More than Just a Game (Report 3): Loot boxes and gambling

A box full of kitten loot - not to be confused with "loot boxes"
in the video game context

Now in its fourth year, the More than Just a Game conference organized by Queen Mary University of London brings together academics, practitioners and industry members to discuss the key legal trends in, and issues facing, the gaming and interactive entertainment industries. For the first time, an edition of the conference was held in Paris. KatFriends Daniel Lim, Alex Woolgar and Shohta Ueno (Allen & Overy) report on the proceedings in this third, and final, installment (the first installment can be found here and second installment here):

"Loot Boxes

Andreas Lober explained that “loot boxes” are a form of microtransaction (i.e. in-game real money transaction) which has become increasingly common as part of the business model of video games. Loot boxes are a mechanism whereby players receive in-game items as a prize at random. The prizes vary in quality and are typically drawn from a pool of potential prizes of varying in-game quality and rarity; the likelihood of receiving a prize will generally be inversely proportional to its rarity and in-game value. Loot boxes may be earned through in game actions (e.g. in return for points or currency that can be earned in-game, or via the completion of in-game accomplishments) but can also increasingly be bought with real money. Loot boxes and microtransactions in general provide an on-going source of revenue for publishers and in the case of “free to play” or “freemium” games, together with advertising revenue, often comprise the vast majority of the income from the game. This business model is very popular in the mobile gaming sphere, but has increasingly spread to traditional console and PC games, including where consumers pay a significant upfront sum to purchase the game. 

Outside of gaming circles, loot boxes had not really been brought to the attention of the regulatory authorities.  Then in 2017 the practice hit the headlines as a result of the manner in which the loot box system had been implemented in flagship title Star Wars Battlefront II. In the beta version of that game, loot boxes provided the player with a small chance of winning access to powerful end-game characters such as Luke Skywalker and Darth Vader.  This circumvented the need for players to spend an average of 40 hours of game play to unlock these characters (i.e. the more conventional route).  The feedback from the beta version was that this amounted to a “pay to win” mechanic which rewarded and encouraged the purchase of loot boxes rather than earning rewards through gameplay.  In response, the early access version of the game removed the highest tier reward (including Darth Vader) from the loot boxes. This frustrated one user who had spent $80 to acquire 12,000 Crystals of in-game currency with the intention of purchasing Darth Vader (either directly or via the randomised loot box mechanic).  The user then found out that the character could only be purchased with a different type of in-game currency, Credits.  Credits could only be earned through in-game actions.  No surprise that this user then vented their frustration online, leading to the most downvoted Reddit thread in history.

There are numerous controversies surrounding the issue of loot boxes and microtransactions.  Are they a necessary evil or do they imbalance and harm gameplay/user experience?  Do consumers have a legitimate expectation to be able to play their favourite characters “out of the box” without investing significant gameplay time?  These issues are complex and beyond the scope of this article (although plenty of virtual ink has been spilled on these subjects, see e.g. this brief analysis of the place of microtransactions in the modern gaming economy).

The key legal issue here is whether loot boxes should be considered as gambling. If it is categorised as gambling, a licence would normally be required in most countries.

Position in Germany

Andreas discussed this issue from a German law perspective – under which one needs to look at three elements: stake, prize and luck. With loot boxes there is no way of getting out of the element of "luck". Meanwhile, the "stake" could be regarded as the in-game currency (or actual currency, depending on the logistics of the microtransaction) which one has spent in return for the loot box.

Accordingly the key definitional issue comes down to the "prize" element, namely whether the "prize" can be considered to be money or money’s worth. If the item did not add any value to the gaming experience, such as a skin (which is an item that can modify the appearance of game avatar), does this mean it adds no value outside of the video game? Until now the prevailing view seems to have been that the in-game rewards from loot boxes are not money’s worth and so fall outside the definition of a "prize", with the result that loot boxes are not considered to be gambling. However, it remains to be seen whether this will continue to be the case; for example an article by Desiree Martinelli reported that wagers on skin gambling in 2016 were worth around $7.4bn.

Position in France

Andrea Dufaure discussed the recent views expressed by the French Gambling Authority in relation to loot boxes. She stressed that the Authority did not make any firm comments but rather they tiptoed around the issue by saying: (1) the consumer is not aware that there will be a further charge during the game in addition to the price of the game itself; (2) luck may mean gambling; and (3) the ability to “cash out” winnings (i.e. convert back to real money) can be gambling, but stressed that this is a matter from the French Courts to decide.

She mentioned that in a recent statement the French Secretary of State focused on the impact it might have on the consumers. In particular, he recommended that loot box mechanisms should clearly indicate to the consumers what the odds of winning are within the video game.

Position in the UK

Finally, Paul Gardner from Wiggin mentioned that gambling is something which is not harmonised at the EU level. In the UK, what constitutes gambling is dictated by Gambling Act 2005. The nature of loot boxes mean that they would fall under the definition of ‘gaming’. “Gaming” means playing a game of chance for a prize.  The definition does not require you to play against anyone, nor (unlike Germany) put up a stake - all you need is the element of luck and a prize which is money or money’s worth.

Paul noted that the Gaming Commission has been very interested in skin gambling.  It published a discussion paper in 2016 and a position paper in 2017. So far it seems like the Gaming Commission has not deemed loot boxes to be gambling but it has raised concerns in relation to children being affected by loot boxes.

As the growth of gaming continues, it will be increasingly important that the industry is regulated at an appropriate level and in an appropriate way. Equally, as inventive game designers continue to push the boundaries of technology and creativity (particularly with AI, VR and AR), IP will need to retain the flexibility to continue to protect the investments made in the industry, without stifling further innovation. 

The More the Just a Game Paris edition conference represented a fascinating snapshot into some of the hottest topics in gaming law. Appropriately mirroring the rapid rise in gaming, the conference series is expanding this year to take in sessions in Spain and Germany, as well as returning to its roots in London on 5-6 April for its main edition.  This year it will be focusing on “the impact of Artificial Intelligence on Interactive Entertainment and our Culture, Identities and Freedoms”. Certainly not to be missed by anyone with an interest in games or gaming law!"