How the legal battle around loot boxes will change video games forever

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Just a few weeks ago, Belgium’s Gambling Committee took up the most controversial gaming question of the season: are loot boxes gambling? Yes, they said.

Loot boxes are, in short, virtual boxes with random contents that you purchase through video games with real money. They contain everything from virtual cosmetic items to power-ups to gear that can dramatically alter your chances of winning the game. Rarer items, of course, show up in loot boxes far less often. The rush of buying them and rolling the dice on their contents has been likened to the psychological sensation one feels when gambling. That gets even more unsettling when you consider how many underage people play these games, and how much they spend; my own younger sibling, a few years ago, drained $400 from my bank account on Xbox Live purchases.

The debate over loot boxes has been one of the most divisive and furious that gaming has seen in years, and certainly one of 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.

Hawaiian state representative Chris Lee recently held a press conference where he characterized loot boxes as “predatory gaming,” and is working on legislation to ban minors from buying them. He later added in a Reddit post that “these kinds of loot boxes and microtransactions are explicitly designed to prey upon and exploit human psychology in the same way casino games are so designed.” In Australia, a regulator for the state of Victoria agreed that “what occurs with ‘loot boxes’ does constitute gambling” and that the regulatory body for gaming was "engaging with interstate and international counterparts" on policy changes.

For years, microtransactions have become more and more prominent in gaming as a way of supplementing income for developers, or replacing the revenue gained by selling units — hence “free to play” games that are free to download and play, but make money by selling you small-ticket items or downloadable content in the game itself.

The unparalleled outcry from players, fans, press, and politicians about loot boxes in Star Wars Battlefront II signaled that we were at a breaking point. A flagship title of perhaps the world’s most profitable and famous IP was monetizing through microtransactions and loot boxes so pervasively that it felt openly exploitative.

Every aspect of the game was now bent toward facilitating microtransactions. Characters or power-ups can take days worth of play to earn, which makes purchasing them in an in-game store more tempting. A process that had begun over a decade ago has reached a crisis point. Loot boxes have brought the video game industry to a crossroads, and the path taken now will shape the future of the industry in profound ways. It could take months or years before a final ruling is settled in any jurisdiction, and even then, a global patchwork of differing laws and rulings will need to be reckoned with. But the implications are clear. The law has always lagged behind technology, but sooner or later it’s going to catch up, and tech companies that are used to doing as they please will suddenly have to figure out what life after regulation looks like. Previously, most defenders of the loot box economy and its associated trading websites said that since real currency wasn’t being won, no real gambling was taking place. But according to some legal experts, that isn’t strictly true.

In a recent episode of his Robot Congress podcast, prominent video game attorney Ryan Morrison interviewed another lawyer, Marc Whipple, who has experience in the gaming industry. Whipple said that gambling, in “most jurisdictions,” was judged to be such if it had three critical elements: “Consideration, which means you have to pay something to play. Chance, which means there has to be something outside your control that determines the outcome of the game. And a prize. And of course, a prize is something, anything of value.” Whipple added, with deliberate clarity: “As close as I’m ever getting to giving actual legal advice to strangers on the internet who are not my clients is this: no, it does not have to be money. It has to be something of value, period.” This discussion neatly lays out where the legal battle lines actually are. The issue has come up a handful of times in American courts, but the industry won those cases because digital objects were determined to have no value. In Whipple’s mind, this was because the judges were not “technologically literate,” and “did not understand what was going on,” instead seeing this very lucrative form of commerce as nothing more than “blips on a screen.” The answer to this question — whether digital matter should be considered as real as what’s in your pocketbook — affects every aspect of the tech industry. If the virtual is not real, rules are irrelevant; if it is, then we’re badly in need of a digital social contract. With the events of the last few years — from a president’s tweets moving markets, to discourse around online harassment — we’re recognizing, slowly, that what happens online is, for all intents and purposes, real.

We cannot simply switch it off. Pursuant to this specific discussion, the American legal framework on gambling is already primed to accept that. The legal test for gambling, here, never required actual currency to be won. “Value doesn’t mean necessarily mean you like it and you want it. Value means it ‘has value.’” said Whipple. “If you can sell it to somebody, if you can transfer it to somebody...and exchange for some consideration, some payment, I would argue under that most gambling statutes that it is almost certainly something of value. If you can’t, that doesn’t mean it isn’tsomething of value, it just means it’d be harder to prove,” The “harder to prove” bit is key, and that will be where the legal trenches are dug on this issue, I suspect. But it’s no guarantee of forestalling regulation and adverse judgements, and that’s equally critical to understand here. The potential implications of this question are tremendous. They could theoretically categorize the entire business model of the popular deck-building game Magic: The Gathering’s as a form of gambling, along with numerous similar properties, and perhaps even the “blind boxes” of unknown minifigures sold by many tabletop RPG companies. That’s for courts and regulators to decide, of course. But the path is open now for major changes to the world of gaming. What caused the game industry to charge so recklessly toward this precipice? Why risk doing something that would invite legal battles and government scrutiny above and beyond anything that the industry endured during the darkest days of the last generation’s culture wars? Inescapably, the answer is money.

