Schrodinger's Loot Box – Gambling, but also not?

While gambling has evolved in a variety of ways across different jurisdictions the core concept remains relatively universal, and that is - to take an action which involves an element of risk in return for an outcome at least partially influenced by chance. With the growth in popularity and value of the esports industry there is more incentive than ever for gambling organisations to enter the scene. Questions around betting on esports teams and skins etc certainly need to be explored, however, in this article we will be considering whether gambling has been a part of some videogames the whole time...

Loot Boxes – what are they, should they be considered gambling, and how should they be regulated?

Context - Gaming as a Service

Games are changing. The traditional model of a one-off £40-£50 fee is slowly being eroded in favour of a gaming-as-a-service model which generates revenue through periodic expansions and/or microtransactions. When utilised correctly the power of this model cannot be overstated. Without the need to require an upfront payment the initial barrier to entry can be significantly reduced, often allowing gamers to start playing for free. Developers can also benefit as it allows them to continually develop and improve the game while profiting from a continuous revenue stream rather than a one-off, make it or break it payment.

What are Loot Boxes?

Since this service model has grown in popularity developers have become increasing proficient at optimising its monetisation possibilities, often by encouraging more microtransactions. Rather than allowing specific purchases, developers sometimes offer players the chance of receiving certain items through randomised bundles of in-game rewards called "loot boxes". Sometimes these items can be purely cosmetic, however, sometimes they grant a competitive advantage contributing to a ‘pay-to-win’ model.

With a range of digital items available, and continuous updates, players can find themselves regularly spending more money for an assortment of random items than they would have spent on any one desired item. In fact, reports have predicted that, if allowed to continue undisrupted by legislation, the loot box industry could be worth as high as $50,000,000 as early as 2022. Many AAA titles have begun utilising this model but it can be found throughout the industry, particularly in free-to-play mobile apps which rely solely on micro-transactions.

So how does this relate to gambling? Well, with the World Health Organisation's classification of Gaming Disorder in 2018, and more attention being paid to the esports industry, many political bodies are beginning to review their approach towards potentially addictive elements of videogames. In the UK in particular publications such as ‘The Immersive and Addictive Technologies Report’ published by the Department for Digital Culture, Media and Sports in September 2019 and the ‘Skins in the Game’ report published by The Royal Society of Public Health in December 2019 have warned of the potential addictive qualities of loot boxes. Although research into the effects of loot boxes etc is inconclusive at this time correlations have been drawn between loot box mechanics and gambling leading politicians to question whether they should be regulated in the same way.

Are loot boxes gambling?

Loot boxes have been likened to a particular kind of gambling often referred to as ‘games of chance’ which is characterised by (1) a chance of receiving a prize (2) of money’s worth. We can use this test for the purposes of a high-level review of the issue without focusing too much on any specific jurisdiction.

(1) a chance of receiving a prize:

When opening a loot box the individual receives a randomised reward. But should that be interpreted as the chance of receiving a reward, as opposed to nothing, or a specific prize. If a paid loot box mechanic had the possibility of receiving nothing at all this would almost certainly be considered a game of chance. However, most games design loot boxes to always give the purchaser some semblance of a reward. Developers such as EA Sports have argued that since all loot boxes result in some from of prize they are merely ‘surprise mechanics’ similar to that of kinder eggs.

Prizes for traditional games of chance can be valued and compared so the alternative interpretation is somewhat untested. Loot boxes provide a variety of digital items which are often difficult to quantify and there is no guarantee of receiving any specific prize. The point is further complicated as, in contrast to kinder eggs, it is arguable that the value of loot box rewards can differ. Of course, the assumption that loot box rewards have any value at all leads us perfectly into the second element…

(2) Do in-game rewards constitute money’s worth?

The central argument against loot boxes being considered gambling is often that in-game items cannot be monetised. Once an item is acquired it cannot be exchanged back into money. As such it is arguable that these digital items have no ‘real-world’ value in contrast to other items used in games of chance such as casino chips. However, there are some arguments that, in spite of this point, loot box rewards do still constitute money’s worth or at least have value:

1. Indirect monetisation – Some games allow for the transfer of items between accounts, opening up the possibility of real-world cash being used alongside in-game transfers. Even when this functionality is not included within the game players still have the ability to transfer ownership of their account along with all of the items bound to it. The lack of developer endorsement for real-world trading has kept most regulators at bay, however, the Netherlands has found that the existence of unofficial monetisation platforms is enough to classify loot box purchases as gambling.

