What’s Under the Tree This Year? A Budding Gambling Addiction

December 14, 2018

Will you introduce your children to gambling this Christmas? This question, while strange on first glance, encapsulates a troubling development in the video game industry. The answer, as many governments and parents are discovering, is likely “yes.” The culprit here is the “loot box,” and the debate is whether recent implementations of loot boxes constitute slot machines within mainstream video games. Some regulators, customers, and parents think they do.

First, some background. We need to start with a design feature in video games known as a “microtransaction.” A microtransaction is a small financial transaction within a game. These have been ubiquitous in mobile games[1] for years. Widely-known examples are Angry Birds and Candy Crush. These games are free to download and play. Within the game, however, players can spend real money to purchase bonuses, power-ups, and other game content.

Each microtransaction is typically small in cost, a few dollars at most, but quantity is how big profits come from small price tags. A google search will lead you to multiple news stories on kids who spent hundreds or thousands of dollars on these transactions on a parent’s phone or tablet. The typical circumstance of having credit card information saved within an account for one-touch purchasing magnifies the risk of unauthorized purchases and overspending. Ultimately, the existence of microtransactions in mobile games and their attendant risks is well known. What is less recognized is the migration of microtransactions from mobile games to mainstream, Triple-A[2] titles on game consoles and computers.

For years, developers of Triple-A games turned up their noses at microtransactions. Developers reasoned that you did not need to debase yourself with microtransactions when you made a game so good that people would pay $60 or more to play it. Nevertheless, these games cost tens of millions of dollars to develop, and the chance to generate post-sale revenue is too attractive to resist forever. Thus, microtransactions gradually became a part of mainstream games.

As an example, a player in a new game can spend a few dollars to personalize aspects of the in-game aesthetic, like alternate character costumes or other cosmetic additions. The existence of these transactions within games played by kids is concerning, but certainly not gambling. Then someone realized that if selling players small game additions is good, selling them the chance to get these additions is better. And so, the loot box was born.

Loot box animation from Star Wars Battlefront II

The basic function of a loot box is that the player spends real money or in-game currency (acquired with real money or through gameplay) to purchase a loot box. When opened, the loot box gives random selections from a pool of available rewards. Sometimes the player “wins” by getting the desired reward and sometimes the player “loses” by getting low-quality or duplicate rewards. The opening consists of flashy animations and impressive sound effects because developers want opening a loot box to be a thrilling experience. The process creates excitement and anticipation, which heightens the appeal of opening loot boxes. For comparison, imagine the sights and sounds of a slot machine or roulette wheel.

Based on these characteristics, researchers from New Zealand concluded that loot boxes have important structural and psychological similarities with gambling.  The sensory stimulation is a key similarity, but the structure of the reward system is also crucial. The random nature of the rewards creates a “variable ratio reinforcement schedule,” which is fundamental to many forms of gambling. The concern is that loot boxes introduce players, especially children, to gambling mechanics and normalizes this behavior. This leads to overspending on loot boxes and, potentially, escalation to other forms of gambling. Moreover, like phones, many of these game systems allow for immediate purchases through previously-entered credit card information.

Compounding the desirability of loot boxes is what is contained within them. Cosmetic changes that do not impact gameplay are enticing, but not essential to enjoy the game. However, competitive advantages and key features have been hidden within loot boxes, which adds an element of necessity to their purchase. One notorious offender is Star Wars Battlefront II, which boasted one of the most valuable intellectual properties in the world—Star Wars.

Battlefront II was a first-person shooter, in which players could play as regular soldiers and their favorite characters, such as Luke Skywalker or Darth Vader. To the disappointment of buyers, Luke Skywalker, Darth Vader, and other famous characters were not playable immediately after purchase. Instead, they were unlocked using credits, an in-game currency that could not be purchased with real money. Players could acquire credits through gameplay or loot boxes. Acquiring enough credits to unlock a character such as Luke Skywalker was estimated to require 40 hours of gameplay. An estimated three hours of gameplay was required to earn a single, basic loot box. Alternatively, loot boxes could be more easily acquired with “crystals,” which were purchased with real money. In short, if a player wanted to enjoy the full game without first investing dozens of hours of play, he or she needed to invest real money into loot boxes.

Adding to the problem, Battlefront’s loot boxes contained abilities and power-ups for players. These granted a competitive advantage against other players, not just cosmetic changes. Thus, loot boxes were required to earn the special characters and to maintain a competitive balance with other players. Within days of release, customer backlash caused Battlefront’s developer to make a significant reduction in the credits required to unlock the special characters and make other changes to lower the importance of purchasing loot boxes.

Battlefront may have reversed course after being caught overreaching, but loot boxes and the extra revenue they generate are here to stay. As a result, gambling regulators and legislators in Australia, France, Belgium, and the United States are calling for action to control the use of loot boxes. In November 2018, the U.S. Federal Trade Commission publically indicated that it was investigating loot boxes. Ultimately, regulators and legislators will need to determine how loot boxes interact with current gambling laws and whether new laws are required to control the use of loot boxes, just as current laws regulate lotteries, sweepstakes, and games of chance.

In the meantime, customers must be cautious with any loot box systems or microtransactions in newly opened games. This Christmas, you or your child may encounter a game within a game that is providing a seductive thrill and teaching dangerous lessons.

Loot boxes also provide a valuable lesson for businesses about the allure of technology and the aggressive monetization of customer interactions. A generous interpretation of loot boxes is that they are an instance of new technology moving past existing laws, and the regulators and legislators racing to catch up. On the other hand, slot machines are not new technology and neither are video games. Video game developers face the risk that regulators will find that existing gambling laws prohibit loot boxes. Alternatively, governments may punitively crack down on what they perceive to be the intentional introduction of gambling to minors. Class action lawsuits are another risk.

Businesses need to pursue revenue opportunities through the introduction of new goods and services. When doing so, however, they must consider how their efforts interact with existing laws and regulations. This review is especially important where new technology is involved, giving the impression that existing laws and regulations do not apply. If your business is considering new monetization initiatives or any other type of expansion, Axley is ready to assist you.

[1] The games designed for play on phones and tablets.

[2] Triple-A or AAA are terms to denote games with the highest production values.

For more information about "What’s Under the Tree This Year? A Budding Gambling Addiction," contact Jeremy R. Lange at jlange@axley.com or 608.283.6728.