Retail prices for video games have adjusted disproportionately to development costs over time. To remain profitable in this new era of price standardization, video game developers have explored alternative means of monetization. The most successful of these has proven to be the “microtransaction,” which generally refers to the sale of digital assets purchased with incremental sums of real-world currency in addition to a game’s retail price. A loot box is a form of microtransaction consisting of a randomized set of in-game content; this content may range from common, seemingly valueless virtual goods to increasingly rare, highly sought after items.
August 08, 2023 Best of ABA Sections
Fake Loot, Real Money: The Uncertain Legal Future of Loot Boxes in Video Games
John Bennett
Loot boxes containing digital content that enhances in-game performance quickly became criticized as a “pay-to-win” mechanic. However, criticisms surrounding loot boxes were not limited strictly to “pay-to-win” mechanics but also include concerns about predatory marketing practices and online gambling.
Exploiting Vulnerable Target Markets and Rolling the Dice
Because minors are noticeably susceptible to being bullied based on their appearance, there is a significant likelihood that some would attach a heightened degree of value or self-worth to their digital features. Video game developers have capitalized on these vulnerabilities by implementing loot boxes that contain a hierarchy of in-game character customization options. Specifically, loot boxes commonly contain character “skins” that modify the appearance of a player’s in-game avatar. By manipulating the statistical likelihood that a certain skin will be awarded to a player when opening a loot box, video game developers are able to create a sense of rarity and prestige surrounding distinct in-game appearances. To maximize profits derived from the desire to modify one’s in-game appearance, video game developers offer the most prestigious character customization options strictly via loot boxes. Because the contents of loot boxes are commonly randomized, there is no guarantee that players will receive the item they desire when opening one. As such, players may elect to continue purchasing loot boxes until the desired item is received or until they run out of funds to continue to do so.
Analysis of Loot Boxes under U.S. Gambling Laws
To be considered gambling, each state requires a player to stake or risk something of value. What exactly a player stakes or risks serves as the consideration for the potential gambling activity. However, various jurisdictions have interpreted what constitutes a sufficient form of consideration quite differently. The view held by a majority of U.S. jurisdictions is that a player must offer a monetary payment or something of monetary value to constitute consideration within the context of gambling. From this perspective, “something of monetary value” is construed conservatively, generally requiring “something” to have direct monetary or tangible value, as opposed to being exchangeable for money. Whether a player purchases a loot box with real-world currency or with virtual currency generated through in-game play would impact the likelihood that a court would determine that gambling has taken place.
Gambling requires an element of chance, which is generally understood to be a lack of control over events or the absence of controllable causation. This element seeks to distinguish gambling activities from games of skill. A player’s skill or in-game performance has no influence over the items contained within loot boxes. Instead, the contents of loot boxes are predetermined based on statistics assigned to individual items. Players cannot leverage their skill or knowledge to manipulate these statistics in any way, and as a result, a novice player has the same chance as an expert player of receiving a “legendary” item when purchasing a loot box.
Gambling has not occurred unless the player may receive a prize. Determining whether something is considered a prize is very similar to how courts approach “something of value” when analyzing consideration. Unfortunately, very few states have directly addressed whether a virtual item may be considered something of value or a prize. Whether virtual items constitute a prize within a gambling context will be decided on a state-by-state basis.
The Effectiveness of Proposed and Potential Solutions
Given the parallels between loot box sales and gambling, legislative efforts to regulate loot boxes have primarily sought to impose age-based restrictions. For example, Senator Josh Hawley (R-Mo.) has introduced a bill titled “The Protecting Children from Abusive Games Act” that includes a “prohibition of pay-to-win microtransactions and sale of loot boxes in minor-oriented games.” ( Protecting Children from Abusive Games Act, S. 1629, 116th Cong. (2019).) If passed, this bill would make it unlawful for game publishers to publish, and digital game distributors to distribute, games with pay-to-win microtransactions or loot boxes if the game is oriented toward minors or if there is constructive knowledge that any of the game’s users are under 18. This bill is certainly on the severe end of regulatory actions, but proponents believe such measures would be widely beneficial.
Some believe that legislative or judicial action is not the answer to solving the loot box controversy despite recognizing the inherent risks loot boxes present. Notably, the UK Gambling Commission conducted a study of loot boxes, which indicated a connection with the early development of gambling addictions in minors. (Gambling Comm’n., Young People and Gambling Report 2017 at 22 (U.K.).) Nonetheless, the United Kingdom has chosen not to regulate loot boxes and instead has taken the position that the private industry will self-regulate. Given the past actions of developers to address identified issues with loot boxes and current efforts by other industry figures, the expectation that the private industry will self-regulate may be perfectly reasonable. However, for loot boxes to even begin to be considered kid-friendly, developments need to take place surrounding parental controls, payment methods, and disclosure.
Perhaps the most effective solution to the dangers of loot boxes is a combined approach of legislative regulations and private industry safeguards. South Korea has taken this position by implementing the Selection System of Game Availability Period. (Paul Tassi, New Korean Law Lets Parents Decide When Their Kids Can Play Games, Forbes (July 2, 2012).) Under this framework, all gaming companies with more than 100 employees and $27 million in revenue are required to offer rigorous parental controls. These controls allow parents to restrict their child’s access to certain in-game features as well as impose time restrictions on gameplay. Additionally, South Korea’s Fair Trade Commission has required video game developers to accurately disclose the odds of rewards offered in loot boxes. (Charlie Hall, South Korea Fines Game Companies Close to $1M over Loot Crates, Polygon (Apr. 10, 2018) (game developers—like Nexon—stated that items were given out “at random” while odds of certain items were closer to 0.5 percent).) By imposing legislative regulations on the most prominent video game developers, South Korea has taken an approach that combines legislation and private industry solutions. However, this mixed approach does not mitigate the risks associated with less prominent developers continuing to engage in deceptive loot box practices. For this reason, proponents of aggressive loot box regulation, such as Senator Hawley, believe further action is required.
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This article is an abridged and edited version of one that originally appeared on page 12 of Entertainment and Sports Lawyer, Spring 2023 (39:1).
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