Loot Box Regulation: Why and How Publishers and Developers Need to Adapt Loot Boxes for Different Countries

Why are loot boxes coming under scrutiny from regulators? How is loot box regulation changing around the world? And what can publishers and developers do to protect themselves from new laws governing the use of the mechanic?

Avatar Jeff Sue General Manager of the Americas for Mintegral 2019-01-03

Loot boxes are one of the most popular monetisation mechanics around. Found in popular games such as Overwatch and FIFA, loot boxes allow players to pay a small fee for a random assortment of cards, cosmetic items or other in game items to boost their in game experience.

Over the past few years, loot boxes have helped to drive game revenues significantly – powering the global games industry to digital revenues in excess of $130bn a year according to Newzoo.

But loot box mechanics are coming under increasing pressure from an unexpected source.

Fifteen gambling regulators from the US and Europe have assembled to look into this issue including representatives from the UK, France, Ireland, Spain and the US.

Meanwhile the Netherlands and Belgium have already outlawed certain designs and threatened studios with fines and jail time should they fail to comply.

So why are loot boxes coming under scrutiny from regulators? How is loot box regulation changing around the world? And what can publishers and developers do to protect themselves from new laws governing the use of the mechanic?

 

Why loot boxes have come under scrutiny

Loot boxes have come to the attention of gambling regulators for two reasons.

First, the randomised nature of loot box item drops has muddied the lines between gaming and gambling. With video games often accused –  whether fairly or not – of being “addictive”, loot boxes that offer an uncertain chance of getting the best items have been perceived to be an unwelcome extension of that.

Second, loot boxes have also suffered for another reason not linked to the publishers themselves: the rise of illegal sites that use in game purchases as gambling tokens.

These sites – which have principally been focused on the gambling of skins – have helped turn loot box content (which has no direct economic value) into items with notional value that can be used to gamble.

This has resulted in a potentially huge black market industry. Juniper Research found that the value of loot boxes and skin gambling could exceed $50 billion by 2022, which could drive “significant gambling participation”.

It is this combination of factors that has led many countries to consider loot box regulation of some form.

 

How loot boxes are regulated (or not)

Loot box regulation varies considerably around the world. But if there is one factor uniting loot box regulation, it is that that the amount they are regulated depends on the extent to which the national authority considers them to benefit from gambling style mechanics.

At the most extreme end of the regulatory scale, the Netherlands and Belgium have both come to the conclusion that loot boxes do constitute as gambling.

In the Netherlands, an April 2018 study by the country’s gambling authority found that four out of ten video games breached the country’s existing gambling laws because the goods obtained could be sold outside the game.

And in Belgium, the authorities reached a similar conclusion after reviewing Star Wars: Battlefront 2, Overwatch, FIFA 18 and Counter-Striker: Global Offensive. This means that both countries perceive loot boxes to be illegal, opening up publishers and developers who use them to fines and prison sentences.

In Asia, loot box mechanics are regulated, but loot boxes themselves are not illegal.  Japan has been exposed to randomised monetisation mechanics for many years through gacha, which provides players with a random chance of getting a set item.

The most aggressive form of gacha monetisation – kompu gacha – was made illegal by Japanese authorities in May 2012 because it offered such a low chance of winning a top prize. However, gacha as a whole has not been banned because Japanese publishers have self regulated – placing caps on player spending and tweaking existing gacha to make it fairer.

China, meanwhile, hasn’t banned loot boxes but it has forced publishers and developers to make their loot boxes more transparent as a legal obligation.

Since May 2017, companies using loot boxes in games have had to demonstrate that content unlocked via loot boxes can be done so in other ways (e.g. during core gameplay).  Additionally, companies using lootboxes in China have also had to demonstrate that in game items can’t be used on gambling sites. They have also had to list the probabilities by which rare items can be unlocked in game to allow players to choose what to do.

Finally, there are a number of countries still exploring their position on loot boxes in consultation with national gambling authorities and other stakeholders.

In the United Kingdom, the Gambling Commission’s current stance is that loot boxes are not gambling if the items cannot be exchanged for real money. However, the industry is expected to state regulate with Margot James, the Minister for State for Digital and Creative industries saying that organisations like PEGI must speak “to the industry to ensure that those who purchase and play video games are informed and protected”.

Regulators in France – ARJEL – and in the US both also reached similar conclusions in regards to loot boxes. However, there are efforts in both countries to examine the issue further. ARJEL has supported an initiative by the University of Bordeaux to examine gambling regulation – and where games fit into it – in 2019, while the Federal Trade Commission (FTC) is examining loot boxes more closely.

 

What should publishers and developers do about loot boxes?

It is clear that loot box regulation is increasingly a hot topic amongst national gambling authorities. It is also clear that video game developers and publishers who use loot boxes are expected to do more to protect consumers and to inform them of what they’re buying.

Therefore, companies using loot boxes in their games should look to do the three following things.

First, companies must understand their changing legal obligations and comply with them. National authorities who have banned loot boxes or who have created legal obligations for the inclusion of loot boxes in games have to be respected.

Furthermore, companies should also work proactively to shut down sites that undermine the legal use of loot boxes. In particular, developers and publishers should chase down sites running illegal item based lotteries to cut the link between loot boxes and gambling at source.

Second, companies should look towards regulation to inspire new best practices for their loot box design. Although it may seem like unnecessary legal burdens, demonstrating that the sector is capable of self regulating and looking to consumer interests will draw the regulatory sting.

Third, video game publishers and developers also need to be willing to defend loot boxes in reasonable way to policy makers. While there are grey areas in loot box design that do need to be dealt with, many of the reasons for loot box regulation is a mistaken link between the game mechanic and the illegal gambling sites that exploit it.

This means that companies should speak to trade bodies and to political representatives to make their case directly.

 

Summary

Loot boxes are being regulated for a variety of reasons, some of which are reasonable and some of which aren’t.

Publishers and developers therefore can’t sit passively by as this happens. The industry must take responsibility for the worst loot box practices, crackdown on illegal activity and work with policy makers to ensure that the mechanic is used properly.

There are many fair reasons why video games businesses can use loot boxes and they can be deployed ethically. But companies must take their use of loot boxes seriously to ensure they are allowed to use them in the future.

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Jeff Sue is the General Manager of the Americas for Mintegral, bringing 12+ years of experience in the ad-tech industry. Jeff oversees the user acquisition and ad monetizations parts of the business for the Americas, consulting developers on the opportunities in China and broader APAC. Before joining Mintegral, Jeff worked as a business development executive for NativeX, HyprMX, and Fyber.
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