Loot boxes – into the end game? - Wiggin LLP : Wiggin LLP

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September 17, 2020

In recent weeks we have seen three Parliamentary reports published which will all play a critical role in shaping the future of gambling regulation in Great Britain (and possibly beyond). Each report’s vision for the future of the gambling industry varies in its tone and coherence, but they present clear themes which we expect will dominate much of the policy debates that will take place when the formal government review of the Gambling Act eventually commences.

Following recent articles discussing VIP schemes, responsible game design and the role of the regulator, in this blog we discuss the recommendations made to categorise loot boxes as gambling and the implications this may have on the computer games industry.

For over ten years, loot boxes have been a feature of many computer games. The House of Lords’ report ‘Gambling Harm – Time for Action’[1] (the HoL Report) signals that their lifespan, at least in the UK, may be coming to an end. Furthermore, if the Government implements all the HoL Report’s recommendations relating to loot boxes, the implications for the computer games industry could be much wider.

The primary recommendation of the HoL Report is that the Government bring loot boxes within the scope of gambling:

“Ministers should make regulations under section 6(6) of the Gambling Act 2005 specifying that loot boxes and any other similar games are games of chance, without waiting for the Government’s wider review of the Gambling Act.”

Background

Loot boxes (also known as loot crates, prize crates and lock boxes) are virtual items in a game that a player can ‘open’ to obtain an additional virtual item (or items) for use in that game. This might be an item that will enhance gameplay (such as a weapon or additional character) or a purely cosmetic enhancement (known as a ‘skin’) to a player’s in-game character or a virtual item. In many cases, a player will open a loot box after purchasing it using in-game currency, some or all of which they will have purchased with real money. In other cases, a loot box might be awarded as a reward for an in-game achievement.

Loot boxes have become a popular and widespread feature of many games. It has been said that some players enjoy the element of surprise involved. As many have pointed out, this kind of mechanic is used widely, such as with Kinder Eggs and Panini football cards, although others might point out that loot boxes do not grant a physical item that can be eaten or traded. Nonetheless, loot boxes can be a divisive topic among players, with some players describing them as a predatory or cynical money-making mechanic that further turns games from a form of culture or art into a purely commercial and sometimes enterprise. Loot boxes for skins generally enjoy wider acceptance than loot boxes for items that affect gameplay. While there is not a consensus on whether or not loot boxes are a welcome addition to the games industry, it is undeniable that they have been very successful commercially and generated billions of dollars for some of the game companies that have used them.

Until relatively recently, few outside the games industry even knew of their existence. However, this all changed following the release of the game Star Wars Battlefront II in November 2017. Some consumers started to complain about the fact that key characters in the game could only be obtained through loot boxes which were opened using in-game currency. This currency could either be ‘earned’ in the game or bought with real money. However, earning in-game currency involved playing the game for a long period of time and so in reality many players would purchase in-game currency to open a loot box, and may have to repeat this process many times in order to obtain a particular character. The resulting player backlash resulted in loot boxes being dropped from the game.

The gathering storm

The Gambling Commission has looked closely at loot boxes but made clear that it does not consider that they fall within the definition of gambling under the Gambling Act 2005 (GA 2005). The GA 2005 defines gambling as gaming, betting and participating in a lottery.[2] It defines gaming as a “game of chance played for a prize“[3] and, for this purpose, a prize as “money or money’s worth.”[4] In November 2017, the Gambling Commission issued a statement[5] that in-game items obtained via loot boxes are unlikely to constitute a prize for money or money’s worth as these are generally confined to the game and cannot be exchanged into real money, at least within the confines of the rules of the game. As a result, in the UK loot boxes are at present unlikely to be held to constitute gambling and therefore fall outside the remit of the Gambling Commission.

However, loot boxes have attracted a growing level of criticism from politicians, regulators and academics. They have pointed to the similarities that loot boxes have with gambling and also to the considerable amounts of money that some consumers spend on in-game currency to open loot boxes. The distinction between loot box mechanics and gambling has been further blurred by the existence of unauthorised sites where items obtained through loot boxes can be sold for real-world money and also by the fact that skins obtained in some games started to be used as currency in online gambling.