2. Ranking/ rarity - It may not always be possible to measure and compare the value of loot box rewards, however, this does not mean they are all equal. Rewards are often ranked with the developers themselves recognising some rewards as more desirable and consequently reducing their prevalence. In addition to this implemented ranking system some rewards also become particularly coveted by the community as a result of scarcity or some external factor.

3. Competitive advantage - Some in-game rewards are merely cosmetic, however, some rewards also provide a competitive advantage in-game. Those items which provide for improved performance arguably have greater value than those which would result in poorer performance. When taken to the professional stage this line of reasoning becomes even more powerful as a competitor’s earnings would be influenced by their in-game items.

4. Subjective perception - Taking the players’ perception into account it is arguable that the in-game items they are vying for do have behaviour-influencing value culminating, of course, in their spending real money on loot boxes.

Consequences for the future of loot boxes

If purchasing a loot box is considered a game of chance then domestic gambling regulations will automatically apply. For example, in the UK, games of chance are regulated under section 6 of the Gambling Act 2005 (GA). The UK’s Gambling Commission has previously refused to interfere with loot boxes, however, it would cause widespread disruption to developers should they change their mind. Inviting, causing and/or permitting minors to gamble is an offence in the UK under section 46 GA but equivalent laws can be found across the world. Regardless of other offences and licencing requirements this provision alone would be enough to quite nearly destroy a country’s domestic loot box industry overnight. We have seen similar situations in jurisdictions such as Belgium where loot boxes were banned and developers were forced to remove the mechanic from games there.

Assuming that current gambling legislation isn’t quite appropriate for the new challenges posed by loot boxes we are left with two alternatives:

Firstly, we could let the market regulate itself. Players have vocalised dissatisfaction with in-game mechanics in the past and loot boxes have certainly received bad PR as a result. If consumers are truly uncomfortable with their presence in games then perhaps they will refuse to purchase loot boxes and decide to play other games instead. Afterall, purchases of loot boxes are entirely optional and shouldn’t developers be free to monetise their products in this way if consumers are happy?

Secondly, countries enact bespoke legislation to directly address loot boxes and other forms of in-game gambling. There are certainly some middle-ground compromises that would help monitor and manage loot box purchases without banning them completely. These include, among others…

Potential loot box regulations:

1. Introducing age restrictions – age restrictions on online purchases are notoriously difficult to enforce but through technology and education it may be possible. New forms of online banking offer parents more control over their children’s spending and could be used to limit online purchases or require parental consent. This leads to the issue of parental education as there are still many adults who don’t understand microtransactions and loot boxes. Looking through the Noobs section of Ethoughts is a great place to start.

2. Banning credit card purchases – consumers can get into greater trouble when buying loot boxes on credit. Jurisdictions can help prevent this by introducing legislation which bans purchases through credit. The UK has already introduced this in relation to traditional gambling through the Gambling Act 2005 (Amendment) Act 2019 which is due to come into force 14 April 2020.

3. Disclosing reward probabilities – Making probability disclosures mandatory is not a particularly onerous obligation and one which China has implemented since 2017. In fact, Sony, Microsoft and Nintendo as well as several game publishers have voluntarily agreed to adopt this practice from 2020 as an act of good faith, perhaps as an attempt to avoid more disruptive regulations.

4. Limited purchases – China has also led the way in restricting the number of loot boxes players can purchase on a daily basis. This mechanic seems relatively sound as it spreads consumer spending and limits the binge effect encouraged by the ‘near-miss’ nature of loot boxes. It also prevents the damage that can be done from credit cards and stolen cards which have both been highlighted as problem areas.

5. Warnings/ ratings – Games have ratings, such as the PEGI system, to educate purchasers of potential harms and the presence of in-game loot boxes could be disclosed in the same way. A loot box warning system has already been introduced in some jurisdictions including Australia. Ultimately, of course, the success of this method also depends on education and a culture of respecting warning labels.

Advice for game developers

At least for now concerns about loot box addiction are gaining momentum and developers should adopt a precautionary attitude when considering how to monetise their games. For example, should loot box models become regulated as games of chance it could be worth removing the randomised element to avoid liability. Fortnite’s in-game shop framework is a great example as the purchases made are certain and so there is no risk involved. Instead Epic Games rotate the items available and continuously introduce new desirable content in order to manage supply, demand and scarcity.

Most importantly, developers, players and the public at large should keep up to date with all the latest developments in loot box regulation and here at Ethoughts is a great place to do it.

Adam McGlynn.