Are loot boxes gambling? Regulators tool up for new game industry battleground


21 Nov 2018297 Views

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Image: © Chodyra Mike/Stock.adobe.com

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William Fry’s technology team examines the varying regulations around in-game purchases in Ireland and around the world.

When, in late October 2018, the video game Red Dead Redemption 2 was released it made more than $725m in its first three days of sale. Although that figure made the game the largest media and entertainment launch of 2018, the record for largest of all time is still held by Grand Theft Auto V, made by the same studio, which grossed nearly €1bn in its opening weekend before going on to become the highest-grossing entertainment product of all time.

In-game transactions

While sales of games themselves have increased substantially, in-game transactions have also emerged as a billion-euro industry.

By paying in actual currency, gamers can unlock and access additional downloadable content. Generally speaking, many virtual items are strictly cosmetic, not giving the player any advantage when it comes to gameplay, though they are often sought out as a way to customise characters.

For instance, in early November 2018, the National Football League in the United States announced a partnership with the video game Fortnite to allow the game’s 125m players the opportunity to pay $15 to wear jerseys and team outfits for a limited time.

Revealingly, the CEO of Take-Two Interactive (the holding company behind both the Grand Theft Auto and Red Dead Redemption franchises) confirmed in November 2017 that, going forward, the company will “aim to have recurrent consumer spending opportunities for every title that we put out”. Early this year, Activision Blizzard (the company behind games such as Overwatch, Destiny and Call of Duty) reported record full-year revenue of $7.16bn in 2017, of which more than $4bn came from in-game transactions alone.

Where do loot boxes fit in?

With in-game transactions now a dependable and popular revenue stream for the video game market, questions have emerged as to the extent such functionalities need to be regulated. In particular, there has been a focus on in-game purchases of ‘loot boxes’, virtual treasure chests which players can buy with real currency without knowing what in-game items they will actually receive (the contents only being revealed once the loot box is paid for and opened).

Fundamentally, the focus on loot boxes has been whether such practices can be considered gambling as they are potentially a game of chance for items of value, however limited.

In April 2018, following an investigation by the country’s Gaming Commission, Belgium’s Minister for Justice Koen Geens announced that such loot boxes could be considered gambling withing Belgian law. “A dialogue with the sector is necessary,” said Geens. “It is often children who come into contact with such systems and we cannot allow that.”

Similarly, in October 2017, Tracey Crouch, then-UK Minister for Sport, said that a gambling licence would be required for any situation where “items obtained in a computer game can be traded or exchanged outside the game platform and where facilities for gambling with such items are offered to consumers located in Britain”.

Conversely, the French gambling authority, following their own study into loot boxes in early 2018, stopped short of labelling them as gambling due to their perceived lack of real-life value of the items. However, the authority did call for a coordinated action plan to be drawn up to deal with the issue moving forward.

Meanwhile, the Entertainment Software Rating Board in the United States also rejected the idea as they reasoned players always received some form of reward no matter the outcome and, therefore, couldn’t ‘lose’ in the traditional sense.

This lack of coordination between jurisdictions has created confusion. Following the declaration that loot box systems were illegal under Belgium’s gambling laws, companies such as Blizzard, Valve and 2K Games used geolocation-blocking technology to halt such in-game transactions for people in Belgium. Having previously said they did not consider loot boxes gambling, Electronic Arts refused to remove the functionality from FIFA 19 before its September 2018 launch. The company is now reportedly being investigated by the Belgian public prosecutor’s office following a referral from the Belgian Gaming Commission and may face court proceedings in 2019.

Ireland’s answer on loot boxes

In Ireland, the situation is less clear.

In February 2018, as part of a major overhaul of gambling law, which includes the creation of a new regulatory authority, the Gambling Control Bill 2018 was commenced in Dáil Éireann. At the time, Charlie Flanagan, TD, the Minister for Justice and Equality, was asked whether in-game transactions around loot boxes would be covered by the proposed new law. He said: “There is no element of gambling involved in such purchases. These purchases do not involve placing a bet or the taking of risk either on a party-to-party or exchange basis.”

Echoing this position in late September 2018 was David Stanton, TD, a Minister of State in the Department of Justice, who addressed the Irish senate following Ireland signing a declaration from the Gaming Regulators European Forum. “If a game offers in-game purchases – be they loot boxes, skins etc – which are promoted to gamers as increasing their chances of success, such purchases are essentially a commercial or e-commerce activity,” Stanton said.

“This activity would fall within normal consumer law and [the Department of Justice] does not have a role to regulate game developers on how their games work, nor in the offering of in-game purchases.”

Interestingly, the Gaming Regulators European Forum declaration itself that Stanton was referring to – while not having legal effect – had acknowledged loot boxes constituted a “blurring of lines between gaming and gambling”.

Pressing ‘Start’ on regulation

Although the statutory landscape is still at the ‘loading screen’ stage, it’s clear that as video game technology develops around in-game transactions, companies will be coming under increased regulatory scrutiny, particularly when it comes to loot boxes.

What remains to be determined, however, is the degree of coordination that will be achieved between jurisdictions, given many companies (and some legislatures) have indicated they do not consider the practice as gambling (and, therefore, are shying away from a self-regulating model).

When speaking in 2017 just as the initial investigations kicked off in Belgium, Geens referred to wanting to see a “European response” to in-game purchases in the future. The 2018 Gambling Regulators European Forum, which includes representatives from the Gambling Policy Division of Ireland’s Department of Justice, recently called for video game companies to “work with their gambling regulators and take action now to address concerns”.

While the Gambling Control Bill is currently still before Dáil Éireann and the Government statements indicate that the legislative overhaul of gambling in Ireland will not immediately be focusing on in-game transactions, it nevertheless appears to only be a matter of time before regulators have to press ‘Start’ on a more comprehensive approach.

By Leo Moore, John Magee and David Cullen with Alex Towers contributing

Leo Moore and John Magee are partners in William Fry’s technology group, which is led by partner David Cullen. Solicitor Alex Towers also works with the technology team, which advises Irish start-ups and established international brands on technology matters such as data protection, intellectual property, licensing, outsourcing and e-commerce.

A version of this article originally appeared on the William Fry blog.