Over the past twelve months, the calls for change have become more frequent and more vocal. In particular:

On 12 September 2019 the Digital, Culture, Media & Sport (DCMS) Select Committee published its report, ‘Immersive and Addictive Technologies.’[6] This report stated that “buying a loot box is playing a game of chance and it is high time the gambling laws caught up.” It recommended that:

“The Government should bring forward regulations under section 6 of the Gambling Act 2005 in the next parliamentary session to specify that loot boxes are a game of chance. If it determines not to regulate loot boxes under the Act at this time, the Government should produce a paper clearly stating the reasons why it does not consider loot boxes paid for with real-world currency to be a game of chance played for money’s worth.” (See our earlier post here[7].)

In October 2019, the Children’s Commissioner for England published a report ‘Gaming the system’[8] that recommended that the Government, “should take immediate action to amend the definition of gaming in section 6 of the Gambling Act 2005 to regulate loot boxes as gambling” (This report also recommended greater regulation of online games and proposed a daily spending limit for children across all games that feature microtransactions.)
In December 2019, The Royal Society for Public Health published a report, ‘Skins in the Game’[9] which examined the attitudes of over 1,100 young people towards concerns over the normalisation of gambling in video games. The report (which was funded by GambleAware) made a number of recommendations including that: “The purchase of loot boxes and skin betting to be legally recognised as forms of gambling.”

The Government signalled that it would look to take action. In a Background Briefing to the Queen’s Speech of 19 December 2019 it announced that it would conduct a review of the Gambling Act, with a particular focus on loot boxes.[10]

On 8 June 2020 the Government then published its response to the DCMS Select Committee Report[11] (see our earlier post here) and said that the Government would be launching a call for evidence into the impact of loot boxes on in-game spending and gambling-like behaviour later this year.[12] Given all of the earlier reports and evidence that has been published on the subject, this seemed a slightly surprising response, although this might partly be explained by the distraction of COVID-19 and the inevitable delays that this will have caused.

However, the HoL Report swings the pendulum right back in the other direction. While welcoming the Government’s announcement to look at loot boxes as part of its review of the GA 2005, it recommends more immediate action stating, “…we believe that this issue requires more urgent attention.”

The approach of the games industry

In the meantime, the industry has been taking steps to address the concerns. For example:

In December 2017 Apple updated its App Store Review Guidelines to provide that: “Apps offering “loot boxes” or other mechanisms that provide randomized virtual items for purchase must disclose the odds of receiving each type of item to customers prior to purchase.”[13]
In August 2019 Sony, Microsoft and Nintendo announced that they would start to require games developed for their platforms that include paid loot boxes to disclose the “relative rarity or probability of obtaining randomized virtual items” with the aim of implementing this change by the end of 2020.[14]
On 13 April 2020 the Pan-European Game Information announced that it will include information about paid random items (like loot boxes or card packs) if these are part of in-game purchases.[15] The information will be included in the form of a notice (Includes Paid Random Items) on physical packaging and on digital storefronts.
On 25th February 2020, games industry trade association TIGA published a voluntary code called, “Principles for Safeguarding Players and Positive Practices”[16]. This contained a similar requirement relating to loot boxes: “Disclose the use of paid or hard currency loot boxes (or other chance systems) up-front before a player purchases, downloads or signs up to a game and describe their potential contents and the chances of that content being received in simple and easy to understand language.”

