On the back of the Star Wars Battlefront 2 debacle in 2017, many European regulators, including the UK and French ones, have started to take an increasingly scrutinising and judging stance, on loot boxes offered for purchase to children and young persons who play video games. Why are loot boxes potentially dangerous? What are the UK and French regulators – and other governments in the world – doing, to protect vulnerable players from these random reward mechanisms?
1. What are loot boxes?
Loot boxes are a relatively recent phenomenon, entering discourse around 2006. There is evidence that the use of the term ‟loot box” developed from the more general phenomenon of ‟Random Reward Mechanisms” (‟RRMs”) that have been used in games since the early 1990s. RRMs operate similarly to other forms of chance, such as collectible cards and Kinder eggs, and can be traced back to 19th-century cigarette cards.
RRMs are based on the principle of desirable ‟free” products contained within another product which is sold and the nature of ‟the game” relies on blind purchases of random items. Using collectible cards as an example, buyers continue to pay for cards in the hope of finding the particular cards they want. The market for these goods operates with information asymmetry: sellers control availability, do not publish probability statistics and capitalise on buyers’ desires.
While these antecedents of loot boxes are established and accept randomness as an element of play in physical and virtual games of chance, research indicates that ‟video games have been putting random items in treasure chests for decades”.
Therefore, the randomness of reward is the key distinguishing feature of loot boxes around which all definitions agree.
In terms of distinguishing and classifying loot boxes, the division centres on the mechanism of reward. Key distinguishing factors in definitions are:
- type: cosmetic (customisation, eg. looks of the player’s character or avatar) versus integral/game improvement (eg. tools, weapons, maps, ‟super powers”);
- currencies used: virtual versus real-world money (with the cost of loot boxes varying from a few Euros (1 to 2 Euros) to up to 100 Euros or more);
- ubiquity: popular versus niche;
- access: reward for playing the game well or a reward for sustained gameplaying (with the cost of loot boxes ranging from some gameplay – such as finishing a level, for example – to heavy – several hours – and often repetitive gameplay – so-called grinding), and
- exclusiveness: the player has no other way of acquiring items other than spending money.
RRMs have been conceptualised in four types, depending on the Resources players tender versus the potential Reward. These may be either (I) Isolated from, or (E) Embedded in the real-world economy. This leads to four types of loot boxes:
- I-I non-purchasable and non-sellable, RRMs in single-player games (eg. Diablo I);
- I-E non-purchasable but sellable, RRMs that can be traded (e.g. Diablo III);
- E-I purchasable but non-sellable, RRMs that can be bought but not traded (eg. Overwatch);
- E-E purchasable and tradable, RRMs that can be bought and traded in multi-player games (eg. Team Fortress 2, CS:GO and PlayerUnknown’s Battlegrounds).
While some researchers consider that only E-E type loot boxes can be considered gambling, others, like Leon Xiao, have argued against that position, pointing towards the FutGalaxy.com case. In this case, a third-party website meant that game currencies and rewards that were Isolated by design, could in fact be traded (making them effectively Embedded in this case).
So loot boxes are a form of microtransactions where they are available as an in-game purchase. However, loot boxes are only one part of the in-game purchase market. Their unique element is the change mechanism. For other forms of in-game purchases, players will know what item they will receive in advance of purchase.
1.2. Scale and scope of the market for loot boxes and microtransactions
In 2021, there were 2.96 billion gamers globally, generating 2020 revenues of USD189.3 billion from the top five companies (Tencent, Sony, Microsoft, Apple and Activision Blizzard), accounting for 43 percent of global games revenues. Video games is one of the fastest-growing entertainment sectors, with predictions of a compound annual growth rate of around 10 percent, over 2022-2030.
In this context, loot boxes and microtransactions are highly lucrative. Revenues generated from loot boxes used in video games will exceed USD20 billion in 2025, up from an estimated USD15 billion in 2020.
No wonder large studios (eg. Activision Blizzard and Electronic Arts) have patented their loot box mechanisms to combat imitation!
As explained in our article on Microsoft’s acquisition of Activision Blizzard, gamers access video games three ways:
- they can purchase the game for a set price (that premium purchase price model is the most traditional business model, still used for the Grand Theft Auto V and Assassin’s Creed franchises);
- they can subscribe, on a monthly (sometimes yearly) basis for access to a game (Blizzard Entertainment’s World of Warcraft is perhaps the most successful game that utilises this subscription model); or
- they download games which are free to play, but may have to execute microtransactions in order to obtain discrete pieces of content (for example, a player may spend a dollar on a new sword for a character, or on a vanity item such as changing the color of their character’s hair, like in the most popular PC game in the world – Riot Games’ League of Legends – which sells a variety of items that can customise the base game, which, itself, is given away for free).
