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.

I’m Betting That Overwatch Loot Boxes Aren’t Gambling (under 31 USC 5362)

Disclaimer: As with all of my posts, this is NOT LEGAL ADVICE. This is academic analysis on a subject of law – and I don’t even have a good tool set (WestLaw, Lexis, etc) for that.

1- Introduction: Micro Transactions and Loot Boxes

The business model for free to play games is to include micro-transactions for aesthetic, trivial add-ons. For Counter Strike: Global Offensive, this manifests as the opportunity to pay a few dollars to buy a key to unlock boxes which are randomly distributed during play. Paying to unlock a box gives a play a random chance to receive aesthetic enhancements for a weapon (a “skin”). The rarity of the skins varies widely. Some of the most rare and prized ones are occasionally sold on eBay (or other 3rd party sites) for over $1,000.*

The question is: Are Loot box systems gambling? What about cereal boxes, TCG booster packs, or other things that allow children to participate in contests involving chance?

Some internet-folk grew a discussion thread to eight pages on the Overwatch forums discussing this topic, and not a single one of them reached for a legal definition of the subject at hand. People just talked about how they felt about the subject. Apparently, it takes a law degree to find the first search result on Google. Law has some flexibility – and that makes these questions difficult-, but there are rules, people!

2- What is the Definition of Gambling?

(For simplicity, I removed references to Insurance, Commodities, and Securities.)

31 U.S. Code § 5362 – Definitions

(1)Bet or wager.—The term “bet or wager”—

(A) means the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome;

[Lotteries and gambling administration]

(E) does not include—

[Insurance, Commodities or Securities]

(viii) participation in any game or contest in which participants do not stake or risk anything of value other than—

(I) personal efforts of the participants in playing the game or contest or obtaining access to the Internet; or

(II) points or credits that the sponsor of the game or contest provides to participants free of charge and that can be used or redeemed only for participation in games or contests offered by the sponsor; or [Fantasy Sports]

3- Analysis: Winning the Gamble Must be Distinct from Winning the Prize

The real key is in part (1)(A): “upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person … will receive something of value in the event of a certain outcome.”

Let’s take three examples that are not legally considered gambling: buying TCG booster packs, putting random prizes in cereal boxes, and… *sigh* there are a lot of reasons I don’t want to mention a certain online service that sends subscribers monthly boxes containing a random assortment of goodies… but imagine that such a thing exists.

My best guess** is that the law requires the “certain outcome” and the prize (“receive something of value”) to be two different and distinct things. In the case of cereal boxes and booster packs, the “certain outcome” is the prize. There is a chance of getting a Holographic Charzard, but winning only means getting the Holographic Charzard. You cannot “win” the card without, at the very same time, having the card: winning the prize always already entails having the prize.

In contrast, consider some examples that are legally considered gambling: slot machines, lottery tickets, and blackjack. In each of these cases, the outcome entitles the player to a prize: the slot machine dispenses quarters (“makes it hail”) as a result of the outcome. For a slot machine, the outcome itself is only a sequence of matched cherries or bars; for a TCG booster pack, the outcome of opening a pack is having a stack of cards.

This distinction may seem pedantic or petty, but it allows people to play games of chance without involving money. It allows people to play poker among friends for no money, or to made idle wagers for fun. It allows Disney to sell boxes of figurines with one shrouded “mystery” figurine included and it allows schoolteachers to play “Science Bingo” in class. It’s a tiny distinction that allows a lot of innocent behavior.

4- Application To Loot Boxes

However, there is still an interesting metaphysical investigation required to conclude this legal analysis: is the opening of a loot box like the opening of a booster pack, or is it like playing a slot machine? Is it actually two different events, or only one? Does the computer run the RNG when it is unlocked, and then determine the prize based on the outcome of the RNG? Or does the loot box already “contain” the prize before the opening?

Blizzard already told players not to bother hoarding loot boxes in the hope of getting future skins, because the contents of the box are already determined when the box is given to the player. If this is true (and if my guesswork-analysis is correct) then there is good reason to think that loot boxes are not legally considered gambling under 31 USC 5362.

I don’t know if a judge would actually go to this level of technical granularity, but there has been a long-standing debate about whether electricity should be legally classified as a “good” or as a “service” – and the distinction relies on a scientific understanding of whether you are being given electrons at your home, or just having your electrons vibrated. It seems like the order of operations carried out by a computer program is somewhat of a macro-level question than the movement of sub-atomic particles.

 

*A tiny cottage industry grew out of this: 3rd party websites that allowed people to wager their digital property from Valve’s game. Several of these sites were recently issued cease-and-desist letters after one of them was revealed to be promoting itself under false and misleading pretenses on YouTube.

** I looked around, and was surprised that I didn’t find a case, law review article, or law that dove into this issue with more specificity. I suspect that there has been a case about this, or at least an article – I just don’t have access to a law library right now.

 

UPDATE: I try to add some extra links when the rest of the world catches up to me.

Robot Congress did a podcast on this subject.

The Verge wrote about it.

 

Watching Over Copyrights and Brands, Part II

You can protect a brand in a lot of ways. You can wave the law around like a sword, or hide behind it like a shield. Or you can not worry about using the law to your advantage and just make a product that others can’t top. One of the most fun things about law school was learning about all of the ways around the law – not breaking or circumventing it, but bridging over the gaps and cracks. Gaps and cracks happen most when the law hasn’t kept up with culture or technology, which is where I think the law is most exciting and interesting.