Some publishers have quietly removed loot boxes from games. Epic Games, the company behind Fortnite has gone further. When giving the keynote address at the DICE Summit in Las Vegas in February 2020, Tim Sweeney, CEO and co-founder of Epic Games, was clear in his criticism of loot boxes:

“We have to ask ourselves, as an industry, what we want to be when we grow up. Do we want to be like Las Vegas, with slot machines … or do we want to be widely respected as creators of products that customers can trust? I think we will see more and more publishers move away from loot boxes…Loot boxes play on all the mechanics of gambling except for the ability to get more money out in the end.”[17]

A closer look at the HoL Report recommendations

The principal recommendation in the HoL Report relating to loot boxes is for the Government to use the power conferred by Section 6(6) of the GA 2005. This provides that: “The Secretary of State may by regulations provide that a specified activity, or an activity carried on in specified circumstances, is or is not to be treated for the purposes of this Act as…a game of chance.”[18]

This is not as simple as it sounds. The regulations would need to define what is meant by a loot box. There are a variety of mechanics, and the HoL Report itself tries to address this by stating that it is referring to, “all mechanisms by which a player pays money for a randomised item.” However, this arguably would not actually cover the majority loot boxes, since in most cases players do not directly pay money for a randomised item, but rather for a defined amount of in-game currency which they may then use in the game, including to ‘open’ a loot box. Other loot boxes do not require any payment at all.

The HoL Report recommendation does not just refer to loot boxes, but states that the regulations should cover “loot boxes and any other similar games”. If defining a loot box is challenging, then defining “any other similar games” will be even more difficult. Moreover, describing a loot box as a game rather than a game mechanic or function is less than accurate.

If the definitions are drawn too narrowly, then they could be circumvented by creating a similar mechanic that falls outside of the definition. This is what happened when paid loot boxes began to be regulated in China in May 2017. The law prevented publishers from selling loot boxes. One publisher changed its approach by ceasing the sale of loot boxes and instead provided loot boxes to players as a ‘gift’ when players purchased in-game currency.[19]

Equally, if the definition is draw too widely, then there is a significant risk that it will inadvertently catch mechanics that they are not intended to cover. The Gambling Commission has warned of the dangers of unintended consequences. Speaking at a Westminster Media Forum event in March 2020, Brad Enright of the Gambling Commission said:

“…I would point out is that a cautionary tale from the history of gambling legislation, would be that tinkering with definitions in order to catch a particular product or activity can be problematic. Many have pointed to the approach that’s taken in Belgium where the definition of prize is far broader and it encompasses any item of worth. And when you apply that to loot boxes that’s undoubtedly the approach that is favoured by those who have flagged concerns to us. The reason people pay to open loot boxes, sometimes to excess, is the hope of securing a rare item which is of intrinsic value to them. Why else would they be paying to open the boxes? But there is a risk in adopting such an approach and that is that you could find the scope of gambling legislation is spread to apply to a number of largely innocent activities which nobody would seriously consider warrant full gambling regulation.”

There are alternative approaches that the Government might explore as part of its review of the GA 2005. For example, it could look to bring loot boxes within the definition of “gaming” which is defined as “playing a game of chance for a prize”.[20] Loot boxes are already a “game of chance”, so this would just involve amending the definition of “prize” which is currently defined as “money or money’s worth.”[21] This definition could be extended to include in-game benefits and virtual items, even if they cannot (lawfully) be converted into real money. Alternatively, a further definition of “gaming” could be introduced that did not include a requirement for a prize but instead included a requirement for a stake (which unlike many jurisdictions is not a requirement under the GA 2005). The alternative definition of “gaming” would then be paying to play a game of chance, whether or not for a prize, which has the advantage that only paid loot boxes would be caught; however, it could have unintended consequences in relation to esports competitions.

However, all options have complications, potential challenges and unintended consequences that would need to be thought through very carefully.

The thin end of a fat wedge?

The HoL Report is alive to the possibility that the regulations it recommends could quickly become obsolete by the introduction of new mechanics. It therefore makes a second recommendation:

“We recommend that section 3 of the Gambling Act 2005 should be amended to give Ministers a power, analogous to that in section 6(6), to specify by regulations that any activity which in their view has the characteristics of gambling should be treated as gambling for the purposes of the Act.”

