The thin red line between gaming and gambling

The thin red line between gaming and gambling

There is a big debate in several countries about the definition of loot boxes and, consequently, on their regulatory treatment

by Michael Haile

Many game experts claim the origins of loot boxes derive from Japanese vending machines called “gachapon”. Using a gachapon machine means making a blind purchase, the user inserts a coin and obtains an item by chance or purchases a blind-packaged item without knowing its content. Loot boxes are sometimes referred to as “gacha”, acknowledging this origin.

Loot boxes spread across the globe over many years and generated significant revenues for the industry, facilitated innovative game designs and created entertainment value as many players seem to specifically enjoy accessing and collecting loot boxes. They became especially widespread in mobile games as the “free-to-play” business model continued to gain traction. The Belgian Gaming Commission defines loot boxes as “…the umbrella term for one or more game elements that are integrated into a video game whereby the player acquires game items either for payment or for free in an apparently random manner”. The Netherlands Gambling Authority writes, “Loot boxes are a type of treasure chest that are built into a growing number of games. Loot boxes in games create a mixing of games of chance and games of skill. Although the outcome of games is determined by skill, the outcome of loot boxes is determined by chance”.

The fact that there are chance based purchases in the video games, loot boxes are effectively a convergence between gaming and gambling, a disruptive development as gaming products, unlike gambling, do not have any age limitation.

What motivates gamers to play loot boxes?

The University of Plymouth and the University of Wolverhampton conducted research to investigate the psychological profiles of people who buy loot boxes to their purchasing motivations. According to the research loot boxes “are structurally and psychologically akin to gambling”. The research found that of the 93% of children who play video games, up to 40% opened loot boxes. It also found 12 out of 13 studies on loot boxes established “unambiguous” connections to problem gambling behaviour, with young men the most likely to use loot boxes, and young age and lower education correlating with increased use. The research revealed purchasing motivations are rooted within a system of personal, social and gameplay factors. Such motivations include both social interactions- (such as gaining status and approval) and game-related motivations (such as improving performance or gameplay experience). Players also purchased loot boxes because of a “fear of missing out” either socially (on shared experiences), financially (on promotions) or acquisitively (on items that are only available for a limited time). Some cyber oriented phycological research refers to “fear of missing out” as missing out on social media interactions while not playing, meaning participants are fearful of not being included in a range of activities if they did not engage with loot boxes.

How big is the loot box market?
The array of access channels, such as desktops, laptops, consoles, tablets and particularly smartphones, allowed the gaming industry to become bigger than the combined size of the film and music industry. Currently, games are becoming services, where the launch and sale of the game is just the start of monetisation, and the main body of the revenue stream comes from creating a large gaming community and an ever-increasing user base that continues to play continuously. Within this evolving gaming ecosystem, loot boxes are one of the main monetisation options that game developers call “the metagame”, enabling the player to strategically engage with a wider community of players. According to Juniper Research loot-box game revenue will reach US$20 billion by 2025, a rise of one third on 2020. Juniper projected that by 2025 around 5% of worldwide gamers (230 million people) will buy loot boxes. The Covid pandemic appears to have had a profound effect on how players are using their money. According to WePC’s research, 47% of players in the Uk have increased gaming expenditure since the pandemic.

The research conducted by the Universities of Plymouth and Wolverhampton concluded that the big spenders in the Uk, the crucial 5% for the industry, spend more than Uk £70 a month, and not all players can afford that level of spending. Effectively, loot box game providers, either by design or chance, are generating a sizable portion of their profits from at-risk customers, which include problem gamblers and gamers with problematic gaming patterns.

What regulations?
Keith Whyte, executive director of the National Council on Problem Gambling in the Uk, stated even if they are not legally deemed gambling, they share core principles with casino games. Mr. Whyte added, “Intermittent variable reinforcement is the means of delivering rewards that is the most exciting to the human brain. It is the fundamental basis to slot machines. It is the fundamental basis to loot boxes. There is no distinction.” It is the gambling characteristics of these games and the prevalence of very young players that caught the attention of policy makers. As loot box games are legally considered video games in many countries, legislating them is a complex issue. Initial attempts to legislate them have suffered from a series of shortcomings, including industry manoeuvring by circumventing legislation and inconsistent policy directives from governments such as only trying to mitigate risks associated with certain classes of loot boxes, as games with explicit cash out features. To complicate matters further, the concept of “value” extends beyond the legal definition of money, as prized items in loot box games hold significant social or psychological capital which can be legally problematic to define. Nonetheless, gamers do ascribe discrete financial values to loot box contents based on purchase or resale price, implying that many loot boxes meet existing criteria for gambling regulation in many jurisdictions.

A report commissioned by the European Parliament concludes that tackling loot boxes by making them illegal in specific nation states should be abandoned in favour of Eu-wide measure focused on game design and consumer protection law. The report notes, “The fact that the national gambling authorities have come to different conclusions about the nature of loot boxes, despite similarities in their national legal definitions of gambling and despite their cooperation in the framework of Gaming Regulators European Forum (Gref), shows the limitations of such a national approach.”

China, Belgium, the Netherlands have taken decisive steps in either making some forms of loot boxes illegal or restricted them. The Department for Digital, Culture, Media and Sport in the Uk launched a consultation on loot boxes in September.
Any legislation regulating loot boxes will require careful consideration. The first steps for regulators and legislators should be a clear legal definition of what loot boxes are, game labelling and age ratings, full disclosure of odds, spending limits in real currency and defined obligations of game providers. Legislators and regulators should also be conscious not to emit regulations that can quickly become redundant in what is a fast-evolving segment of the gaming market.

Loot box game providers must also take note that as they blur the space that separates gaming from gambling policy makers have no choice but to intervene. If they are forward looking, they have the chance to learn from past choices, good and bad, made by traditional gambling operators and avoid potential problems that can occur regarding player protection, accountability and transparency. Sidestepping regulatory directives aimed to protect children and vulnerable adults is a short-sighted business practice as a legislative and regulatory backlash created by societal harm could prove to be detrimental to the future development of their market.