If you have more than the most passing of interests in the video game industry, you will know that the hot topic in the field for the past few weeks has been the use of “lootboxes” by Electronic Arts as a reward system in their new title Star Wars: Battlefront 2. The consumer backlash to EA has been dramatic. Market analysts have downgraded their recommendations for EA’s stock due to disappointing sales of the new title, and there have been calls to regulators around the world to investigate whether such measures constitute gambling (which is prohibited without a licence in many jurisdictions). The results of such investigations will vary and will depend on different attitudes of parliaments and regulators and the details of their legislative regimes. So, could lootboxes be considered gambling in Australia?

A brief history of the video game business

For those less inclined than the author to blow all their spare time on video games, a brief history of the business models of the video game industry is in order.

When computer games and video games first became mass-market entertainment products, the business model was relatively simple – the consumer bought a single unit (a disc or set of discs, or a cartridge, and later digital downloads of just the game software) which had the entire content of the game software on it for them to enjoy. As technology developed, and video games became larger, some game publishers began to release add-ons known as “expansion packs” – optional extra content for a game that built off the core software of the original game, like small sequels or extra levels for the player to use. Expansion packs would generally be a separate, cheaper unit purchase, but would require the player to already have the base game.

As digital downloads became more accessible, it became possible to distribute very small add-ons for small fees. Now, instead of releasing expansion packs that were almost an entirely separate game to justify a price that would cover manufacturing and distribution costs, you could sell small pieces of downloadable content (DLC) for only a couple of dollars – things like extra items for a player’s character to help them with challenging opponents, additional lives or attempts at a level, or even just aesthetic changes such as a fancy hat for players to customise their in-game appearance but that have no other effect on the gameplay itself. Given there are essentially no incremental distribution or development costs for these types of DLC compared to the development of the base game, even a small price tag on this DLC can be very profitable. The opportunity to buy them can also be embedded into the core game itself, removing some of the logistical hurdles to the purchase.

Mobile games are particularly well-known for these purchases, commonly known as “microtransactions”. Indeed, many mobile games are free to play upfront (“f2p”) but have plenty of opportunities for the player to purchase optional extras: more crop supplies in Farmville, extra attempts at a tricky level in Candy Crush, etc. The latest iteration of Candy Crush (Candy Crush Soda) alone made US$118 million in revenue in FY2017, largely on the back of these microtransactions, and that’s just one of many such mobile games in the market). One of the defining features of microtransaction business models is that most of the revenue comes from a very small amount of the userbase, nicknamed “whales”. Most users will never purchase anything in Candy Crush, but the tiny minority of whales may spend thousands of dollars each on it.

The latest iteration of microtransactions is lootboxes or lootcrates. Players can purchase an in-game container which holds a randomly chosen selection of in-game items (functional or cosmetic), and the player only finds out what specific items are in their box when they open it. In some games, this is the only way to obtain in-game items. In others, players can purchase the particular in-game item they want, but typically at a much higher price than the lootbox that gives them multiple items, but only a chance to get the one they particularly want.

The thrill of opening a mystery box (an inconsistent positive reward) triggers the pleasure centres in the brain more effectively than a consistent positive reward. This has been used by other industries for a long time – trading card “booster packs” and Kinder Surprises are examples of real-world implementation. A genre of YouTube videos very popular among children are “unboxing” videos, where the filmmaker records themselves opening such items to reveal the contents, allowing viewers to vicariously experience the thrill. It has been alleged that slot machines use the same process to encourage continued play by making spinning the wheels an enjoyable experience for the player, even if they don’t profit from each spin.

