Trying Their Luck With Loot Boxes, Betting on Microtransactions

Almost exactly three years ago, I explored the question of whether loot boxes might be considered gambling (under a specific federal statute). Despite my analysis, the controversy has not abated. Either my earlier writing was insufficient, or I am not the final authority on all US law. Or both. In any case, I am revisiting this topic.

We have a long history of kids buying an unknown, unidentified, or concealed thing and not calling it gambling: baseball cards, gashapon machines, Kinder Eggs, mystery figurines etc. We also have an established tradition of letting children play games of chance for the opportunity to gain rewards at carnivals and arcades. But stories of kids bankrupting their parents to buy baseball cards are… rare. People have ruined their lives in pursuit of many things (one psychologist admitted to having an addiction to collecting classical music). However, there seems to be an ample stock of stories of people meeting financial hardship after engaging in microtransactions of video games.

Societies make laws and institutions to mitigate the extent to which people can harm themselves and each other. Do the practices of the video game industry cause the kinds of harms that run afoul of these laws and institutions when they make it easy for a customer to bring about self-ruin (and extend that ruin to others)?

 

I. Definitions

I will define the following terms based on my understanding and experience:

Loot Box:  In-game items, conditions, or abilities available to a player, initially concealed from players when obtained. These can be given to players by the game (often for completing particular objectives) or they may be purchased, either with in-game currency or legal tender (“real world money”).

Microtransaction: The option to translate legal tender (“real world money”) for objects or conditions in the game. Although these are often near a $5 price point, it is not uncommon to see options for $30 for a single item, and many games provide bundled options for over $50 or $100. The implied predatory tactic at work in this mechanic is “nickel-and-diming” the customer: the company wants the player to perform repeated small transactions so that the player does not recognize the aggregate amount spent, and therefore spend more than the player would if the player were presented with that aggregate amount.

Pay-To-Win: The design of a game to be unreasonably difficult without the use of microtransactions. This is often combined with games with very low or no cost to play the game, then a significant escalation in game difficulty. Notably, the game does not cease to function, nor become unplayable from a programming perspective.

Cosmetic: An item, feature, ability, or condition in a game which does not affect the mechanics of the game, or the mathematics that calculates the success of the player in the game (or the ability of the player to progress in the game). Some microtransactions are argued to be less predatory because the possible outcomes are cosmetic, and the lack of an impact on game mechanics precludes an assertion of pay-to-win design.

Shareware: The business decision for a company to provide a substantial portion of a game free of charge, often to generate awareness and word-of-mouth advertising. The company expects that the success and appeal of the free portion of the game will lead customers to purchase the full game.

Demo: A small portion of a game available for customers to sample the general style, art, user interface, and gameplay experience, typically for free. In the last 10 years, it has been more common for demos to be available only by watching others (often employees of the company) play the game. Some recent demos have been criticized for misrepresenting the game they purport to demonstrate.

 

II. The Controversy

The largest looming question is whether loot boxes constitute gambling. This question has the biggest legal ramifications, particularly because many of these games and transactions are available to (if not also marketed towards) minors, for whom gambling is illegal.

The second biggest legal question is whether the practices surrounding these microtransactions (advertising, communications, implementation, functionality, etc.) comport with relevant laws and regulations, particularly those set forth and enforced by the Federal Trade Commission (FTC).

Another important question is whether these practices are ethical, dangerous, predatory, fair, or are otherwise positive for the entertainment software industry, developers, publishes, and customers.

 

III. The Analysis

Issue One: Is it gambling?

I still find my previous analysis on the gambling question relevant. However, I don’t know how it would be received by a court or administrative agency. Under my analysis, the issue turns on whether the contents of the loot box are determined before or after the transaction is made. I think the strength of this analysis is that it help to delineate between the purchasing of unknown items available to minors (e.g., baseball cards, Kinder Eggs, etc.) and conventionally understood gambling (sporting events, slot machines, blackjack, etc.) I think the weakness of my analysis is twofold: 1) it may be too technical for some adjudicating bodies to appreciate, and 2) it fails to address the unsavory impacts of loot boxes and microtransactions.

It has become popular to declare loot boxes to be a form of gambling (and some games aren’t exactly shying away from that accusation or the image).  However, I am still unconvinced that any purchase of an unknown item falls under the legal definition of gambling. It may be true that it can be called “gambling” in a cultural sense, but this uses the term to mean “any taking of risk or a confronting of uncertainty.” This use of the term is unsatisfying because it also describes going to a new restaurant (and hoping the food is good) or ordering a shirt online (and hoping it fits well).

I have not yet heard a persuasive explanation that distinguishes buying a pack of Magic: The Gathering cards at my local game store from buying a pack of Hearthstone cards in Blizzard’s digital store. There might be an important distinction. There might not be one. Maybe the purchase of sealed packs of trading cards (Pokemon, YuGiOh, MTG, etc.) needs to be restricted. Maybe Disney needs to put the “mystery figurine” boxes in the “Adults Only” section of stores at Disneyland. However, if the sales of concealed items to minors are permissible, it isn’t clear why purchasing concealed outcome in a game’s loot box is necessarily legally different, in and of itself.

 

 

Issue Two: Is it unfair or deceptive?

The FTC has sometimes found a great deal of latitude in its statutory jurisdiction over “unfair and deceptive trade practices.” The task before the FTC is to determine whether the entirety of the game and microtransactions are designed in a way that is unfair or deceptive to the customer. There is a snag, however: the terms “unfair” and “deceptive” are not clearly defined. Even a sciolistic understanding of advertising in the US shows that there is a lot of distance between an advertisement and the reality of a good or service. The FTC has the responsibility to determine when advertising and marketing tactics (which are frequently adversarial, treating the customer either as a target or an enemy) become unacceptable in the eyes of the law.

Any evidence of companies’ deliberate efforts to obfuscate the amounts spent is likely to earn umbrage from the FTC. I’m fairly confident that the FTC will be displeased with implementation of microtransactions by many companies, and not just because they have addressed a similar issue already.

I’m less certain as to how the FTC would react to the concept of loot boxes. The FTC would examine the implementation of the loot boxes—not just the mere concept of them. The recent decision by several game platforms to require disclosures regarding the probabilities of outcomes for loot boxes will probably please the FTC, because the FTC likes it when useful, relevant, complete information is put in the hands of the consumer. However, some companies are not even putting truthful information in the hands of the consumers. Additionally, the FTC would still take seriously the claims that companies rely on the same tactics as those used by casinos, and the same psychology behind gambling addiction to advance their products. The many stories about the disastrous effects of these strategies on people’s lives would also hold significant weight in the judgment of the FTC.

I think it is likely that the FTC would find some practices by some companies to be unfair or deceptive. Crucially, this would almost certainly lead to a new promulgation of guidelines (and maybe codified regulations) that detail specific requirements for game developers who wish to implement microtransactions, loot boxes, or similar structures.

 

 

Issue Three: Is it good for the industry?

Ostensibly, these strategies have been good for the bottom line of some major companies. But let’s reflect on a very different business strategy. In 1993, Doom was the most popular game of its era and genre, and the developers gave away 1/3 of it for free, as shareware. That is an astonishing truth. It was free and the developers encouraged the unregulated sharing and spreading of it. This is a complete reversal of the current marketing strategies in the video game industry. In every way, this is the opposite of a loot box. And the bottom line did just fine: the developers still made enough money to buy ostentatious sports cars and the company survives to this day. I think there is a lesson for developers from the successful marketing of Doom: Make a game so good that people are happy to play it.

Sure, shareware didn’t always work. Apogee could have been the poster child for shareware. Now Apogee games are the poster child for orphan works. But in fairness: not every loot box game turns a profit, either.

It really goes without saying that loot boxes and microtransactions are designed to make more money for the companies that make and publish the games. I suspect they have been profitable strategies up to this point. However, if you have to spend one hundred million to defend your company’s strategy for making seventy million, that strategy isn’t so good for the bottom line—and that’s not to mention the impact of the negative public image of being perceived as predatory or dishonest.

