Micropayments and loot boxes: a global regulatory challenge that is transforming the gaming industry

@LawAhead

Are gamers gambling through video games? Every country has a different approach to regulating gambling, but if loot boxes and micropayments come to be considered gambling, a couple of questions emerge for the video game market.

By: Elvira Torres Benito, attorney at law and IE Law School professor

Clash Royale, Candy Crush, and Clash of Clans are video games that have enjoyed great success in recent years. They are all free-to-play games based on microtransactions and loot boxes. It is important to define the concepts of microtransactions and loot boxes.  Microtransactions may be defined as small payments made by users. Loot boxes are virtual goods available for purchase within video games. Loot boxes have emerged as a lucrative tool emerged in the massive multiplayer game ZT Online.

Loot boxes may be seen as a way to monetize free-to-play PC games that mushroomed in Asia, as well as other games in Western countries such as gaming through MySpace, Facebook and eventually on smartphones. In 2009, a video game called Zynga made at least $50 million per year, mainly from sales of virtual goods. However, it’s not only PC games that incorporate this source of revenue; console games do too, the first of them being The Mass Effect 3. The marketing explanation is clear. Consumers prefer to try a game for free and pay small amounts of money, rather than paying 70 or 80 dollars upfront for a game.

In particular, FIFA has long used the system of microtransactions and loot boxes within Ultimate Team. In this game, the user can earn two kinds of currency: coins and FIFA points. Coins cannot be converted to FIFA points. Coins are awarded to the player for their achievements. FIFA points, conversely, must be paid for and are needed to buy high-level players, such as Cristiano Ronaldo. As an example, famous FIFA YouTuber Castro1021 live-streamed himself paying 6000 euros for Ronaldo in the game.

This system has been accepted, but recently, some critiques have been raised.


What has been the response of gambling regulators to the debate created by loot boxes and micropayments?

Star Wars BattleFront has not been exempt from these critiques. In fact, after the video game was launched, it was leaked that 4,500 hours of play or a payment of 2,100 euros were required to unlock the game. In microtransaction payments, that means opening 3,111 boxes, requires 324 cards at maximum. The Belgian Minister of Justice Koen Greens said of these leaks that “putting gambling in gaming is dangerous for the mental health of children, who may be tempted to buy loot boxes.

The Belgian Gaming Commission then announced an investigation and stated: «The crate mechanics of Star Wars Battlefront II are not gambling (…).  A player’s ability to succeed in the game is not dependent on purchasing crates. Players can also earn crates through playing the game and not spending any money at all. Once obtained, players are always guaranteed to receive content that can be used in-game«. On the other hand, the Belgian regulator (Belgium Gaming Commission) has definitively considered “loot boxes” and micropayments as gambling, hitting violators with fines of up to 800,000 euros and up to five years’ imprisonment.

In addition, loot boxes have been considered gambling by Australian gambling regulators while in the US, regulators have merely expressed concern. Specifically, in Australia, a strategic analyst for the compliance department at the Victorian Commission for Gambling and Liquor regulation, Jarrod Wolfe, said: «What occurs with ‘loot boxes’ does constitute gambling by the definition of the Victorian Legislation”. Even so, video games fall under the Australian Interactive Gambling Act 2001. On the other hand, on February 14, 2018, a United States Senator called on the Entertainment Software Ratings Board (ESRB) to review the impact of loot boxes in games. The the ESRB’s response has been to label video games that contain loot boxes and micropayments with a special notice for consumers.

That analysis leads us to examine how the design, development and marketing of the video game industry would be affected once upon loot boxes and micropayments are under national gambling law.

In Spain, this problem has not yet been studied, but it is likely, following the text of the Spanish Gambling Act – 13/2011, that loot boxes and microtransactions would generally be included within the concept of the game. It would be necessary to distinguish loot boxes from microtransactions. Indeed, loot boxes include randomized content, so it could fall under the concept of a bet (article 3 of the Spanish Gambling Act). However, microtransactions may be considered purchases. An example of microtransactions is a purchase of a digital item (e.g. the football player Ronaldo). The buyer and seller have complete and absolute certainty about this transaction, and therefore, microtransactions would be excluded from the scope of gambling under Spanish legislation. In terms of loot boxes, however, video games would be subjected to the limitations imposed by the Spanish Gambling Act. The main consequence is to exclude children from every video game that includes the possibility of paying through micropayments and loot boxes in accordance with article 6 of the Spanish Gambling Act. That analysis leads us to examine how the design, development and marketing of the video game industry would be affected once upon loot boxes and micropayments are under national gambling law.

The effects of gambling regulations

Understanding the video game industry as global, since design and development are mainly the same in every country, and product launch dates are close in every national market, imposing national restrictions would create different versions of the video game. However, some markets may not be viable in economic terms, so some video games could be excluded in certain countries as designing and developing a new configuration may not be profitable in a particular market. On the other hand, in the case of the European Union, the free movement of goods outlined in articles 24 and 28 to 37 of the TFEU does not prevent to future legal barriers based on internal law. In other words, the general rule in the EU market is the free movement of goods (i.e. video games that are sold on compact discs) and services (i.e. video games that are played in various countries and are available online), but countries can restrict these freedoms using exceptions contained in the TFEU. Specifically, public order and morality have been used before to restrict these freedoms, and these limitations have been recognized as legal by ECJ jurisprudence. The Schlinder case and Laara and Others case can be considered the cornerstone of this jurisprudence (European Court of Justice (Case C-275/92 Schindler [1994] ECR I-1039, paragraph 58, and Case C-124/97 Läärä and Others [1999] ECR I-6067, paragraph 33).

The debate over loot boxes has been the most important stories for the industry in 2017. Billions of dollars are on the line here — especially as legislators and regulators in more countries have started to speak up.

Considering whether loot boxes and micropayments qualify as gambling is not an irrelevant legal debate. Indeed, that assumption would provoke a breach in the global video game market, turning it into a narrow market requiring an extra investment for design, development and marketing of every video game released in order to fit specific aspects of internal law.

 

Elvira Torres Benito is an LLM in Public International Law by the Queen Mary University of London, UK, and is specialized in Public International Law, Union Law, and International Human Rights Law. She was called to the Bar of Madrid, and currently, she works as a lawyer as well as an academic researcher for the José María Cervelló Chair. She attended the program of the Institut René de Cassin, linked to the European Court of Human Rights. 

 

Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution