2022 In Review: Funding Winter, Regulatory Haze Put A Spanner In Gaming Growth

What kept the Indian population happy and entertained when the Covid-19 pandemic stopped all offline activities in one fell swoop? It was entertainment, digital entertainment at that, and the magical world of gaming, to be precise, where users ruled all at their will.

India never took to big-time gaming before the pandemic struck in 2020. But that narrative has now changed. The number of gamers in the country jumped to 507 Mn by March 2022 (24% were paying users) from 450 Mn, a 12% rise from the year-ago period, according to a report by Lumikai, a gaming and interactive media-focused VC fund. 

Download Annual Funding Report 2022

Although the newfound growth has triggered new interest in this space, the sector has repeatedly come under the regulatory scanner in 2022. To begin with, the Indian government banned the popular battle royale game Battlegrounds Mobile India (BGMI) without citing any reason.

Many state governments also banned online gaming or imposed unexpected restrictions (more on that later). More importantly, the sector may soon be subjected to huge tax burdens that signal fresh troubles for the industry. 

According to Inc42 data, Indian gaming startups saw a massive decline in funding in 2022. Together, they raised $349 Mn, which was 80% lower than the capital inflow of $1.74 Bn in the previous year. The average deal size stood at $3.4 Mn, a 38% decrease compared to 2021.

The deal count in this space also fell to 27 from 35 in the previous year. Nevertheless, the sector minted a unicorn this year as Games 24×7 entered the coveted club with a valuation of $2.5 Bn, taking the number of gaming unicorns to four.

As for gaming formats, real-money games continued to rule, accounting for more than 50% of the total gaming revenue in 2022. In addition, the mid-core gaming segment saw significant growth throughout the year, according to industry experts.

Why Gaming Boomed In 2022

The steady rise in the number of gamers, including paying ones, should not come as a surprise as most people paid for real-money games like rummy and poker and made in-app purchases while playing casual and core games, industry experts told Inc42.

Payments were smooth and plentiful as Indians have embraced digital payment options in the wake of the pandemic, and gaming is no exception.

Gaming as a popular form of online entertainment has lured millions in the past couple of years, and the trend is not going anywhere soon. A quick look at the growth numbers will validate it further. Take, for instance, Baazi Games, which added 1 Mn new users this year for PokerBaazi, according to Varun Ganjoo, cofounder and chief marketing officer of the online gaming startup.

“The extensive growth of new-age gamers in Tier 2 and 3 cities reinforces that gaming is now part of [mainstream] entertainment. With the spread of gaming activities outside metro cities, perceptions around online skill-based games have changed, and their acceptability has increased,” said Ketan Godkhindi, chief strategy officer at Witzeal Technologies.

Gaming might have gained traction due to the quality, variety and execution of content as talented creators and tech professionals are increasingly joining the industry.

Consider this. Five years ago, there were just 25-30 gaming companies in India compared to 900+ in 2022, according to Justin Shriram Keeling, founding general partner of Lumikai.

“Currently, an incredible number of new founders are coming into this space. Yes, some founders exited earlier; we have seen multiple exits. But many have started afresh in a new white space in the past year. So, there is significant growth on the supply side, and more companies are coming to the market,” he said.

Ganjoo of Baazi Games said that the startup more than doubled the headcount across verticals from 150 people in 2021 to 300 people in 2022, but the tech team saw the maximum growth.

“The online gaming sector is booming. We have seen an increased intent from new talent to join this space. But there still exists a significant skill-demand gap, and we need to work towards training the talent,” he added.

Regulatory Flux Was A Matter Of Concern

Gaming startups in India could have seen a high-growth year in 2022, but for the ‘perception’ problem and regulatory uncertainties.

Incidentally, the year started with a positive development as the ministry of information and broadcasting (MIB) set up an Animation, Visual Effects, Gaming and Comic (AVGC) task force to help upskill and employ young people across the sector. Thanks to the initiative, gaming was recognised as an organised sector capable of generating employment instead of a side gig or fringe activity.

However, all was not hunky-dory as the controversy around games of chance versus games of skill continued to rock the ship. For context, gambling/betting for monetary gains is prohibited in India. Given the cash implications of real-money games, several states like Andhra Pradesh, Telangana, Odisha have banned them to curb such ‘gambling’ activities. Others, like Meghalaya, Nagaland, have regulatory measures in place and allow online gaming companies to operate.

