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Gaming sponsors brace for impact amid GST turmoil

The uncertainty surrounding the potential imposition of retrospective tax has left many gaming companies anxious, as they fear a dip in their budgets. The industry size is estimated to be around $2-2.5 billion. (MINT_PRINT)
The uncertainty surrounding the potential imposition of retrospective tax has left many gaming companies anxious, as they fear a dip in their budgets. The industry size is estimated to be around $2-2.5 billion. (MINT_PRINT)

Summary

Leading gaming firms, including Dream11, Games24x7, and MPL, may reduce their advertising budgets by INR 500-600 crore ($67-80 million) this year.

New Delhi: The marketing budgets of the top gaming industry sponsors could go haywire this year if the Goods and Services Tax (GST) Council on 2 August announces a higher taxation on the industry.

With India hosting the ICC Men’s Cricket World Cup in October-November, this year is significant for all sports-related advertising, said industry experts.

While in 2022, the top four gaming firms had a combined budget of about 3,800 crore for marketing and advertising, according to their filings with the corporate affairs ministry, the uncertainty surrounding a potential imposition of retrospective tax, has left many top firms anxious, as they fear a dip in the budgets of gaming companies in a knee-jerk reaction to the GST Council’s move.

Leading gaming firms, including three fantasy sports platforms, such as Dream11, Games24x7 and MPL, may reduce their advertising budgets by 500- 600 crore for this year, while other major spenders, such as Winzo, Zupee and Junglee Games, grapple with the prospect of reducing their annual marketing expenses.

According to All India Gaming Federation’s estimates, the size of the industry is at $2-2.5 billion (about 16,000 crore).

Unlike any other industry, gaming firms face the possibility of indirect taxes exceeding their own revenues, which will force them to cut their budgets drastically.

“Everything is in a flux right now. Industry-wise, it could translate into 60-70% cuts of all advertising budgets. For bigger players like us, the impact initially may be less at 40-50% reduction in budgets. If retrospective tax and deposits come in, everyone expects some of the smaller players to not survive. So, we may have to keep our advertising budgets a little high to capture market share," said a senior executive of a fantasy gaming company.

A second executive of another gaming company said: “The industry makes for a significant chunk of digital ads. The expenses by large operators like us include ads on TV, print, Google and OTT platforms, as well as payment gateways. If it comes through, it will have a drastic impact on our spending and we may have to change our business model. It may take us up to 12 months to tide over the challenges, but not more. Layoffs will be seen not just for smaller players, the impact will be seen across."

Roland Landers, chief executive, AIGF, said large companies will survive, but it may still take them a year or two to get back on their feet. But, MSMEs will be facing the maximum brunt of the decision.

While ad budgets may see a 50-70% dip across the industry, the top 10-20 firms could see 30-40% drop, he added.

“The real impact will take some time to be seen as some of the smaller players spend significant sums in advertising and customer acquisition that may go unrecorded in reports. The estimates may vary as it is an unprecedented fall. But we do expect 30-50% drop in the business of legitimate gaming companies," he added.

As per their MCA filings, M-League Private Limited, Singapore-based parent company that owns MPL spent $92 million or 752 crore on marketing in FY22, which increased its losses to $149 million in the fiscal, gaining 3x over FY21. That year, its entire expenses jumped 116% to $215 million. A major driver of this was its advertising and other promotional expenses which increased 81%.

PlayGames24x7 reported total expenses of 1,497.2 crore in FY22, similar to its FY21 figure. Interestingly, in FY22, it spent over half of this in advertising and promotional expenses. Around 870 crore or 58% of its entire expenses in FY22 were spent on that.

Similarly, Dream11 reported its advertising expenditure at about 2160 crore in FY22, which went up over 70% from 1250 crore the year prior. Winzo spent 198 crore on advertising in FY22, representing a 6.5x increase from the previous year.

“I do see headwinds coming because gaming advertising is generally related to sports and especially cricket. I do see a blip or correction but the magnitude is too early to predict. Gaming itself has multiple segments, and one of them very heavily dependent on cricket is fantasy gaming. I do see the GST implementation playing a big role in affecting the gaming industry asset. 28% is not an easy number and the consumer has to pay the GST," said Ajit Varghese, head of network ad sales for Disney Star.

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