What's in the box? Overseas developments bring the regulation of loot boxes into focus

This article was originally published in the Internet Law Bulletin.[1]

In recent years, ‘micro-transactions’ have become an increasingly common feature in video games. 

The term ‘micro-transaction’ refers to a model where players can purchase:

1. specific in-game items, contents or features (eg cosmetic items, player bonuses or new game modes); or
   
   
2. a virtual item that gives players a chance of winning a random virtual reward, more commonly known as a ‘loot box’.

The latter loot box type micro-transaction has attracted controversy around the world, and is now gaining attention in Australia. Some of the major overseas developments include the Dutch Gaming Authority (DGA) determining that Electronic Arts (EA) breached the country’s Betting and Gaming Act by offering loot boxes in FIFA Ultimate Team – FIFA Ultimate Team allows players to open “packs” containing a random selection of real life soccer players and items that can be used when playing FIFA. The DGA’s view was supported by a Netherlands District Court on 29 October 2020, which confirmed the DGA could issue EA a weekly fine up to a maximum of €10 million (a decision EA intends to appeal). Other countries have commenced inquiries or proposed legislation to regulate loot boxes (such as a mandatory 18+ age rating for games involving loot boxes).

Regulations are now being considered in Australia with Tasmanian MP, Andrew Wilkie, recently announcing an intention to introduce a new bill which will prevent loot boxes from being accessed by minors in Australia.[2]  

This article looks at what loot boxes are, why the controversy exists, and how they are currently regulated or may be regulated in the future.

What are loot boxes?

Over the past two decades, the production costs associated with video games have increased. However, the price for many games have remained constant. This has led to developers seeking alternative revenue streams, including by releasing sequels or expansion packs for popular games (which still required development time), or adopting a subscription model for appropriate games (predominantly for Massive Multiplayer Online Role-Playing Games where new content is continually added).

In the early 2000s, another feature began to appear – loot boxes. Depending on the game, a player could purchase loot boxes with in-game currency or real-life money, and open the loot box to have a chance at winning a random prize. Some of these prizes were cosmetic and offered no in-game benefit (e.g. an outfit for the player’s avatar), while others had functional utility in the game (some even offering an advantage for players). The functional utility component was controversial because some players argued loot boxes made a game “pay-to-win” – essentially a player would need to pay real life money to be competitive in the game.

Despite the controversy, loot boxes became a key source of revenue for video game developers, with Juniper Research estimating that the revenue from loot boxes will exceed US $20 billion by 2025 (up from US $15 billion in 2020). That research also predicts more than 230 million gamers will purchase loot boxes in 2025 (with the vast majority of purchases coming from mobile games).

Are loot boxes a type of “gambling”?

One of the key debates concerning loot boxes is whether they should be classified as a type of ‘gambling’ or a ‘surprise and delight’ mechanic (similar to opening a packet of trading cards or a reward in a Kinder Surprise).[3] This is an important issue because if loot boxes are a form of ‘gambling’, game developers may be exposing children and other vulnerable people to an unregulated form of online gambling.  

It’s important to note that there is currently limited academic research that explores the impact that loot boxes have on children or vulnerable people. Several governments (including the Australian Government) have so far declined to implement loot box regulations citing that research on gambling-related harms experienced as a result of loot boxes in games is in its infancy.[4]  

There are two aspects to the debate as to whether loot boxes are considered a form of ‘gambling’:

1. whether they fall within the legal definition of ‘gambling’; and
   
   
2. whether they fall within a psychological definition of ‘gambling’ and should be regulated as such.  

Do loot boxes fall within the legal definition of gambling in Australia?

The Interactive Gambling Act 2001 (Cth) (IGA) regulates ‘interactive gambling’ and applies in addition to the applicable state and territory laws. Under the IGA, it is illegal to provide or advertise a ‘gambling service’ (unless an exception applies). A ’gambling service’ is defined to include a service for the conduct of a game where:

1. the game is played for money or anything else of value;
   
   
2. the game is a game of chance or of mixed chance and skill; and
   
   
3. a customer of the service gives or agrees to give consideration to enter the game. [5]

Criteria (ii) and (iii) are met for most loot boxes – there is an element of chance in the prize a player will receive, and the player needs to pay to purchase a loot box (especially where real-life money is involved). Accordingly, whether a loot box meets the legal definition of a ‘gambling service’ largely depends on whether it is played for “anything else of value”.  

This issue was discussed in detail in a report released in November 2018 titled the ‘Gaming micro-transactions for chance-based items’, which came about after the Senate referred an inquiry on loot boxes to the Environment and Communications References Committee. While the Australian Government did not introduce regulatory changes following the report, several of the arguments discussed in the report still form part of the debate on whether loot boxes are played for “anything else of value”.

There are four common points made to support the argument that loot boxes are played for “anything else of value”:

1. players can monetisation virtual items – virtual items can have real life value, some even being sold for thousands of dollars. This has led some groups to argue that loot box prizes clearly have ‘value’. There are two common counter-arguments. First, that players do not purchase loot boxes to win money – they purchase them to enjoy the game. Second, while it may be technically possible to purchase virtual items, most game developers do not authorise or facilitate ‘real-world’ transactions for virtual items. Such conduct is often in breach of the games’ user terms and conditions and are restricted to unofficial trades between players.  
   
   
2. players are guarantee to win a prize – loot boxes may be distinguished from traditional forms of gambling because players always win a prize (and suffer no loss). However, this depends on the definition of ‘win’ – some players may ‘win’ by receiving a prize with more functional utility in the game than those that don’t receive it.
   
