Nazara Technologies chief executive Manish Agarwal has scale on his mind. After a blockbuster public market debut in February, India’s first publicly listed gaming company raised a Rs 315 crore war chest on October 6 — through a preferential allotment — from Singapore sovereign wealth fund GIC-managed investment firm Gamnat Pte and Ahmedabad-based Plutus Wealth Management.
This fundraise comes at a time when India’s mobile gaming industry has witnessed a boom with the pandemic-induced home confinement accelerating the growth of these games. Mobile app downloads increased by 50 percent while user engagement rose 20 percent, according to a recent report by the Internet and Mobile Association of India (IAMAI), RedSeer and OnePlus.
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The industry is set to more than triple in size to $6-7 billion by 2025, from $1.8 billion in 2021, the report said.
Nazara Technologies, which has been actively acquiring gaming companies as part of its “Friends of Nazara” network in recent years, is looking to capitalise on this trend through larger deals to fuel growth, Agarwal told Moneycontrol’s Vikas SN in an interview.
Agarwal also spoke about the challenge in monetising casual games and Nazara’s plan to become a significant player in skill-based real money games amidst the ongoing regulatory uncertainty in the sector. Edited excerpts:
You just went through a big IPO. What was the reason behind this financing?
So, our IPO was a pure offer for sale (OFS) and we didn’t have a primary fundraise. In our scheme of things, you can’t have a blindfold as an object in your primary raise.
Ours is a very evolving fast, dynamic space. So, we cannot have some term sheet signed and then wait for an IPO to happen and then the founders keep waiting for it. That doesn’t happen. It was impossible for us to give definitive company names and term sheets and other things to create a very objective use of proceeds in our DRHP and RHP, and hence we could not do any primary fundraise.
We are a debt-free and cash-flow positive company, and we have cash so we don’t have any other requirement for today’s money to see off our debt.
As we have grown in the past through the “Friends of Nazara” network, we will continue to expedite it and explore more opportunities. We also need to increase the size of M&As as our scale is also increasing. Earlier, we were looking at Rs 17-20 crore companies, but now we need to look at Rs 50-60 crore companies, which means that we need to look at slightly larger deals.
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Our approach is to always have a combination of cash and equity in deals, with a substantial amount of equity being given to the founders and investors of the target company. But you still need cash, which is why we wanted to create this warchest so that we can double down on identifying targets.
We are also operating in four high-growth segments — gamified learning, freemium, eSports and skill-based real money gaming — all of which are a massive TAM (Total Addressable Market) and have huge tailwind opportunities due to which we needed the money for acquisitions. We may use the proceeds to also increase some equity in our downstream subsidiaries as and when required.
You’ve actually been very active in M&As. Are you looking at any new verticals for opportunities?
We continue to operate in four verticals and look at white spaces in each of these verticals. For instance, we have a white space in the kids (7-12 years) space. In freemium, we only have Cricket and would like to have more competitive multiplayer games that lend themselves to esports. We would like to have more IPs in esports and more geographies under our belt.
We would also love to become a significant player in skill-based real money in India by consolidating some companies in the space.
What is the rationale behind your ’Friends of Nazara’ strategy?
Our thinking is very simple. We do not have the time and bandwidth to wait for opportunity costs. We work with founders and help them grow faster, rather than trying to do a product market fit over many years.
If you are able to do that, it will create a positive virtuous cycle since that will create higher growth, which will lead to higher valuation. That allows you to acquire more companies or raise more capital at a lower valuation, which will help you grow further.
How is the real money gaming segment shaping up for you?
It is a sub 2 percent segment for us in terms of revenue but the overall market is large, at around Rs 11,000-13,000 crore. This business has very strong network effects of trusted brands, concurrent users and liquidity pools on the platform, hence you cannot compete being a really small player. So, the choice is not to really play or play big in this segment.
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If you want to play big, then you will have to also spend that cost of opportunity, and invest a sizable amount of money to build that concurrency and scale. But we believe that we have a huge opportunity ahead of us and if we can consolidate some of the companies in the market, we will be able to create a formidable position to compete on unit economics with deeply entrenched players. Having this war chest really helps you to evaluate options, have discussions and make quick closures. But do we have a pipeline? No, we don’t, we will build it out.
There is however a lot of regulatory uncertainty around real money gaming. In the past few months, there has been a problem with States, be it Andhra Pradesh, Tamil Nadu, Kerala and now Karnataka. Is there a solution to this?
My view is that there have been more positives than negatives in the last two months. The Supreme Court unambiguously made Fantasy a game of skill. The Madras High Court overturned the Tamil Nadu government order and also said State governments cannot ban it. The Kerala High Court recently overturned the Kerala government’s order.
I am seeing that State governments are losing legal battles in their respective high courts and judgements are becoming sharper and clearer.
Given that the space is so large and new, there will be constant challenges but our view is that over the next four to eight quarters, things will start becoming clearer and firm. This is also why we went ahead and looked at OpenPlay.
Karnataka is definitely a setback but we believe we are moving from black colour to white colour although they are still grey at the moment.
How big is South India for real money gaming?
South India is a big market for Rummy, not real money. If you look at fantasy or poker, they’re nationally distributed, and so is casual gaming. But Rummy has a pretty good concentration in the southern states.
The monetisation of casual games has been a big challenge. How will that improve in the future?
About 380 million people out of 450 million gamers play casual games in India. These games can only be monetised through ads and that is a very difficult one because your paid-user acquisition versus LTV:CAC (Customer Lifetime Value to Customer Acquisition Cost ratio) equation doesn’t set up. So, unless you’ve got a big breakout hit, you will not be able to really succeed in a casual market as a developer. This is because you will get tons of downloads but not revenues.
That said, the market has changed big-time in the last three years with the rise of mid-core and hardcore gamers, which is around 70-80 million gamers. In terms of in-app purchases, this market used to be $50 million in 2017-18 but has now grown to $500 million, driven by imported competitive multiplayer games — like Battlegrounds Mobile India, Free Fire, Call of Duty mobile-enabled by eSports. That is where your growth is happening.
However, in any market across the world, mobile gaming has grown through in-app purchases and not through ads. India’s story of in-app purchases is three to four years away, after which I believe that it will shoot up dramatically due to better digital monetisation and more infrastructure being created for multiplayer mobile games. More competitive tournaments will also spur people to further hone their skills and improve their levels in a game, which will increase in-app purchases. This will also bring more global publishers to the country since this is the largest market in the world untapped by the gaming sector.
If you look at Free to Play mobile games, the future will lie in in-app purchases on multiplayer games in India. Titular games will give you a huge amount of volume but only those with a network of 50 million-100 million monthly active users will have some scale. Anyone with a smaller network will not have scale.
What is your view on the ongoing debate on in-app commission rates?
I think the challenge for 99 percent of the Indian developer ecosystem is to first design a game that can generate enough in-app purchases. If your game doesn’t have in-app revenue, you anyway are not getting any benefit.
The 1 percent of guys who are successful may get positively impacted from a lower rate. But how much will it actually benefit them? How much will the friction be (circumventing app store payments) and how will it impact your cost per trial or cost per acquisition? That’s something we will know only after A/B testing, once it is in place.