Regulatory indecision hampering mobile gaming ad revenue?

A sizeable portion of online mobile gaming’s advertising revenue hinges on the Government of India’s ability to make a regulatory decision for the sector.

In early 2023, the Ministry of Electronics and Information Technology (MeitY) decided to crack down on India’s nascent online gaming industry. While we say nascent, that is not to be mistaken for small—the largest online gaming firm today is almost as large as a midcap enterprise. However, irrespective of size, a large chunk of the country’s largest revenue-generating sub-division of the gaming industry has, for nearly a year now, been stuck in the middle of a regulatory indecision that could, potentially, hurt the advertising potential that this sector could realise.

“The government has found no suitable applicants for self-regulatory bodies for gaming and is considering whether it should take matters into its own hands.”- Rajeev Chandrasekhar, Union Minister of State for IT

Reference to context

On 6 April 2023, MeitY amended the existing Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021—bringing online gaming under its ambit. This particular version of online gaming is defined as a sub-segment of the overall gaming industry that includes the ever-contentious titles such as rummy, fantasy sports, and other casual games that include financial transactions.

Online gaming, in this definition, has been contentious in India for more than a year now; multiple courts, including landmark high court judgments, have debated and ruled on whether rummy and fantasy sports could be reasonably classified as games of ‘skill’. A large faction of regulators have held the belief that they qualify more as games of ‘chance’, and must therefore be clubbed under the same bracket as betting and gambling, and regulated on the same note as well.

The industry, meanwhile, has claimed that a player needs to possess specific skills to play and win a hand of rummy, or top the charts and win money in a fantasy league—hence, these titles are nothing like betting or gambling.

Between FY 2019 and FY 2023, the average revenue per user of the overall gaming market rose 10x to nearly Rs 1,600.

MeitY, meanwhile, ruled that all of these games and gaming companies are, at the very least, intermediaries. This essentially means that these firms offer platforms, akin to how Meta offers Instagram as a mobile-first social media platform. Amid much ado and a Supreme Court hearing that now promises to be a major potboiler slated for a precedent-setting hearing that is to commence on 2 April this year, MeitY recommended that the online gaming industry submit proposals for setting up self-regulatory bodies (SRBs).

These bodies, to be sure, were to be appointed by MeitY itself, and were to act as nodal enforcement bodies that would judge if a game could be permitted to operate or not. Multiple factors, including that of money laundering, were to be taken into effect. Most importantly, though, SRBs were to issue verdicts on whether a game is a game or a betting platform in disguise.

However, in January, Union Minister of State for IT, Rajeev Chandrasekhar, told a business newspaper that after nearly eight months, the government found no suitable applicants for SRBs, and is now considering whether it should take matters into its own hands.

Why the long context?

The long-shot aftermath of all of this, potentially, can have a significant impact on advertising revenue in the gaming sector. On 25 August 2023, the Ministry of Information & Broadcasting (I&B) issued a notice to all traditional and social media platforms, warning them of “appropriate actions under various statutes” if they allowed direct or surrogate advertising by online gaming firms to be broadcast on them.

The I&B ministry’s key concern was that allowing such ads would let gambling and betting platforms advertise their services. It is because of this that the ministry underlined that only “permissible” online real-money games were to be allowed to advertise.

While revenues from advertisement contributed USD 600 million in FY 2023, it is projected to nearly triple to USD 1.7 billion by FY 2028.

While this move, on paper, kept it legal for online gaming entities in India to advertise, the challenge lay in this one word, “permissible”. In the absence of SRBs, who is to judge what is permissible, and what isn’t?

The impact of it all

A report published by gaming-first venture capital fund, Lumikai, on 31 October 2023 said that India’s gaming market was set to grow at a compound annual growth rate (CAGR) of 20%, to reach a revenue of USD 7.5 billion by FY 2028. More importantly, the report said that in four years between FY 2019 and FY 2023, the average revenue per user of the overall gaming market rose 10x to nearly Rs 1,600.

What’s intriguing to note here is the role of online gaming in driving this growth. Lumikai’s report indicates that in FY 2023, online gaming as defined so far in India accounted for nearly 65% of the entire gaming sector’s revenue. This makes for US 2 billion in revenue. However, in the next five financial years up to FY 2028, it is advertising that would rule the revenue growth roster—while ad money contributed USD 600 million in revenue in FY 2023, it is projected to nearly triple to USD 1.7 billion by FY 2028.

While this ad revenue is expected cumulatively from all forms of gaming, it is safe to say that, with online gaming’s proliferation, this sub-segment would have a massive impact on how this ad revenue growth takes place.

A senior executive at a top online gaming firm, on condition of anonymity due to the pending Supreme Court hearing, said that this is a key concern. “Many significant marketing campaigns remain under concern for us since we do not want to spend heavily on producing them, and later be banned from running them. The SRB appointments could have cleared the air on this, but until then, we’ve only got unpredictability to contend with,” he said.

Regulatory uncertainty and a prohibitive ban on the sector will adversely impact both direct and advertising revenue from online gaming titles.

Executives from two other firms, which are also a part of the upcoming Supreme Court hearing, agreed to this. “Ads are crucial to maintain a healthy balance in any industry. It also supports tertiary aspects of an industry and expedites the overall growth of a particular industry. Right now, with no clarity on regulations, we are not sure how the sector is to be regulated,” one of the executives said.

The three of them estimate that if the regulatory uncertainty is not fixed by this year itself, and a prohibitive ban is put on the sector, both direct and advertising revenue from online gaming titles will be adversely impacted. While a ban may not be on the cards, the government has not been in favor of the sector so far. All eyes, therefore, would be on the Supreme Court, and the judgment it gives concerning how online games are to be considered would be crucial in laying a precedent for ads from this sector.

Eventually, this could make a billion-dollar difference, within as little as the next three years.

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