It is in the third and last scenario, the freemium model of distribution, built round microtransactions as a revenue stream, that loot boxes thrive. The game is downloaded from digital platforms such as the App Store, Google Play or Steam, with most players spending no money at all to play the game. Loot boxes are inserted into freemium games as a mechanism for in-app purchases. Even if players do not wish to access loot boxes, they cannot avoid exposure to these features of the game: they will constantly be reminded of the opportunity to avail themselves of the random rewards contained in loot boxes.
1.3. Are loot boxes included in the definition of ‟gambling‟ under the UK gambling act 2015 and French law dated 12 May 2010?
No, loot boxes are not legally considered gambling in the United Kingdom (‟UK”) and France.
Concerns have been raised about whether the purchase of loot boxes is like a ‟game of chance” and therefore a form of gambling. Particular concerns have been raised about loot boxes within video games targeted at children or young people.
In 2016, the UK Gambling Commission identified loot boxes as a potential risk to children, as part of a wider review of gaming and gambling. The Gambling Commission subsequently stated that whether it has powers to intervene in the loot box market is based on a judgment of whether a particular activity is considered a game of chance played for ‟money or money’s worth” under relevant provisions of the UK gambling act 2005. The commission said that ‟where in-game items obtained via loot boxes are confined for use within the game, and cannot be cashed out, it is unlikely to be caught as a licensable gambling activity. In those cases, our legal powers would not allow us to step in”.
The same conclusion was reached by French ‟Autorité de régulation des jeux en ligne” (‟ARJEL”), in its 2017-2018 activity report, concluding that loot boxes (except E-E type loot boxes, such as in games PlayerUnknown’s Battlegrounds, Team Fortress 2 and Counter-Strike: Global Offensive, which had been investigated already, and largely resolved by ARJEL, other regulators and the game industry) were outside the scope of French law of 12 May 2010 relating to the opening of competition and regulation in the sector of online money and chance games.
So, for French and UK gambling regulators, the games that are most commonly mentioned in the debate on loot boxes (Overwatch, Star Wars Battlefront 2 and FIFA Ultimate Team) belong to the E-I type (purchasable but non-sellable RRMs) and thus do not meet the legal definition of gambling.
Not every European country has taken this route, though, with Belgium and the Netherlands ruling that the sale of loot boxes in certain circumstances is a form of gambling under their national gambling legislation. Slovakia also considers loot boxes to be gambling under its national legal definition but has yet to take regulatory action. More recently, Spain has committed to introduce new legislation to restrict the sale of loot boxes.
Interestingly, the European Union (‟EU”) institutions, and, in particular, the European Commission, declined to take any significant targeted action to address the topic of loot boxes because the EU has little competence in the area of gambling, as this competence mainly lies with EU member-states.
So, in France, the UK, but also Denmark, Finland, Sweden, and the other EU member-states (except Belgium, The Netherlands, Slovakia and Spain) loot boxes are regulated by general national legislation on contracts and consumer protection.
2. Why are loot boxes an issue, as it stands?
A scandal erupted in November 2017, when game studio EA suspended microtransactions in Star Wars Battlefront 2 following a furore over loot boxes, hours before the game’s launch. While other game developers and publishers had been embroiled in the controversy over loot boxes, EA took the brunt due to the imbalance potentially caused by randomised loot, in this competitive multiplayer shooter game.
This is when more and more national gambling authorities and governments started to take the issues potentially caused by loot boxes really seriously, and launched investigations.
Moreover, a study published in 2020 surveyed the 100 top-grossing games on the Google Play store and App Store. It found that 58 percent of the Google games, and 59 percent of the iPhone games, contained loot boxes. Of those that contained loot boxes, 93 percent of the Google games, and 95 percent of the iPhone games were available to children aged 12 and over. So, loot boxes are an extremely common occurrence, in freemium games.
Also, loot boxes are becoming even more appealing to players because premium fashion brands and luxury labels, such as Gucci, Burberry and Nike – are partnering up with video games publishers to provide even more attractive and hype cosmetic and avatar-customisation options to players. So this makes it even more difficult to resist, for fashion conscious youth, opportunities to purchase loot boxes containing fashion designers’ items, on their favourite game.
In September 2019, the UK House of Commons Digital, Culture, Media and Sport Committee (‟DCMS”) published its report ‟Immersive and addictive technologies”. The report detailed financial harms associated with online gaming, including gambling-like behaviours which can affect some users, especially those in vulnerable age groups like children and young people. DCMS heard evidence that there were ‟structural and psychological similarities between loot boxes and gambling”. The report recommended that loot boxes that contain the element of chance should not be sold to children playing games, and instead in-game credits should be earned through rewards won through playing the games.