This has the potential to be extremely broad. The definition of “gambling” in the GA 2005 is fairly precise. However, the prospect of extending gambling to include any activity that has the “characteristics of gambling” creates considerable uncertainty. Most obviously this could be used to extend gambling to casino style games, in-game casinos that are incidental to the principal game and similar mechanics. It could go even further. There are a number of very popular games that most people would not consider to constitute gambling, but which at least arguably have characteristics of gambling. For example, there are many games where some players spend money on a virtual item in the hope that it will be sufficient for them to complete a level. There is no prize as such, but completing the level will bring them some satisfaction, sometimes augmented by flashing animations and secretion of dopamine.

Where does this leave the games industry?

It now seems fairly clear that attempts by the industry to head off legislation in this area by self-regulation is likely to prove to have been too little too late, at least in relation to loot boxes in the UK.

If this is correct, then the UK will not be the first country where this has happened. For example, loot boxes are already classed as gambling in Belgium. However, the UK is a much bigger games market (generally considered within the top 5 in the world by revenue) and so a change in the UK will be much more significant. Furthermore, the approach in the UK will also be closely looked at by other countries, so it is more likely that a change in the UK could be followed in other countries.

Equally, the real impact of the potential change relating to loot boxes should not be overstated. They have only ever been a feature in a minority of games in terms of pure numbers and some publishers have never used this mechanic, although some of the most popular and biggest games have used them. While the charge will undoubtedly hurt a few publishers, as mentioned above, some have already removed them from their games and others will follow. Of more concern perhaps will be the potential for wider changes that may follow if the Government were to implement the second recommendation in relation to similar game mechanics.

It should of course also be remembered that the effect of the recommendations will not be to make loot boxes or any other mechanic illegal as such, but rather bring them within the definition of “gambling”. It will be open to a games company to continue to use any such mechanic by acquiring an appropriate licence from the Gambling Commission. It is unlikely that many will want to adopt this approach, but it is an option that some might at least want to explore.

The bigger picture

Although the HoL Report (and therefore this note) focusses on gambling-related issues, the games industry needs to be mindful of consumer legislation – indeed in some countries this may present a much greater challenge.

The Policy Department for Economic, Scientific and Quality of Life Policies carried out detailed study on loot boxes at the request of the committee on Internal Market and Consumer Protection. Their report published in July 2020 called “Loot boxes in online games and their effect on consumers, in particular young consumers.”[22] It made a number of recommendations. In particular, while it recommended that, “national gambling authorities intensify their cooperation”, it also recommended that it was necessary, “to broaden the perspective beyond gambling aspects and approach the issue of loot boxes and other problematic game designs from a wider consumer protection angle.”

Many publishers will take the view that the potential loss of unlicensed loot boxes in the UK will not be unduly problematic – and some even regard it as a positive development. However, dealing the wider issues of games with “characteristics of gambling” and “problematic game designs” will present much greater challenges.

[1] https://publications.parliament.uk/pa/ld5801/ldselect/ldgamb/79/79.pdf

[2] Section 3, Gambling Act 2005.

[3] Section 6(4), Gambling Act 2005.

[4] Section 6(5), Gambling Act 2005.

[5] https://www.gamblingcommission.gov.uk/news-action-and-statistics/News/loot-boxes-within-video-games

[6] https://publications.parliament.uk/pa/cm201719/cmselect/cmcumeds/1846/1846.pdf

[7] https://www.wiggin.co.uk/insight/dcms-publishes-its-report-on-immersive-and-addictive-technologies/

[8] https://www.childrenscommissioner.gov.uk/wp-content/uploads/2019/10/CCO-Gaming-the-System-2019.pdf

[9] https://www.rsph.org.uk/our-work/policy/gambling/skins-in-the-game.html

[10] Queens Speech December 2019 Background briefing notes

[11] https://www.gov.uk/government/publications/government-response-to-the-digital-culture-media-sport-select-committee-report-on-immersive-and-addictive-technologies

[12] https://www.wiggin.co.uk/insight/government-to-call-for-evidence-on-the-regulation-of-loot-boxes-under-the-gambling-act/