Regulating loot boxes – open your beginner crate

In this article we consider the prevalence of loot boxes in video games and methods to mitigate the risk of regulation.

Loot boxes have transformed video games by allowing players to express their personality through rarefied skins and other cosmetic items, added entire meta progression systems to base games, and sustained the economic viability of the free-to-play model which has brought games to a new and diverse audience. However, loot boxes have come increasingly under the eye of legislators and regulators worldwide for alleged anti-consumer practices and utilising psychological drivers akin to gambling.

In this article, we provide context behind the emergence of loot boxes in the video games industry, the rationale used by those who wish to impose regulation, and some practical steps that could be taken to show the would-be legislators and regulators that the industry is self-regulating effectively.

What are loot boxes?

Loot boxes can be broadly categorised as virtual containers of hidden and randomised in-game items. Once purchased (usually via real currency, in-game currency, in-game progression or otherwise gifted) and subsequently opened, the loot box reveals the identity of the randomised in-game items which now belong to the player.

Loot boxes are not always described as such, for example the Battlefield series has previously contained “Battlepacks”, the Forza series “Prize Crates”, and Middle-earth: Shadow of War “War Chests”.

Despite the intensifying press coverage, the industry is not moving uniformly towards greater implementation of loot boxes, and the three franchises referred to above have either stripped out or diluted loot boxes in their latest iterations. Nevertheless, loot boxes still remain prevalent across both traditional “AAA” full priced retail games and even more widely in the free-to-play space, where loot boxes are more fundamental to the economic model.

What is free-to-play?

The distribution of games via the free-to-play model has been a positive trend in the video game industry since the turn of the century. Free-to-play allows gamers to have high quality gaming experiences without any required outlay aside from the device or platform they choose to play the game on.

Although some free-to-play games have no gateways for depositing real world currency, most of the larger free-to-play games do contain mechanisms for purchasing additional content with real world currency.

This freemium free-to-play model is made economically viable by a proportion of the player base paying for such additional in-game content. This is despite the free-to-play game fundamentally being available with no additional purchases necessary, and often a significant number of players never purchasing any in-game items. A similar model applies for traditional AAA games that contain additional purchasable in-game content yet still require an initial payment for the base game.

Why are loot boxes so prevalent?

Providing additional in-game content for purchase comes with an inherent risk of unbalancing the player base of the game between those who purchase the additional content and those who do not, and this risk particularly applies both to AAA and free-to-play games whenever there is some aspect of multiplayer involved. To mitigate this, some games offer purchasable in-game content that is cosmetic only, and therefore does not penalise non-paying gamers in the core gameplay experience. This cosmetic content (skins, decals, emotes) can still be highly desirable to designate status and express personality within the game.

However, other games do offer purchasable in-game content that does fundamentally alter the gameplay experience or assist progression through the game. Examples include weapons in shooting games, or players in sports games. Although games offering this type of in-game content for purchase can be categorised as being “pay-to-win”, two mechanisms are often used to maintain a balance of sorts between the two wings of the player base.The first is to offer two different types of in-game currency (one earned through gameplay and the other paid for) which means the gameplay altering in-game content is made available for purchase through gameplay alone, albeit usually at a devalued rate.

The second is to hide the actual in-game content which can be purchased behind a game of chance, the loot box.

By preventing players from directly purchasing in-game items, it is less likely that the gamer pool becomes imbalanced, and that non-paying gamers are put off by being at a perceived disadvantage. For example, in FIFA Ultimate Team it is not possible to purchase any player directly with the premium (paid for) in-game currency. Instead, players can purchase packs that contain a number of hidden players. The more expensive the pack (purchasable with both the premium and gameplay earned currency), the more likely that a high value player resides within.

Therefore loot boxes have helped to facilitate larger player bases in games, and especially in free-to-play games, by preventing players who are willing to pay more from directly purchasing advantageous in-game content, and incentivising the wider player base to engage with the in-game economy as loot boxes often contain a chance of a high value item.

Why are there calls to regulate loot boxes?

Due to the randomised nature of loot boxes, some players can be particularly enticed into thinking that their next loot box purchase may contain a high value item. This is in the same way as theoretically any lottery ticket could entitle the owner to a jackpot. This “one more go” gameplay loop has been accused of leading to a relatively small proportion of players spending large amounts of money on loot boxes (such a proportion sometimes known as whales).

A common characteristic of loot boxes is that the contents of the loot box are blind to the player’s existing inventory and previous expenditure. This is also true of some forms of gambling. The blackjack table, fixed odds betting terminal or horse race do not take into account how much the player won or lost the previous day. This can be differentiated from non-monetised traditional in-game upgrades or indeed other forms of microtransactions.

There is a risk that this distinction may get swept up by any heavy handed regulation of loot boxes in video games. For example, if a consumer goes to a supermarket and decides to spend £1,000 on a new TV, this is not gambling behaviour. The consumer has had the opportunity to take stock of their existing inventory, identify a specific new item, and purchased it. This is akin to a player identifying a specific item in a video game and purchasing it directly with premium currency.

