By Noah C. Hummel-Hall
Video games are now an inextricable part of the modern American social fabric. Nearly 227 million Americans play video games for at least one hour a week.[1] Seventy-seven percent of those 227 million play three or more hours a week.[2] And these “gamers” do not live in an alternate reality from those who refuse to partake. Approximately 77% of American video game players voted in the 2020 election.[3] But what makes this over $151 billion (USD) global industry shine so brightly over even Hollywood and the music industry?[4] Put simply, economics. People want to play video games and businesspeople have devised ways to monetize their interests through products and services. People demand and the businesses supply.
The monetary objectives of video game studios and their parent companies have sophisticated alongside the technologies at their disposal. What used to be a model of developing and selling individual cartridges or disks containing a game asset has become a myriad of revenue-generating processes. Game makers have had to complicate their revenue models to keep up with a rapidly complexifying and competitive market. Without addressing all the unique or rare cases, there are six main sources of revenue for video game makers: (1) brick-and-mortar retail sales and digital downloads; (2) subscription models; (3) live experiences (such as traditional arcade games, or in-person virtual reality games); (4) advertising; (5) raking (taking a cut of proceeds from gambling games or transactions on virtual goods); and (6) microtransactions.[5] While most of these methods fall neatly into various categories of regulatory oversight already established by state legislators, Congress, or international treaties, there are still gaps. Microtransactions are one such category where history, the law, and the industry clash.
Since 2017, regulatory concerns over a highly profitable class of microtransaction offerings, “loot boxes” and “gacha systems”, have inflamed.[6] Both forms of microtransaction involve the consumer using real money to purchase license to a randomly generated number (“RNG”) that interacts with the game and the game company’s online servers to return an in-game reward to the player. In other words, the player pays the developers to receive a virtual item(s) within the game, and the nature of that item’s value is randomly determined at the moment of purchase. Typically, the subjective value of the item(s) can vary from common and worthless to incredibly rare and valuable (within the game). Items acquired through loot boxes and gacha systems typically cannot be converted back to the player in the form of real or virtual currency. The product is often purely intangible and remains within the game’s ecosystem.
Consumers are spending unprecedented amounts on these types of microtransactions. It is estimated that global consumer spending on loot boxes reached $15.265 billion (USD) in 2020 alone and is estimated to reach $20.331 billion (USD) by 2025.[7] As lucrative as they may be, there are profound social and economic concerns created by these monetization practices which have both consumers and regulatory bodies on alert. Video game developers and producers need to remain vigilant when deciding whether to employ such a revenue model, as the risks are increasing. In the past five years, consumers have begun to bring numerous suits against video game companies for injury from loot box or gacha type microtransactions.[8]
There is much scholarly debate over whether loot boxes and gatcha systems constitute gambling games themselves,[9] and US circuit courts have split over the issue. The disagreement between the circuits originates from two central issues: (1) an uncertainty by judges on how to treat the intrinsic value of virtual currencies, and (2) the archaic legal structure available for plaintiffs to bring their actions. Claims of complicated and often intangible injuries are shoehorned into very old anti-gambling statutes with regional case-law sometimes requiring physical or tangible financial injury. Counsel for video game developers and producers needs to be cognizant of jurisdictional exposure when deciding which markets to release their product to. But this isn’t 2001 anymore. Game launches are increasingly portable and global, so jurisdictional exposure can be, by competitive necessity, almost unlimited.
International actors have demonstrated a determination to curb the use of loot boxes and gacha systems as predatory forms of virtual gambling. French regulators allow players to bring anti-gambling claims against video game companies even if the player does not have a French domicile.[10] Japan has banned all complete gachas (gachas which do not allow a guaranteed rare item after a certain number of attempts).[11] Regular gacha systems are still permitted, but with some limitations.[12] Japanese regulators have stated they strongly dislike the practice and feel it teaches a “passion for gambling” in video game players, including children.[13] South Korea, China, the Netherlands, and Belgium have all taken regulatory action to limit or curb monetization through loot boxes or gacha systems.[14]
Whatever the origin of these regulatory actions, they are happening swiftly across the globe, and counsel for video game developers and producers need to keep up to speed. Global interest to apply a sovereign stance on permissible microtransaction use is evolving.
[1] See Electronic Software Association, Essential Facts about the Video Game Industry, 2, 7 (2021).
[2] Id. at 7.
[3] Id. at 2.
[4] Grand View Research, Video Game Market Size, Share & Trends Analysis Report By Device, By Type, By Region, and Segment Forecasts, 2020-2027 (2020), https://www.grandviewresearch.com/industry-analysis/video-game-market.
[5] Dan Nabel and Bill Chang, Video Game Law in a Nutshell 213 (2018).
[6] See Mitchel Fleming, Fixing the Odds: Designing Intelligent Loot Box Policy in the Canadian Context, 78 Univ. Toronto Fac. L. Rev. 74, 76 (2020).
[7] J. Clement, Global Video Game Loot Box Market Value 2020-2025 (2021), https://www.statista.com/statistics/829395/consumer-spending-loot-boxes-skins/.
[8] See Wesley Okereke, Gamble-Boxes and Micro-Theft-Actions: Why Loot Boxes and Microtransactions Should be Banned from Video Games, 45 T. Marshall L. Rev. 57, 70 (2020).
[9] Fleming, supra note 6, at 74.
[10] Laura Huck, Games-Law – Recent Developments in France: The Position of the French Regulator Regarding Loot Boxes (2018), https://iot.taylorwessing.com/games-law-recent-developments-in-france-the-position-of-the-french-regulator-regarding-loot-boxes/.
[11] See Edwin Hong, Loot Boxes: Gambling for the Next Generation. 46 W. St. L. Rev. 61, 69 (2019).
[12] See id.
[13] Kathleen De Vere, Japan Officially Declares Lucractive Kompu Gacha Practice Illegal in Social Games, Adweek (May 18, 2012), https://perma.cc/4QMF-ATXN.
[14] Nicholas Straub, Every Country with Laws Against Loot Boxes (& What the Rules Are), Screen Rant (Oct. 5, 2020), https://screenrant.com/lootbox-gambling-microtransactions-illegal-japan-china-belgium-netherlands/.