3. What are the UK and France doing to limit the damage caused by loot boxes?
This prompted the UK government to launch a call for evidence in September 2020, and the wider review of the gambling act 2005 in December 2020. The consultation outcome of the call for evidence was released in July 2022 with the main message conveyed by the UK government to the games industry being that it must self-regulate and take action on loot boxes, or risk future legislation. In a typical Tories’ move, the conclusion of the consultation was that improved industry-led protections were the best approach, over regulation under an amended version of the gambling act 2005 (which would classify loot boxes as gambling) and other statutory consumer protections. Under these improved industry-led protections, industry trade body Ukie and its members must go further, and more should be done across game platforms and publishers to mitigate the risk of harm from loot boxes, while purchases of loot boxes should be unavailable to all children and young people unless and until they are enabled by a parent or guardian.
So the view of the DCMS, set out in its July 2022 conclusion to the call for evidence, is that it would be premature to pursue legislation with regards to loot boxes without first pursuing enhanced industry-led protections. And convene a technical working group to pursue these enhanced industry-led measures to mitigate the risk of harms from loot boxes in video games. The technical working group would include representatives of games companies and platforms, government departments and regulatory bodies.
Among the members of this technical working group is above-mentioned Leon Xiao, a PhD fellow focusing on loot boxes and video game law.
In a seminal piece, L. Xiao criticises Belgium’s loot box ban as ineffective, because, even though Belgium technically ‟banned‟ loot boxes using its gambling law in 2018, 82 percent of the highest-grossing iPhone games on the Belgian App Store continued to monetise using loot boxes in 2022. This is because the Belgium regulator has not actively enforced the law due to a lack of resources and enforcement power. Therefore, any self-regulatory framework should be supported by effective enforcement mechanisms, with an independent body set up to review compliance actions by game publishers and hand down penalties (such as fines and financial penalties) in case of non-compliance. Funding for this enforcement task could be obtained through a mandatory levy on the gaming industry.
L. Xiao also suggests that the UK loot box self-regulation involve the creation of a ”code of conduct” within the meaning of Regulation 2(1) of the Consumer Protection from Unfair Trading Regulations 2008. This would imply that any failure to comply with verifiable self-regulatory commitments, explicitly set out in such code of conduct, by a signatory company, may be subject to legal proceedings. This combination of flexibility, industry commitment to self-regulation, and enforcement powers thanks to UK statutory regulations, would be ideal, according to L. Xiao.
Another tool to enhance self-regulation would be to require mandatory loot box probability disclosures, such as the ones required in China. Indeed, China has required video games platforms to disclose the probabilities of obtaining randomised items from loot boxes since 2017. Only 64 percent of games containing loot boxes disclose probabilities on the UK App Store, compared to 95.6 percent on the Chinese store. While Apple has some App Store Review Guidelines which set out that loot box probability disclosures must be made, it has not actively enforced this self-regulatory probability disclosure requirement. This should change according to L. Xiao and failing to disclose probabilities should cause the games to be removed from the store. Also, these probability disclosures should be sufficiently prominent and easily accessible to players, and the UK self-regulation measures should encompass industry-wide minimal standards that all companies must meet in this respect.
One self-regulatory measure that has been uniformly applied is PEGI’s ‟Includes paid random items” label. European video game content rating system provider PEGI would attach this to any games containing loot boxes to ‟provide additional information” to players and parents. But PEGI label seems ineffective because it does not inform players and parents as to exactly how the loot box mechanic can be identified so as to allow players and parents to avoid engaging with it. Therefore, an improvement would be to specifically describe the loot box mechanic in the game, and provide a choice in the options’ menu to turn the ability to purchase loot boxes on or off (potentially even with the default option set to off).
While the UK is attempting to find the best way to force the video games’ industry to self-regulate on loot boxes and microtransactions, and France has lost the plot on the subject entirely, Australia has filed a loot box bill on 28 November 2022, with its proposed legislation requiring games with loot boxes to be rated R18+ and carry warnings for parents, in order to keep children from purchasing and playing games with loot boxes.
This is a stark warning to video game companies that they must change their ways, quickly, in order to work with governments and, in particular, the UK government, to implement effective and strictly enforced self-regulating measures to avoid any further children’s and young persons’ psychological and financial exploitation via loot boxes. I am hopeful that game publishers have got the message since many large studios, such as Activision Blizzard, Electronic Arts, Ubisoft and First Touch Games, as well as trade association representing the UK’s game industry TIGA, submitted evidence to the above-mentioned 2020 call for evidence. Let’s watch the space and see whether video game companies are up to the challenge, and can come up with decisive self-regulatory measures, which will be enforced industry-wide, in the UK and beyond.
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