Ather Energy executives Arun Vinayak and Sanjay Byalal, the startup is looking to cut charging times to 15 minutes regardless of the vehicle category. The startup is banking on its patented ‘water-based’ off-board thermal management system to accelerate the future of EV charging infra in India.

The startup has also set an ambitious target of deploying 1,000 ‘e^pumps’ and 25,000 Exponent-powered EVs by 2025. Will it get there and solve one of the biggest hurdles in EV adoption?

Read the full Exponent Energy story

Sunday Roundup: Startup Funding, Tech Stocks & More

• Weekly Funding Updates: Just a total of $4.4 Mn was raised by Indian startups in the past week. No, that’s not a typo. Startup funding has never seen these lows for many years
• EaseMyTrip’s Q1 Results: EMT saw its profits plunge by 22% YoY as a result of a significant increase in discounts during the quarter ended June 2023

• Ola Electric Plays Big: Besides launching a cheaper electric scooter, Ola Electric unveiled its plans for the motorbike space with four new concepts targeted for late 2024
• Navi’s UPI Play: The Sachin Bansal-led company has entered the payments space to become something of a fintech super app

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then, you can follow Inc42 on Instagram, X/Twitter and LinkedIn for the latest news as it happens.