 

 

IV. CONCLUSION: Maybe Legal, Likely Unethical, Definitely Unnecessary

Loot boxes and microtransactions may very well be legal—but that doesn’t mean that they’re “good” in any sense of the word. There are urban legends of drugs that are so addictive that dealers give away the first dose for free, because they know that the user will immediately become addicted and begin paying. They lower the barrier so that more people will ultimately become customers.

There are two options for developers who crave financial eminence: make a game so good that people want to play it, or make a game so addictive that people struggle to stop playing it. The two games may look similar, but the core functions are opposites. One is a positive experience that works to enhance the player’s life. The other is an effort to remove autonomy and destroy the player’s life. One is giving. The other is taking.

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“Fair Use!” Shouldn’t Be The Battle Cry of Pirates

***Disclaimers: Jim Sterling emphasizes that he does not advocate pirating Nintendo games; he  only argues that there is a moral justification for doing so. Furthermore, I don’t have all of the information on this matter, and I’ve tried to indicate when I’m inferring some facts. As always, this writing is NOT legal advice.***

Jim Sterling thinks it’s morally justified to pirate Nintendo’s games. I disagree.

As I understand it, Jim’s argument is that Nintendo abuses copyright law by failing to respect the legitimate activities of journalists like him. Jim feels that Nintendo’s failure to respect the legal rights of others permits others to ignore the legal rights of Nintendo.

The basic analysis of this claim comprises two questions: 1) Is Nintendo actually abusing copyright law? and 2) Does that abuse justify piracy? I think simple proportionality suggests that if a company fights with one person over a few pennies, responding by depriving the company of millions of dollars from millions of customers is probably not justified. So, I’ll just focus on the first question.

1)  Is Nintendo Abusing Copyright Law?

Probably not. As far as I can tell, Jim is angry that Nintendo issues ContentID strikes against Jim’s videos that incorporate some of Nintendo’s content (e.g., a few seconds of a trailer for a Nintendo game). Jim contends that his use of Nintendo’s content is protected under Fair Use.

A) ContentID: Still Not The Same As Appearing In Federal District Court

Nintendo is operating within YouTube’s copyright-themed pretend-cyber-law-court system. (I don’t know if they’ve issued DMCA takedowns, which would be an actual, real, legal action.) ContentID has a status similar to a retail store’s policies, in that it’s up to the private enterprise to design and operate the system pretty much however they like. Except in this case the law (DMCA) frames how a private company will design their system: If a party issues a warning about a copyright issue and the host service doesn’t remove it, and then the party goes to court with original poster over it, the party can collect from both the original poster AND the host. Thus, the host is really incentivized to make the choice for which the law will never penalize them, and just take down everything, every time anyone is unhappy. Maybe there are some complaints to levy against the DMCA for that (and against copyright law for incentivizing rights holders to protect their rights or risk losing them). But being slighted by a retail store’s return policy doesn’t justify torching the manager’s car.

B) Fair Use: Still Not A Magical Invocation

Jim’s claim to the Fair Use exception is not as clear as he hopes it is. Before the internet, fair use was a tiny, unheard of piece of an area of law that most citizens and attorneys didn’t think about very often. In the last 20 years, it has become the backbone of the amateur, self-starter internet entertainment and journalism industry. Despite getting burdened with all of that extra responsibility, the legal doctrine has not been expounded or clarified by courts or legislatures. The biggest case for fair use was Campbell v. Acuff-Rose Music, Inc. in 1994, which focused on the use of music for parody and explicitly stated that the law does not recognize a market for derivative works (which, I would argue, is very close to what most UGC on the internet is). (It would be great if someone could take a corporation like Nintendo to court to get a ruling on Fair Use in the context of YouTube journalism and criticism—though I’m sure that corporations will settle at outrageous expense in order to avoid losing the grey area that allows them to make these kinds of aggressive claims.)

Jim’s use of Nintendo’s content seems intuitively fair to most of us, but the analysis required by the law isn’t the intuition of the average citizen. The statute requires consideration of four separate factors:

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of the copyrighted work.