Using this type of pleasure-triggering process to encourage repetitive behaviour has been well-studied in psychology. Such mechanisms are known as “operant conditioning”, or more colloquially “skinner boxes”. Tying this model to microtransactions has been very successful for a number of video game publishers, and some argue that the core game design is increasingly being used as a vehicle to funnel players into the skinner box mechanism. Prominent game designer Dr Richard Garfield (best known as the creator of the trading card game Magic: the Gathering) posted a game-maker’s manifesto on Facebook identifying what he saw as particularly exploitative trends in game development. Game publisher Activision Blizzard (which acquired Candy Crush’s publisher King Digital for US$6 billion in 2015) was recently granted a patent for a system and method to use competitiveness between players in a multiplayer game to drive microtransaction purchases by ensuring that experienced/high skill players with the best in game items are paired with or against weaker/newer players so that the weaker/newer player is encouraged to purchase those in-game items to emulate the stronger player (or, more to the point, to stop getting beaten by the stronger player).

The upfront price tag (adjusted for inflation) for video games has not changed significantly in recent years, but the development and marketing costs are increasing with some “triple-A” video game titles costing as much or more to make as Hollywood blockbusters (see Ars Technica and The Economist), so publishers are becoming ever more creative in seeking ways to boost their profit margins.

A perfect storm of factors, including the nature of the content available in the lootboxes, the relative price of those items in in-game currency if a player doesn’t play lootboxes, and the sacredness of the Star Wars IP to fans, appear to have pushed consumers too far and triggered this backlash, including calls for regulators to see lootbox microtransactions as a form of gambling (and in particular, one marketed to children).

Belgium was the first to respond to calls, with the Belgian Gaming Commission announcing that it will investigate and may seek to have lootboxes banned in Europe – see PCGamer’s article on the Commission’s announcement. The UK Gambling Commission has taken the position that lootboxes will not be considered gambling if the contents are in-game items that cannot be considered money or money’s worth, but noted that parents’ concerns are not about whether their children’s activities constitute gambling in a technical legal sense but whether the game products pose a risk of exploitation to their children, and the Commission flagged the possibility for parliament to respond to the increasingly blurred line between video gaming and gambling.

Australian approach

In Australia, gambling is regulated in each State and Territory separately. Each jurisdiction has its own set of gambling legislation which is broadly similar. For example, in all jurisdictions lotteries and casinos require an authorisation or licence from the government, and in many jurisdictions those licences are exclusive (in WA, lotteries may only be conducted by the State, not private operators like the recently combined Tatts and Tabcorp). However despite their broad similarities, they differ from each other in the fine details, and that is where the proverbial devil lies when it comes to lootboxes – the specific definition of “gambling” is subtly different between each jurisdiction. In Victoria, for example, section 1.3AA of the Gambling Regulation Act 2003 (Vic) defines gambling as an activity in which “(a) a prize of money or something else of value is offered or can be won; and (b) a person pays or stakes money or some other valuable consideration to participate; and (c) the outcome involves (or is presented as involving) an element of chance…”. In NSW’s Unlawful Gambling Act 1998, “unlawful games” is defined much more specifically: https://www.legislation.nsw.gov.au/#/view/act/1998/113/part1/sec5.

In addition to the State and Territory regimes, the federal Interactive Gambling Act 2001 (Cth) (“IGA”) prohibits offering certain gambling services over the telephone or internet, including a prohibition on broadcasters from advertising such services. The IGA defines a “gambling service” to include “service for the conduct of a game where: (i) the game is played for money or anything else of value; and (ii) the game is a game of chance or of mixed chance and skill; and (iii) the customer of the service gives or agrees to give consideration to play or enter the game”. Enforcement of the IGA was until recently the responsibility of the Australian Federal Police, but it was generally not a high priority for their limited resources, and the Australian Communications and Media Authority (ACMA) had a limited role enforcing the advertising prohibitions against broadcasters. Recent amendments have given ACMA the power to enforce the IGA against the persons offering the prohibited gambling service directly, not simply the broadcasters that advertise the service, but we have not yet seen ACMA take action in respect of these powers.

The Victorian Commission for Gambling and Liquor Regulation (VCGLR) have begun to look at the issue of lootbox microtransactions, after being contacted by Australian reddit user “/u/-Caesar” (The reddit discussion about the correspondence is available here). The VCGLR stated that they agree that lootboxes constitute gambling by the definition of the Victorian legislation, but that they have limited ability to enforce the law against publishers like EA who are located overseas.