The absence of a uniform pan-India regulation to fix these issues has put most gaming companies in a quandary for now. Worse still, the compliance burden increased as states like Tamil Nadu and Rajasthan issued several notifications throughout the year.

Tamil Nadu passed a Bill in October to ban/regulate online gaming after promulgating an Ordinance to that effect. The new law is yet to come into force, but it has already created confusion about the legal status of games like rummy and poker.

Although the Tamil Nadu government clarified the situation last week by saying it did not propose a complete ban on online games but only prohibited online gambling, the ‘perception’ problem that gaming is tantamount to gambling is still there. Companies also fear that more states may follow suit, and businesses will be left in the lurch as they fight long-drawn-out legal battles.

It is to be noted that the Indian government has now decided to come up with a proper policy or a new law for the online gaming sector that may help harmonise fragmented legislation and a straight-jacketed approach. The government is planning to make such a move realising the impact online gaming has on society, Union Minister of Electronics and IT Ashwini Vaishnaw said recently.

The government is also working on the GST rate of the online gaming industry. Currently, the entire industry pays 18% GST on gross gaming revenue (the net amount after removing the prize money). The industry demands differentiated taxation based on the nature of the game (chance versus skill), but the Group of Ministers (GoM), set up by the finance ministry, may recommend levying a uniform GST of 28%. The GoM has yet to reach a consensus regarding the final tax rate, while the GST Council deferred its decision again in its last meeting.

Although several issues in the online gaming space need ironing out, the process has started, according to stakeholders.

“This has been a significant year for the industry. First came the formation of the AVGC task force during the Budget. Then came the Karnataka High Court judgement, which iterated the distinction between games of skill and games of chance and upheld the protection of the former as a Fundamental Right,” pointed out Trivikraman Thampy, cofounder and co-CEO of Games24x7.

“At the Centre, too, there has been steady progress, and the concerned ministry is working towards regulating the sector. The entire industry is committed to working with the government to create a valuable and progressive business environment focused on sustained growth and consumer protection,” he added.

Why Indian Gaming Startups Saw Sluggish Funding

Interestingly, the slump in funding is not solely blamed on the ongoing funding freeze or the global economic downturn. Many industry experts believe that the lack of regulatory clarity is one of the key reasons behind the decline, much like in the crypto space.

“To be specific, I see only one major reason affecting funding activities in the gaming sector. There is a need for more clarity on the government’s regulations. With the current activities on the regulation front, we would certainly witness increasing interest from investors,” said Ganjoo of Baazi Games.

Penta Esports founder Anurag Khurana had a different take. According to him, the crypto market crash impacted the funding in the gaming sector as a significant portion of the capital came from the crypto and blockchain domains. As the digital assets market crumbled in 2022, these investors took a backseat.

“Gaming has not been isolated as an industry from the funding point of view. Many investors are waiting for clarity on regulations and taxation (GST). As soon as we have that, several deals will happen, mostly in the first half of the next calendar year,” said Godkhindi of Witzeal.

How Gaming Will Fare In 2023

In spite of a few hurdles, the industry remains hopeful about the year ahead. The sector is estimated to touch a $3.9 Bn mark by 2025 as per a KPMG report, given the rising number of paying users, regular gamers and in-app purchases.

“We are going to see more diversity of content. After BGMI and Free Fire suspension, many Indian companies are working on mid-core and action genres. It will be interesting to see which of these games or if any of these games can fill that vacuum,” said Keeling of Lumikai.

For instance, Pune-based SuperGaming is developing a made-in-India game called Indus as it has realised that the Indian audience consuming the battle royale genre is now hyper-aware of the features they want from the game.

“This is partly due to their exposure to international titles like PUBG and Free Fire. Consequently, we have seen for the first time an extremely knowledgeable audience in India with a distinct set of preferences,” a company spokesperson said.

Then there will be more extensive use of AR-VR and metaverse as Web3 gamers will look for more immersive experiences.

“India has already rolled out 5G, and the possibilities with 5G are endless. The increased bandwidth will help us introduce better UI/UX on all screens across the country. This will lead to a rise in average weekly hours spent on gaming, a trend we have already witnessed since the pandemic,” said Ganjoo.

Download Annual Funding Report 2022