The biggest problem for Jim in this analysis is that his videos are monetized, which means that his use of Nintendo’s content is not a non-profit endeavour. He also might use as much as 1/3 of a 3 minute trailer, and seeing the trailer in Jim’s video might make some people less likely to go watch the full trailer (though it could also have the opposite effect). The point is that there are some arguments to be made against the idea that Jim’s use of Nintendo’s content is beyond reproach. I think the balance of analysis goes in Jim’s favor for fair use, but I don’t think every single court in the US would rule that way- though more court rulings are moving in this direction. (I did not apply Lenz to this analysis because: 1) It applies to DMCA takedowns, not ContentID strikes, 2) There is a good-faith argument in consideration of fair use, as outlined above, and 3) It’s a Circuit ruling, rather than a Supreme Court ruling.)

Ultimately, Jim’s entire argument really hangs on this one point- that fair use gives him a right to do this, just like the first amendment would give him a right to run a newspaper or stand on a soap box in Central Park. As a matter of academic legal analysis, 17 USC 107 is not as robustly defined or developed as the Free Speech clause of the First Amendment. Fair use is not just a legal way of saying “I used citations.”

I don’t want to pick on Jim too much, though. This case is just an example of the kind of faith that consumers and “Prosumers” and “content developers” and “social media dracoliches” put in the legal concept of fair use. It’s an incredibly misunderstood point of law, and it’s a point of law that is bearing more of a social and economic burden than it was ever originally designed to bear. Every year, ordinary intuitions about the meaning of “fair use” are driven further from the statutory language by cultural norms and everyday practices. In the end, no one seems to have a good grasp on this concept: Consumers and content creators think it is carte-blanche permission to use someone else’s work, and entertainment companies seem to think it’s a lie invented by hippies who just want free stuff.

2) “Legally Justified” Doesn’t Mean You’re Either Good or Smart

I think there’s a reasonable case to be made that Nintendo is acting within their legal rights. I think there’s a much stronger case to be made that Nintendo is acting against their economic interests. Copyright law is woefully outdated, and companies that cling to it too tightly will fall behind the times. One of the most useful aspects of copyright law is the right of the owner to not pursue actions against infringers. A smart company recognizes when infringements under the law can work in the interests of the company. Devolver Digital is a smart company.  Entertainment companies that are the most successful in steadfastly safeguarding their intellectual property will be among the least successful at recruiting, engaging, and retaining an audience.

Entertainers without audiences are dead.

I think there’s a better way for Jim (and his industry) to strike back at Nintendo: just leave them behind. Nintendo wants to live in the 20th century. Nintendo doesn’t want to participate in a world of Let’s Plays and livestreams and podcasts and social media and fan participation. There’s no shortage of other game companies and other games to play and discuss. It doesn’t help that Nintendo recycles only 2 or 3 major franchises and rarely comes up with any new ideas- and fails to execute them when they do. Nintendo needs all of these copyright infringements to survive, but they don’t know it. I don’t think they will learn that lesson until they get exactly what they want.

“Come At Me, Copyright Bro” –Google Legal Team, 2015

Making Trades

Most competitive games involve the concept of trading. The idea of a trade is to risk some of your resources in order to deprive your opponent of some of their resources. This is part of a smaller skirmish which is only part of the overall game. The goal is to lose less than your opponent, thus putting you ahead. For most games, successful trades require a proficiency that comes with study and experience. It requires knowing both what you and your opponent are capable of and thereby knowing what will happen. The best players are not surprised by the outcomes of their choices; they know before they act how the exchange will unfold. When chess masters think about future moves, they are performing this kind of trading calculus.

Attorneys make the same kind of considerations. Particularly, those who litigate (though many attorneys don’t) use their knowledge and experience to predict the outcomes of various legal strategies. For a master attorney, the outcomes of legal choices are as unsurprising as the outcome of a chess move is for a chess master. Good attorneys don’t pick legal battles wildly or whimsically. They know in advance what the risks are. They know the possibilities and probabilities, the parameters and requirements.

I have no doubt that YouTube’s new fair use policy comes to us after many, many hours of careful thought by many legal experts. It is bold and brazen, but calculated and deliberate. It is not, strictly speaking, a defiance of a federal law. But this new policy does cast aside some of the protections offered by the law.