   
3. loot box prizes are a form of ‘surprise and delight’ – it is often argued that loot boxes simply offer a ‘surprise and delight’ mechanism (similar to opening a packet of trading card games or a reward from a Kinder Surprise). Those in favour of loot box regulation seek to distinguish the mechanics because of the psychological differences between the two, including that individuals can rapidly purchase loot boxes online and because there are other mechanisms that encourage players to purchase more loot boxes (such as having flashing lights and music when opening a loot box).
   
   
4. players have a broader concept of ‘value’ – finally, the term ‘value’ is vague, with certain groups advocating for a broader definition to be adopted.  Those groups argue that a value should be considered subjectively – if an item is scarce, provides a competitive edge or is otherwise desirable, arguably the reward has subjective value. This broader definition is inconsistent with the ‘Explanatory Memorandum’ for the IGA, which states that a game must be played for a prize of monetary value to meet the definition of gambling.[6]

The debate about value is also relevant in the state and territory laws, with Victoria’s Gambling Regulation Act 2003 (Vic)[7] and New South Wales’ Unlawful Gambling Act 1998 (NSW) requiring a prize to have some sort of ‘value’.[8]

To date, the Australian Communications and Media Authority (ACMA) (which is the responsible regulator for the IGA) has formed the view that loot boxes do not meet the legal definition of a ‘gambling service’ because many of the rewards from a loot box do not have monetary or other quantitative value. However, ACMA has also acknowledged that there are cases where this position isn’t clear cut – particularly where there’s a secondary market for the items.[9]  It is clear that the question of whether an item can be monetised is a key factor in determining if loot box mechanics could be considered a ‘gambling service’ under the IGA.

Do loot boxes fall within the psychological definition of gambling?

Despite the uncertainty regarding whether loot boxes meet the legal definition of ‘gambling’, certain groups have argued that loot boxes should nevertheless be regulated in the same way as other forms of gambling because:

1. they meet the psychological definition of gambling; and
   
   
2. they use psychological mechanisms in the same way as other forms of gambling to encourage purchases.  

While arguable, loot box mechanics may meet a psychological definition of ‘gambling’ on the basis that:[10]

1. a loot box is often able to be purchased with real-life money;
   
   
2. the reward a player obtains from a loot box depends on chance;
   
   
3. purchasing loot boxes is voluntary; and
   
   
4. in some circumstances, the ‘winner’ of a more desirable reward will have a direct competitive advantage over ‘losers’ in competitive gameplay.

In addition, many loot boxes use similar psychological mechanisms that are used to encourage gambling. For example, loot box offerings commonly adopt sensory feedback similar to what’s used with pokies machines (such as by using flashing lights and music), allow purchases using in-game currency to affect a person’s ability to monitor their spend, and are available via one-click purchases.  

While these features may exist, the Australian Government has so far declined to conduct a formal departmental review into loot boxes or take steps to regulate them. Until there is a sufficient body of evidence as to the gambling-related harms associated with loot boxes, it may be that they remain unregulated in Australia.

What is the future for the regulation of loot boxes?

Given the focus of international regulators, it’s possible that certain loot boxes may be regulated at some point in the future. Five commonly discussed forms of regulations are:[11]

1. Mandatory classification of games including loot boxes with a “MA 15+” or “R 18+” rating. While this may send a strong message about the suitability of a game for children, it risks diluting the significance of a “MA 15+” or “R 18+” – if a simple sports game has an “R 18+” rating, parents may not consider other “R 18+” games to be harmful. It would also have a significant impact on games which have a younger target audience.  
   
   Despite the risk of dilution, regulation through the classification scheme appears to be the approach the Australian Government is most strongly considering (as indicated by the its response to the 2020 Senate enquiry the “Protecting the Age of Innocence Report”).  Tasmanian MP, Andrew Wilkie, has gone a step further and is set to introduce the Classification Amendment (Loot Boxes) Bill 2021 to the House of Representatives in August 2021. While the text of the bill hasn’t been released as at the date of this article, if passed, this bill would prevent video game developers from targeting loot boxes at minors through the content classification guidelines.  
   
   
2. Mandatory labelling that games involve ‘simulated gambling’. This would provide parents with more information about the contents of a game. However, the messaging would need to be carefully crafted because evidence suggests parents have misunderstood the connection between loot boxes and ‘simulated gambling’ (a phrase used in overseas classifications).
   
   
3. Disclosure of odds for all loot boxes. This approach would require game developers to display the odds associated with winning prizes and all prizes available.   This solution has been adopted in China, and voluntarily by certain developers to provide greater transparency.  
   
   
4. Developing a consumer protection framework. It has been argued that there is a need for a consumer protection framework to be developed to improve understanding about loot boxes, require video game developers to identify and report safety concerns.  It is unclear if this would be a self-regulatory regime or require legislative intervention.
   
   
5. Introducing purchasing limits and exclusions. Another option that some groups have argued for is to introduce the ability for players to control their interactions with loot boxes through self-exclusion or self-selected limits. Some game developers have introduced this functionality in the past on an ad hoc basis, but the impact on development time and impacts on the actual video game will need to be considered.

Conclusion

Currently loot boxes fall under a “grey” area of the law – there are strong arguments both for and against loot box mechanics falling within a legal or psychological definition of ‘gambling’.  At least currently, one of the critical factors is whether a virtual item can be ‘cashed out’ within the game, or on a third-party platform.

With increasing focus from international regulators, it is at least likely that some form of regulation will be imposed in the future. The regulations will likely be informed by detailed academic research concerning any proven evidence of gambling-related harms associated with loot boxes. Loot boxes do not operate homogeneously meaning any government intervention will need to be nuanced and allow flexibility in application.