Future of video game loot boxes uncertain as game-of-chance mechanics come under increased government scrutiny

For those who don’t follow the industry, and if I’m honest, even for many that do, the growth of video games, both in popularity and profitability, has been nothing short of astounding. In 2017 the video game industry reported revenue amounting to $108.4 Billion. To put that in perspective, 2017 also saw the American film industry enjoying unprecedented success as well, with global box office revenues exceeding $40 Billion for the first time.

While titles like Epic Games’ Fortnite and Rockstar Games’ Red Dead Redemption 2 became minor cultural phenomena over the last year, mobile gaming continues to be the largest revenue driver in the industry. These games often rely on a ‘Free-to-play’ revenue model that relies on users making in-game purchases for additional items or content with real-world money.

These in-game purchases, often referred to as micro-transactions, have become an important, though increasingly controversial, tool to game developers and publishers seeking to maximise and extend the profitability of their products. This strategy has proven so effective, that most new game releases, free and paid alike, now carry micro-transactions of their own in some form. While those who play games regularly often bemoan such practices, micro-transactions, and the windfall of profits they bring in, appear to be here to stay.

And It Was All Going So Well

However, one popular type of in-game purchase, the ‘loot box’, has recently drawn a large amount of scrutiny from various governmental bodies and advocacy groups who feel that the mechanics of ‘loot boxes’ could technically qualify as gambling. A serious charge indeed for entertainment products that are, more often than not, targeted at children and teenagers.

According to these groups, the problem with loot boxes is that, unlike other micro-transactions, the reward that players can gain from purchasing a loot box is randomised. While players may purchase a loot box for a fixed amount, let’s say ₹100 for example, they may receive items worth anywhere from less than ₹20 to several thousand rupees (No, really!).

Representational image. Reuters/Wolfgang Rattay

Representational image. Reuters/Wolfgang Rattay

On the face of it, this would mean that loot boxes fulfil the three basic points to qualify as gambling, there is a ‘consideration’, in the form of the money paid to purchase the loot box, a potential reward in the form of the items you may get and odds of winning said items. For its part, the industry refutes this claim on the grounds that the items gained have no real-world monetary value and that every box is guaranteed to contain a reward.

However, it appears lawmakers around the world are increasingly unwilling to accept the video game industry’s interpretation of the law. Earlier this year, Belgium has imposed strict guidelines on where and how loot boxes could be implemented in games, leading most companies to make loot boxes unavailable to customers from that nation.

While it’s unclear exactly how much revenue loot boxes alone generate, it is notable that major Japanese publisher Square Enix, withdrew several titles from the Belgian market following the ‘loot box’ ruling, preferring to not sell those games at all, than remove the offending feature. By some estimates, despite recent setbacks, gaming loot boxes alone could be on track to be worth $50 billion by 2022.

But while disruption in loot box sales in Belgium or the Netherlands (who introduced their own restrictions shortly after) was no-doubt frustrating for publishers, the impact to their bottom line remained relatively negligible. However, what these rulings did accomplish was establish a precedent.

In November, the United States, Federal Trade Commission (FTC), at the urging of the Senate, agreed to launch an investigation to determine if ‘loot boxes’ are indeed a form of gambling and whether games that implement them would require additional regulation. A move that was, somewhat predictably, heavily criticised by the Entertainment Software Association (ESA), the primary trade association and lobbying group of the US video game industry. Understandable concerns, if not entirely sympathetic, as the impact of the United States implementing anti-loot box legislation would be far more damaging and possibly even ruinous to some smaller publishers.

In a communiqué to the press following the FTC announcement, the ESA stuck firmly to their previous position that loot boxes do not constitute gambling, stating:

“Loot boxes are one way that players can enhance the experience that video games offer. Contrary to assertions, loot boxes are not gambling. They have no real-world value, players always receive something that enhances their experience, and they are entirely optional to purchase. They can enhance the experience for those who choose to use them, but have no impact on those who do not.”

Speaking personally as a long-time gamer who has thrilled, despaired and occasionally raged over the contents of various loot boxes that I have purchased over the years, I have to say I don’t really mind them. That being said it’s also true that some games are far more predatory than others and their presence in paid games (ie not free to play) is, in my opinion, entirely unacceptable.

A Major Tipping Point is on the Horizon

Considering the size and importance of the US gaming market, the decision of the FTC will likely have further reaching ramifications than the verdicts reached by other nations so far. It's difficult to predict what the FTC’s decision is going to be, although it is very unlikely that an outright ban would be recommended. It’s important to note that at the same time the Netherlands and Belgium were introducing new restrictions on loot boxes, the United Kingdom and New Zealand ruled in favour of game publishers, with their inquiries determining that loot boxes were not akin to gambling.

What we can probably expect is that games may be required to change how they present or promote loot boxes, possibly placing an age restriction or warning on purchasing in-game items although that seems unlikely. At most, we may see games in the US being required to provide more transparent odds of what you could win or even clear information what specific items you can get, a practice that some companies are already testing in the Netherlands.

What we are probably not going to see is games containing loot boxes being required to carry an 18+ age rating, although I can’t deny it would be interesting to see if any game publishers would be willing to take that offer. Given that all other non-chance based micro-transactions are still perfectly acceptable, a company agreeing to restrict its audience rather than remove loot boxes would be a clear indication of just how profitable these items truly are.

Additionally, it should be noted that ever since loot boxes first started coming under widespread scrutiny back at the end of 2017, many game makers have begun to move away from the practice, with some even using the absence of loot boxes in their games as a bragging point. Even Electronic Arts, the company whose egregious loot box practices contributed heavily to the public outcry that caused regulators to take a greater interest, has decided to drop loot boxes from some of their upcoming releases.

In the end, loot boxes could end up being nothing more than a fad, quickly abandoned now that it has begun to fall out of vogue, and drawing unwanted government scrutiny to an industry that has so far has enjoyed near-total self-regulation, at least within the United States.

It is interesting to note that the current FTC investigation appears limited to only determine whether purchasing Loot Boxes qualify as gambling under existing laws and conventions. What it doesn’t seem to be aimed at is determining if the definition of gambling should be expanded to include ‘Loot Boxes’ and similar offerings in their current form; a decision that could significantly impact the final outcome of the commission’s investigation.

The Best Regulation Still Starts at Home

Currently, India’s IT ministry and the National Indian Gaming Commission have made no public announcements with regard to loot boxes in video games. But with video game revenues in India passing the ₹37 Billion ($500 million) mark in 2017 and estimated to be on course to grow to over $1 Billion by 2020, it’s safe to assume that officials are closely observing on-going investigations and could launch one of their own to determine the government’s stance towards this issue.

As a parent, if you are concerned about your child falling for predatory or misleading sales practices, monitoring their purchases or restricting their ability to make in-game purchases without your approval will almost certainly be more effective than even the most well-intentioned lawmakers are likely going to be able to come up with.

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Updated Date: Dec 12, 2018 13:17:42 IST

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