Picking A Skirmish

The Digital Millennium Copyright Act (DMCA) covers a wide range of topics, including questions of copyright infringement on the internet. To incentivize websites to host material, as well as to incentivize their cooperation with the policing of copyright infringement, the DMCA offers “Safe Harbor” protections to those websites that promptly take down those materials suspected or accused of copyright infringement. The system is called “notice and take down”: When someone gives a website notice about infringing material, the website simply needs to take it down. This is why so many US-based companies are quick to take down content when a copyright claim is filed: the compliance of the host protects them from a lawsuit for the copyright infringement.

For many years, YouTube took advantage of the protections offered by this law. When a copyright infringement claim was filed, YouTube promptly removed the content in question. It could often be uploaded again, with the content uploader asserting that the video did not infringe a copyright. The dispute would then be between the user and the [self-proclaimed] content owner, Google having excused (or protected) itself.

Google’s new policy is to reject some copyright complaints in certain cases. Those cases are those in which Google thinks that the video does not infringe copyright and is protected by the fair use doctrine. What sounds most impressive is that Google will even defend legal claims against those videos in court for up to 1 million dollars in legal costs. That isn’t actually as impressive as it sounds, because Google has left the Safe Harbor protections when it refuses to remove disputed content. In this act of defiance, Google is on the hook for copyright infringement as though they had been the ones to upload the video.*

The DMCA does not give license to content hosts to make judgments about fair use. That remains the purview of the courts. Google is relying on their legal team’s expertise to predict how a court would rule regarding a video. If they are wrong in this prediction, they could lose rather badly.

Uncertain Factors, Unpredictable Trades

The fair use doctrine is not extremely well-developed. American law schools require all students to pass certain courses, and many of these core courses** feature cases that are over 100 years old. One of the most famous cases in Contract Law is from 1854 (and from an English court, no less). The most famous cases on Fair Use are from the 1980s and 1990s, and they don’t give a thorough, detailed explication of this legal concept. They only apply fair use to some specific sets of facts.

Fair use is far less certain a legal doctrine than the two-hundred (or seven-hundred) year old precepts that guide areas of law such as property, tort, or contract. This makes it harder to predict the outcomes of taking some cases to court. There are no masters for making “trades” with fair use in court. It hasn’t gone to court enough times with different cases for anyone to know exactly what it’s capable of.

This is an incredibly exciting challenge that Google has thrown down. They have stepped out of their sanctuary. They have taken up a weapon that is uncertain and largely untested. They are risking substantial damage if they lose. And they really didn’t have to do any of it. They could have stayed safe and sound, risk-free, and followed the pattern of notice and take down. They didn’t need to change anything. I can only guess what might motivate them to make the world a better place for others. Perhaps Google decided that if they are going to control the world, they want it to be a world more worthy of their control.

(Or maybe Google is throwing their weight behind fair use now that it is it the next defense for Java APIs after a ruling earlier this year that Oracle can copyright the structure, sequence, and organization of an API.)

 

*A little over-simplified to avoid a discussion about the difference between joint and several liability.

**Copyright law is not a required course, and isn’t always even offered as a full subject by itself—making fair use a small part of a lesser-known area of law.

 

Thoughtless Atrocities: Why Lots of Shooting is preferable to a Little Raping.

I address a debate between Penny Arcade and Jim Sterling. http://www.escapistmagazine.com/videos/view/jimquisition/5972-Rape-vs-Murder

The issue is: For videogames, is shooting morally different from raping? They’re both bad things, obviously–  but isn’t the point of video games to let us go into a different sort of reality where we can do bad things without actually hurting anyone? There are at least three recognized approaches to questions of morality: Utilitarian, deontological, and virtue.

Utilitarians are interested in total net outcomes, so if no one is actually hurt and someone is happy because they played the game, it’s probably ok. (If the player ends up hurting people as a result of playing, the utilitarian might object.) Deontologists have to decide whether the rules that govern morality apply to imaginations and simulations of immoral behavior (18th century Kant doesn’t say much about virtual reality as we think of it).