If the consumer goes to the supermarket and buys a lottery ticket for £10 which entitles them to one random item (and indeed with such randomisation skewed in favour of lower value items), this could be perceived as gambling type behaviour. The consumer might win a teacup, of which they already have plenty, or some meat, when they are vegetarian. This could be construed as akin to purchasing a loot box.

It is the latter gambling “style” drivers that have increasingly caught the eye of politicians and regulators worldwide, particularly in the context of games either explicitly targeted at or in any event played by minors, however microtransactions more widely risk getting swept up too.

International plans for regulation of loot boxes

US Senator Josh Hawley revealed his plans in May 2019 to introduce legislation aimed at loot box mechanisms in games (the bill text can be read here). Accompanying materials released on the Senator’s website describe loot boxes as a “manipulative design” which “exploits children” and “monetizes addiction”. Hawley’s stated goal is to prevent games from offering purchasable randomised rewards or pay-to-win microtransactions to minors.

This development in the US is part of a series of conversations governments and regulators are having across the world as they grapple with loot boxes. The direction of travel is towards regulation, and in 2018 both the Belgian and Dutch regulators designated some loot boxes as gambling.

The position in the UK

Loot boxes are also gaining increasing attention from the UK government and wider public. Last year, a petition to the government was signed by nearly 17,000 people. The influential Digital, Culture, Media and Sport Committee is currently looking at the links between video gaming and gambling as a part of an inquiry. Concerns are not limited to games played by minors (as is a major focus in the US), but also to “problem gambling” in adults.

As it stands, the Gambling Commission in the UK does not consider that most loot boxes fall under UK gambling law. To some extent this is based on a technicality. Where loot boxes contain in-game items which are not capable of being cashed out, the Gambling Commission does not recognise them as prizes as defined in the Gambling Act 2005.

However, how accurate is this interpretation in light of the fact that gamers can in some circumstances monetise their in-game items? Some gaming platforms allow players to sell their in-game items to other players for store credit. Alternatively, gamers can sell tradable items on third party platforms. For games where in-game items are non-tradable, accounts with valuable items are traded on third party platforms (albeit usually in violation of the terms of service).

The ultimate destination of the current direction of travel is likely to be regulation, both in the UK and in other jurisdictions. We therefore suggest that it is in the wider video games industry’s long term interest to take a slightly different approach to stave off regulation which could potentially be indiscriminate in coverage.

Potential regulatory structures

As food for thought, we have set out two possible versions of the future below. The first version contains examples of “worst case” regulation that would have a stifling effect on the video games industry, through the need for increased compliance, legal risk analysis and direct loss of profit through the required removal or dis-incentivisation of loot boxes.

The second version contains some voluntarily implemented mechanisms which could show legislative stakeholders that the video games industry is aware of the potential issues and is self-regulating effectively. 

“Worst case” regulation that could be imposed on the video games industry

Voluntary measures to lower the risk of regulatory scrutiny

Taxation/duty of loot box revenues

Less reliance on loot boxes for game longevity/profitability, increase in the relative
evaluation of in-game non premium currencies 

No digital purchasable randomised rewards

Greater transparency around loot box drop rates via displayed percentages

Consent to loot box content required from player before game can be played

 Clearer labelling of games that contain loot boxes (in line with the ESRB’s sensible approach)

Thorough age authentication KYC required before game can be played

 Greater visibility of age ratings

Hard cap on loot box purchase amounts per
player (hourly/daily/weekly) through mandatory cool down timers

Greater information made available in-menu to
players about their past loot box expenditure, real time
pop ups to players if excessive loot box purchasing behaviour detected

Loot box free alternative versions of games required

 Loot box contents also earnable and
genuinely attainable through gameplay (including cosmetics)

Toning down of loot box animations

 In-menu option to turn off loot box animations

Advertising restrictions

Clearer targeting of advertisements at intended market if game not aimed at minors

Self-regulation has been proven to work in the video games industry. In 1994, as a result of the threat of legislative intervention to regulate video games in the US (particularly video games with violent content), the Entertainment Software Association founded the Entertainment Software Rating Board (ESRB), which received backing from developers, publishers, console manufacturers and retailers. This self-regulatory rating system successfully avoided US regulation of video game content. The “spirit” of this 1994 collaboration could be utilised to great effect today.

Conclusion

Loot boxes and microtransactions have facilitated enhanced player experiences, democratised games, and allowed gamers to express themselves more creatively. However, the increasing calls for the regulation of loot boxes stem from a dissatisfaction by some gamers, or those ultimately picking up the bill, of certain implementations of loot boxes.

Without any recognition of these concerns, the video games industry risks opening its own loot box containing disproportionately restrictive regulations. To mitigate against this, developers and publishers that still incorporate loot boxes in their games should consider reviewing, and if necessary altering, some of the mechanics which are likely to come under the most scrutiny.

Article authored by Kireth Kalirai and Michael Yu, Simmons & Simmons LLP

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.