5 Things Entrepreneurs Should Know Before Venturing Into An RMG Business

Real money gaming (RMG) in India saw a phenomenal 28% compound annual growth rate over FY20-23. It saw the emergence of unicorns and fast-growing companies with viable and capital-efficient business models in India. While overall gaming in India was at $3.1 Bn in FY23, only real money gaming was at $2 Bn. However, 2023 was disruptive for the real money gaming industry with new GST regulations for the industry. This new tax structure is now levied on the entire deposited amount (full face value) rather than only the winning amount and platform fees. This completely changes the economics for the RMG companies as well as the motivation of their users. Hence, many real money gaming companies are paring down estimates and 2024 will certainly break the growth trend. RMG companies are expected to see a minimal ~5% growth in the next 4-5 years. RMG industry has reached here with ~$2.5 Bn of invested capital, and potentially another $4 Bn of investment in the next 3-4 years. There is still potential for further growth by penetrating deeper and expanding the offerings. However, if you are planning to build in RMG, think about the following 5 Es: Economics RMG as an industry did well because the business model was viable. With the new GST regulations, the new business model has to work again to make a viable business. To put it in numbers, if INR 100 was deposited by a user earlier, she had a full INR 100 to play with and would pay TDS only on earnings (if she wins!). RMG companies will pay GST on their fee-only, so approx INR 2-4 only or INR 100 depending on their take rate. Now, for INR 100, only INR 78 is available as INR 22 (28% of 78) will be the GST portion. This is a dramatic change in unit economics as it reduces the gross margins/take rates significantly (and in some cases, negative). So, if you are building a new RMG business, you need to solve for following levers to counter this: Bearing the burden of this deduction fully or at least partially so the economics doesn’t change for the user. If you can build high take-rate games, this can still be profitable Reducing cashbacks, and coupons, and keeping the game utilisation high. This will increase the net take rate and your ability to pass more to the user Incentivise users to play more with their deposits. Since GST is paid on deposits only, economics will improve significantly if users reduce the frequency of depositing e.g., playing more with the available INR 78 and then withdrawing. Engagement Engagement is the key metric to solve in RMG businesses as high retention can solve for better unit economics. Customer acquisition is simple maths in RMG. As long as the overall profit generated by a customer during its life is more than the acquisition cost, businesses can keep acquiring customers. As the profit generated per transaction is reduced significantly, you are required to create high engagement and retention games so the number of transactions per user increases to compensate for less profit per transaction. The RMG companies have solved and optimised campaigns for new user acquisition, but there is more work to be done on retention. Entertainment Gaming as an industry is about entertainment, if I broadly use “Entertainment” as a solution for psychological needs, social interactions, pure fun, simple reward systems etc. Users pay to solve for this entertainment. Sometimes, it’s in the form of in-app purchases e.g., in casual games like Candy Crush. Sometimes, it may not be in actual currency, but when your attention span is sold to advertisers. Real money gaming differs from gaming only because it has added one more dimension to it. The option of making some money by honing and applying your skills. However, it still needs to be solved for entertainment otherwise it will be hard to retain users who are losing money, resulting in poor retention and poor economics. As an RMG publisher, we should ask the hard questions. What’s in it for users who lost? Do users like spending time on your platform? Why will they continue to come back and play again? If they aren’t coming back, then unfortunately, this isn’t a viable business model. Education Real money gaming companies need to educate their users more than ever now. RMG as an industry has matured in recent years, and it’s important to invest in educating the overall ecosystem as you build in it now. Education can solve for following three areas: Building trust: Wherever money is involved, however small amounts of it, it’s important to be transparent to invoke trust. Marketing misinformation is easy in this industry, so companies need to be proactive in managing it. Trust builds loyalty, which isn’t great in this industry. For example, users are known to use multiple or switch their fantasy cricket apps during the season. From the economic perspective, less trust means less retention. While great marketing messages can get you new users, only trust will help us increase retention. Training: RMG companies are a game of skills and hence, it is important for them to create avenues for skill enhancement. Skill enhancement is also a prerogative of RMG companies. Path to progress and predictable achievements are also part of a good game experience, and more training will result in improved performance. We have seen some of it in RMG, e.g., experts in fantasy cricket apps, but there is still a lot more to be done here. Optimise: More trust and training can convert your users into your partners, and help you optimise the overall gameplay experience. For example, you can be more transparent and increase the fill rate of your games. Also, after new GST guidelines, it has become important to communicate with users clearly on the charges and suggest ways to optimise e.g., play more with deposited amounts. Environment These are volatile times for the RMG industry, and you need to be completely aware as an entrepreneur. First, the regulations are out and we need to watch out for the impact and any further clarifications as The Directorate General of GST Intelligence has issued GST demands with penalties and interest to multiple companies. New players don’t have the past baggage but they need to stay on top with The Ministry of Electronics and Information Technology (MeitY), the nodal ministry for online gaming in India. Second, the VCs are apprehensive about the current situation and raising early-stage money won’t be easy. We might see less than an estimated $4 Bn investment in the next few years, and very little of that in new companies. New entrepreneurs should be frugal and try to prove unit economics at some level, before trying to raise VC money. Finally, there is a perception issue which becomes important when you are building a team. Recent layoffs at RMG companies haven’t helped the cause. Building a good founding team is never easy, but it is even harder for RMG startups now. Overall, passionate founders will continue to build interesting businesses in RMG. It might take more time to become larger than what we have seen earlier.

5 Things Entrepreneurs Should Know Before Venturing Into An RMG Business

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