Virtue ethics is general more concerned with how a person is motivated and what traits she or he cultivates. They might want to know: “Why do you want to simulate shooting or raping?” If you have a desire for immoral behavior for which you are simple finding a socially acceptable outlet, the virtue theorist does not approve. Goodness, on Aristotle’s view, is not wanting to do something bad but choosing not to. That is mere continence. Being good consists in wanting to do good things, not in merely avoiding the evil one desires to enact.

There is another approach to this issue, perhaps from the camp of the phenomenologists (who are interested in what we experience and how). In modern video game, I can shoot and kill 100 “bad guys” in minutes. I can shoot them with sniper rifles from hundreds of yards away. I can surprise them when they turn a blind corner. Not that we would want to, but could we imagine a simulation in which our avatar rapes 100 people in only a few minutes? Without wanting to get too into the awful details, rape seems (and I’m lucky that I wouldn’t really know) to be a very personal and intimate crime. It takes more time than does the pulling of a trigger. It involves being in the other person’s space— part of what makes it horrid is how up-close and deeply personal it is. It has a feel and an experience altogether distinct from running into a room of enemies and spraying bullets and running out. The murders of video games may be considered more acceptable than the simulations of sex crimes because the experience of the simulation is decidedly different. One can be uninvolved or unaffected by a repeated and impersonal slaughter-simulation, but one cannot be aloof or disengaged in a simulation of a personal, knowing, invasive act.

(NOTE: I have never done, nor ever intend to do, EITHER of these things! Sometimes explaining hell means imagining hellishness. Maybe killing a room full of people feels just like committing a sex crime. I hope I never get to find out empirically.)

Most videogame slaughter can be understood as mechanical and impersonal. It is inconceivable that sexual crimes could be simulated in a comparably impersonal and wholesale fashion. I conclude that the impersonal slaughter of videogames poses less of a moral problem than does the simulation of rape because of the distinctly different phenomenology of the experience. (Of course, there are plenty of other reasons to accept the same conclusion that do not conflict with the reasoning I offer here.)

“Just A Game”: Why Should we take Video Games Seriously?

The acceptance of video games in society means the difference between the development of the medium and its cycle of growth and contribution, and the stagnation of the medium as irrelevant and its creative strangulation. It also means the difference in the image of a gamer: a 40 year old man-child living on Cheetos and pizza in his parent’s basement, playing 20 hours of WoW per day, OR any gender, of any ethnicity,  in any place,  with any occupation, with a healthy, balanced life.

1-Videogames need to be taken seriously because they are a vehicle for exploring alternatives to copyrights and traditional business models; they have a chance to move IP law from the 20th to the 21st century. Videogame journalist Jim Sterling asks who the “they” is that “needs” to “take video games seriously.”  Among other people, law makers ought to take video games as seriously as books and film—if not more so because of the special relationship video games have with emerging technologies. Part of what I find exciting about studying Intellectual Property law right now is that new technologies rarely come packaged with a complete set of clear law surrounding it. The law gets to be created along with the technology. Video games are one area (perhaps the single most consumer-intensive area) that highlights that point.

2- Anyone with money should take video games seriously- both for their sake and the gamers’. Taking the medium financially seriously enhances what it can achieve. If it’s “taken seriously,” investors will throw money at it (although capitalism can kill creativity, which is a concern on the other hand). The success of E-Sports shows investors and advertisers that there’s money to be made with video games beyond mere game sales, and that is one of the greatest hopes of the industry and the players.

3- Society at large has already noticed video games. Perhaps the issue is better framed as their “acceptance” of them than “taking them seriously.” If they are to survive and thrive, they must be seen as more than mere childish gimmicks or dangerous indoctrinations of violence. Videogame journalist Seth Schiesel once told an advertising conference (with both ad companies and game companies present): “If you keep thinking about your customer as only grunged-out young men, you will go down just like comic books in this country… you will always be marginalized and you will never be taken seriously.” There have been amazing graphic novels produced in the last 50 years. When works on par with Maus and Persopolis are in production, they’re kept well hidden from the public; only the “niche” audiences really know where to get them. Videogames will be worse-off if they are kept in a “niche.” Others rejecting the value of my hobby doesn’t make me enjoy it less, but it does steer the substance of my hobby down a path of lesser quality.