In recent times, the Indian online gaming sector is witnessing a significant tumult due to the newly instituted 28% Goods and Services Tax (GST) regime. This has spurred a wave of consolidation in the industry, as many small gaming startups are contemplating sales or looking for acquihire opportunities. Let’s delve deep into this unfolding scenario.

GST Implications on the Gaming Sector

The newly introduced 28% GST regime has been received with a wave of discontent, especially because it fails to differentiate between games of skill and games of chance. This policy decision by the central government has initiated a sequence of events leading to a consolidation wave in the gaming industry. Following the implementation of the GST, numerous startups have communicated with the central government, proposing modifications to the current tax structure for the industry’s betterment.

As per information procured, approximately 20-25% of these startups are now exploring opportunities for sale or are considering acquihire prospects. It is noteworthy that a single gaming giant might have engaged in discussions with at least 100 small online Indian gaming companies for potential acquisitions in August alone.

Investment Dynamics and Valuation Concerns

Within the investor community, there is a growing consensus that many gaming startups are facing valuation depreciation, with some even witnessing a 50-60% loss. Daily dialogues with 2 to 3 companies ready for sale indicate a distressed market scenario where buyouts seem to be the only viable option. Investors predict an increase in industry consolidations over the upcoming quarters.

Simultaneously, industry experts opine that this period presents a golden opportunity for firms with substantial capital to expand their capacities by merging or acquiring smaller counterparts, potentially saving numerous enterprises from dissolution.

Industry Reactions and Strategies for Adaptation

Several gaming startups have faced adverse effects following the central government’s decision to impose a 28% GST on the sector. Consequently, several companies have shut down, while others have opted to reduce their workforce to minimize expenses. Notable industry player, MPL, initiated layoffs post the implementation of the new GST rule, followed by Spartan Poker.

Regarding potential sell-offs, sector specialists suggest that real money gaming platforms promoting games such as rummy, poker, and ludo might contemplate selling their assets owing to the existing market conditions. Prashanth Joshua, CEO of gaming firm 1Verse, emphasized that platforms engaging individual players would be more severely impacted compared to those involving groups in fantasy gaming setups.

Moreover, Joshua noted that certain companies with traditional focuses on games popular among various Indian communities might not opt for sale. Instead, companies boasting substantial user bases might consider merging with entities possessing robust technological interfaces, considering aspects like product quality, customer experience, and user retention as significant factors for acquisition prospects.

Echoing similar sentiments, Pearl Agarwal, the managing director of gaming-focused fund Eximius Ventures, highlighted that both small and large gaming companies would have to prioritize user retention to mitigate the tax burden brought about by the new GST rule. On the other hand, E Paul Micheal, a gaming consultant and former CEO of India Plays, anticipates fewer new entrants in the real money gaming industry due to the altered tax structure, foreseeing a wave of consolidations that might foster innovation and offer increased liquidity for users.

Focus Shifts in Funding Patterns

Even though real money games account for over 70% of the online gaming industry’s revenues, venture capital funds are showing an increased interest in investing in non-RMG gaming companies. These non-RMG firms primarily derive their revenues from advertisements and platform fees. However, attracting investments requires them to offer value propositions to users beyond mere entertainment.

Venture capital entities like Kalaari Capital, Matrix Partners, and Lumikai have unveiled new funds to concentrate on online/mobile gaming ventures in India. These initiatives mark a pivotal shift in the investment landscape, spotlighting the long-term potential of the Indian interactive market. As a testament to this, global gaming venture funds are actively seeking opportunities with Indian gaming startups, largely propelled by India’s extensive gamer base of 450 million.

Conclusion: The Path Ahead

Currently, the Indian gaming industry stands at a critical juncture. The unfolding events in the coming months will determine whether the sector will overcome the regulatory hurdles and emerge resilient, backed by strategic consolidations, or succumb to the challenges and decline gradually. Notwithstanding the existing predicaments, there is an evident surge of interest from both domestic and global venture capitalists in the Indian gaming market, fueled by the country’s expansive gaming demographic and emergent trends in Generative AI, web3, NFTs, and gaming infrastructure.

The future holds numerous possibilities, and it remains to be witnessed whether the industry will navigate through this period of uncertainty to forge a stronger and more sustainable path forward. The ongoing developments indicate a complex yet promising trajectory, where adaptability and innovation might dictate the industry’s forthcoming chapter in India.

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