The VCGLR’s view may not be correct. While in many cases the in-game rewards received in lootboxes can be purchased outright using in-game or real-world currency, it is not clear that those rewards would be considered something of “value” within the meaning of the Victorian or other jurisdiction’s legislation if the rewards cannot be converted back into real-world property or currency. As we have previously discussed, virtual economies do not have clear legal recognition. It is difficult to say that the Sword of Azeroth has any material value if the game publisher can cease business and turn off its servers tomorrow and all user accounts are deleted. This interpretation appears to be consistent with the approach taken by the UK regulator. This becomes less clear where, as is the case for some games, in-game items may be sold on a secondary market to other players for real-world currency, whether endorsed or prohibited under the game license.

Furthermore, in some cases the servers on which the games are played may in fact be located in Australia and give a basis for Australian enforcement.

Possible regulatory outcomes

Say that a government or regulator in Australia took the view that lootbox microtransactions are gambling and sought to take regulatory action. What would that action look like?

If a regulator took the view that the operation of lootbox microtransactions were prohibited gambling, then they could potentially seek a court order to prohibit the sale of the games containing those microtransactions (or to prevent the lootbox microtransaction components being operational within Australia).

If the regulator’s argument could not be made out, there are still a number of other regulatory avenues that could be applied to protect vulnerable persons – for example, the national Classification Board assigns ratings (G, PG, M, etc.) to media distributed in Australia, including games, on the basis of six classifiable elements (themes, violence, sex, language, drug use and nudity). The Classification Board could take the view that including lootbox microtransactions in a game means the game requires a higher rating (although the Guidelines for classification suggest that “themes” require a higher rating if they have a sense of threat or menace, and it is not clear that this would capture gambling content without further revision of the Guidelines.

There may also be other sui generis mechanisms for limiting any exploitative impact of lootbox microtransactions on vulnerable people such as children or problem gamblers. For example, in China recent legislation requires lootboxes to be accompanied by information about the probability of opening particular digital items so that purchasers are able to make an informed decision. Australian legislators might take a similar approach, or the ACCC may consider failing to publish the probability information to be misleading or deceptive conduct.

If new legislation is brought in to regulate lootboxes in video games (when paired with microtransactions or otherwise), the specific drafting of that legislation will be critical, as there may also be unforeseen regulatory impacts for other gaming products. For example, a prohibition on the sale of random or unknown content may also prohibit trading card or miniature figurine games that traditionally sell booster packs (packages of assorted game pieces where the specific content of any given package is unknown but the rarity classes in each booster pack are known, such as one rare item, two uncommon items and three common items in each) – many such games have digital equivalents that would be affected even if a new lootbox law was in respect of digital games only.

Prohibition on in-game rewards determined by random chance would affect many video games, even if they didn’t use lootboxes – it is a very common practice for defeated monsters in fantasy games to drop a particular in-game reward at a fixed percentage rate. More broadly, most games (and even many sports) have a randomised component – Snakes and Ladders, for instance, is entirely random with no skill from the players involved, but this is not ordinarily of concern for parents or vulnerable people.

Closing remarks

The recent backlash against EA for the use of lootbox microtransactions has raised many complex regulatory questions about how to treat gaming entertainment versus unlawful gambling, and even more broadly what that regulation is truly intended to protect consumers from. Gaming consumers themselves are not even aligned on this point, with some saying that any lootbox microtransaction is exploitative, while others say that purely cosmetic lootbox purchases are acceptable as if they do not contain rewards that give players a competitive advantage over their opponents, there is no incentive for players to enter into the arms race of constantly buying more lootboxes for a chance to get the edge. Still others say that microtransactions are objectionable in general, as they allow publishers to lock away game content in a game that the player has already paid for, thus double-dipping on fees.

EA has for the present moment announced that it will be disabling the lootbox features of Star Wars Battlefront 2, but as game developers continue to seek ways to make their games more profitable and regulators increasingly get involved in preventing exploitative behaviours in the gaming industry, this issue will continue to arise in the foreseeable future.

Categories: Marketing and advertising