A law review article in the aptly titled “Gaming Law Review” made that abundantly clear, with language that was unusually blunt for an academic paper. In her article “Skin Gambling: Have We Found the Millennial Goldmine or Imminent Trouble?” lawyer Desirée Martinelli analyses the legal landscape as relates to the practice of “skin gambling,” which is the practice of using skins — cosmetic alterations to in-game objects — as the ante for ever rarer ones. One report by the gambling industry analyst Chris Grove estimated that $7.4 billion worth of skins were wagered in 2016, with some significant percentage of that money undoubtedly going to the distribution platform Valve, which sold many skins in the first place. Valve has since pledged a crackdown on skin gambling, of course, but a broader issue remains: the mentality that let it flourish for so long in the first place. Martinelli concludes that “the lack of regulation provides the perfect atmosphere for thirsty, tech-savvy entrepreneurs looking to capitalize on the craze” and that “courts may find it necessary to start reining in this millennial goldmine especially if a social policy concern such as underage gambling through e-sports and skins betting arises.”

The implications of this argument go far beyond skin gambling. The question of whether virtual goods have “real-world value” is central to a range of ethical questions about microtransactions, and is at the heart of the loot box question as well. In all cases, the motivation behind each mechanic is quite simply a yearning to make as much money as possible. There are practical reasons for this: blockbuster video games routinely cost tens of millions of dollars to make now, with costs continuing to rise. It’s difficult to get sales figures on loot boxes by themselves, but they’re normally grouped into a bucket of controversial practices that are known in business jargon as “player recurring investment.” In other words, any penny made from something other than the initial cost of purchasing a game. This can be downloadable content (DLC), microtransactions as a whole, in-game advertising, subscription fees, and of course, loot boxes. As implied by the name, it’s money made from players who keep coming back to a game. Players “recur,” and the amount of time they spend in-game is more or less proportional to how much money they spend. Ubisoft recently reported that for the first time, the company made more money from these microtransactions than it did from from digital sales of the games themselves. Not only that, but microtransaction sales had grown at a significantly faster rate than those overall unit sales compared to the previous year (83 percent compared to 57 percent).

More sensational individual stories have hit the wires as well. Kotaku interviewed a man who’d spent over $10,000 on microtransaction payments. In an interview with Waypoint, CEO of Bigmouth Games Manveer Heir said that, during his previous employment at BioWare, he had “seen people literally spend $15,000 on Mass Effect multiplayer cards." The reason, he said, was both profit and retention. Keep the players playing for longer, and thus paying for longer. The numbers, just from individuals, can be eye-watering. But the entire lucrative enterprise depends on these goods being categorized as “not real” or having “no value.” This is, unsurprisingly, the mindset of game developers at large, and it’s supported by at least a few regulators worldwide.

The New Zealand Department of Interior Affairs, which oversees its gambling licensing, told me that it “is of the view that loot boxes do not meet the legal definition of gambling.” The Australian state of Queensland, meanwhile, disagreed with its southern counterpart in Victoria on the question. At the heart of such opinions is whether virtual loot is real and valuable. Tim Miller, the executive director of the UK Gambling Commission, reinforced that point in an interview with Eurogamer’s Vic Hood, emphasizing that he doesn’t believe loot box proceeds are “valuable” — an opinion that could transform the future of gaming.

If they are deemed “valuable,” mechanics strewn through countless games on every platform, might end up being criminalized or strictly regulated in the US and abroad. Regulators could raise questions about card games and tabletop role-playing games that bank on similar mechanics with much tighter profit margins. The recent statements from gambling regulators and legislators worldwide constitute an opening shot in the battle over loot boxes, not a climax. The industry’s biggest players are unlikely to give up a multibillion-dollar revenue stream without a fight. But the stakes are larger than even that princely sum. This is a battle for the soul of gaming; we’re at a crossroads where the industry has to choose who and what it wants to be.

The loot boxes of Battlefront II seemed to presage an industry that produced lavish video lottery machines, where all art had been sublimated into mere backdrops for mechanics whose sole purpose was the extraction of maximum profit. The gaming industry has been on the cusp of a digital nightmare where games and their stories were tailored around profitable systems, not the other way around. Thanks to this controversy, it has a chance to take a different path now. Loot boxes are only one kind of microtransaction, but they’re often discussed as a unit because all microtransactions rely on similarly seductive sales techniques.

They also permit theoretically unlimited revenue to be drawn from a game. Cajoling and enticing players onto that limitless funicular track of spending raises serious ethical issues, especially where our youngest players are involved. Because of the moral panics that have been weaponized against everything from Dungeons & Dragons to Grand Theft Auto in the past, everyone who works in or around the gaming industry has a certain, marrow-deep revulsion to arguments that smack of “what about the children!?” But children aren’t the only ones harmed by a gambling economy; their cases are just especially egregious. It is long past time to stop reliving the culture wars of the last three decades and move on. Many of the people complaining about loot boxes now are the very same people who play and adore games, not right-wing religious extremists who want to obliterate everything we love. Seeking to ban a specific revenue-generating practice that is inessential to artistic expression is very different from banning games on the basis of content — or banning them altogether. If we can have the debate on those terms, rather than the apocalyptic ones we’ve been saddled with, something good might come out of this whole mess.

The future could still be one in which we — consumers, regulators, developers, and critics — develop an entirely new ethical framework around microtransaction economies and the sale of digital content. Perhaps it will require government intervention, or perhaps it’ll take the form of industry self-regulation. Either way, the industry could come out the other side of this acrimonious debate, and its forthcoming legal battles, not just intact, but better than it was before. 

Correction 12/19/17 2:30 PM ET: This article has been updated to include the correct name of Hawaii state representative Chris Lee.

https://www.theverge.com/2017/12/19/16783136/loot-boxes-video-games-gambling-legal