One of the most genius aspects of the overwhelming media hype-package of Overwatch is the way it manages concerns for copyright and trademark infringement. Blizzard achieved a level of branding and promotion that reduces their concerns for infringement. Overwatch is inimitable. That doesn’t make it invulnerable, but it might be the next best thing.

I. “Junk” from “Rats” Can’t Hurt the Bastion of the Marketplace

Even before I ever visited New York City, I knew that people sold cheap, counterfeit Rolexes on the streets. Having this explained to me as a child is also how I heard about Rolex, incidentally – and learned that it was different from Rolo. I always thought it was interesting that everyone knew about this black market for counterfeit goods, but no one seemed extremely worried. I think one reason for the lack of concern is that Rolex knows they won’t go out of business because of cheap knock-offs.

The best games, from the biggest studios­, have less to worry about when their IP is infringed or “heavily borrowed.” Dominating the games market is less about legal force than it is about marketing and loyalty. For one thing, Activision can’t claim copyright over the concept of a military-shooter and force other studios to not make games that compete with Call of Duty. So Activision makes Call of Duty a brand, because brands command loyalty. A given Call of Duty game may be worse in every respect to a competitor’s game, but fans will still choose the inferior product because of its franchise. (This is one of two reasons anyone rooted for the Cubs from 1945- 2015.) Blizzard created something powerful: a genuinely superior product that commands tremendous brand loyalty.

II. Just Palette-Swap For A New Game! Sounds Pharah- don’t you McRee?

Of course, just because no one can succeed in really ripping off Overwatch doesn’t mean people won’t try. League of Legends had this experience, also. Generally, game knockoffs like these are about as much of a concern as e-mails from dispossessed millionaire Nigerian princes. It’s a reprehensible practice that creates clutter and will accidentally trick some people, but they aren’t going to displace the original.

Companies can compete with Overwatch, but they can’t replace it. The entire experience is too complete and interconnected. No parasitic effort can trick a gamer into thinking they have the real deal, no one can deliver a superior version of the same experience, and no one pull more brand loyalty in online gaming.

III. Leaving your Trace[r] Mei Show that You’ve been a [Road]Hog, and You’ll Get No Mercy

Although Blizzard won’t feel the financial impact of the feeble efforts of clones, there are things that can still undermine the game. For example, a company could make an add-on that allows players to cheat at the game. Of course, a company called Bossland did exactly that. Rather than simply ban the players who use this add-on (per violations of EULA and ToS agreements), Blizzard has gone after the makers of the program – who are super proud of what they do.

I am a little bit surprised that they cite copyright infringement in their claim. This is interesting because it seems well outside the scope of traditional copyright law, but copyright law has been slowly evolving in the last decade. I think the technical details of how Bossland’s program interacts with Blizzard’s game could be essential to determining if applying copyright law is appropriate. After the recent ruling in Google v. Oracle, courts are more likely to find infringement just from making two programs talk. (The fair use defense that saved Google is not going to help Bossland.) In this case, it seems extremely likely that Bossland had to access and take (or manipulate) some of Blizzard’s code, which may be enough for infringement. But the ways that 3rd parties can interact with programs is still an interesting question for copyright law to resolve.

Regardless of the copyright claim, I think the other claims made by Blizzard are plenty strong enough to win, so I don’t think a court will end up going into detail about it.

Watching Over Media and Brands, Part I

More than any game I’ve ever seen, Overwatch is a multi-media, total brand experience. The trailers for the game could compete with Pixar shorts in every respect. The game is supplemented with comics, toys, and a professional eSports scene. It sets new industry standards in showmanship, advertising, and storyline. This is a lot more than just a video game. This is the new model for integrating a concept across every medium and platform to reach every possible audience in every way. This isn’t just the new benchmark in video games. This is the blueprint for every successful future entertainment product. Blizzard understands “today’s media landscape” as more than a business-boardroom buzzword. Other industries also have successful examples of dominating multiple platforms, though none quite on this scale.

Today’s musicians can’t get away with merely releasing music. They need to tweet and vlog, and most crucially, they need to do live performances. Katy Perry recently set the record as the most followed person on Twitter, even though publishing 140-character quips was never in the job description of a musician or a pop star. Similarly, writers can’t just write books anymore- they need to write about their writing, and then talk about writing about their writing with other writers who want to talk about talking about writing. John Green aspired to be a writer when he took a job doing data entry at a publishing company. At the time, he didn’t hope to become a transmediaplatformleader-we-don’t-have-a-word-for-this-thing. However, his understanding and use of YouTube and Twitter allowed him to promote his young adult fiction beyond what a traditional book publisher would imagine. His new media fed his career in the old media, and vice-versa. (And compared to Twitter and YouTube, video games are old media.*)

Movies won’t succeed just by creating more epic battle scenes in 3D to justify the expense of going to the theater. They need to change the experience in more fundamental ways- they probably need a smooth integration of social media, but they also need some interaction the viewers can’t get outside the theater. They need to learn what Prince knew: you can’t get the live-show experience sitting alone in your home. One way movies could adapt to the 21st century is to turn an evening at the movies into a kind of social event, akin to a concert, sports game, or convention. Another way is to make it an even more technologically-driven experience, with augmented reality or virtual reality – a kind of entertainment-themed, futuristic, individualized experience like a museum or library. That is a lot more expensive, though, and all of the theaters near me just spent a lot of money upgrading their seats.

The media channels of the 21st century aren’t just more avenues for information – they are layers of information interacting with the other layers. Television programs and movies also have to adapt to the way consumers use the newest technology. Adaptation looks like spreading out- growing to cover a larger area – but it’s also about moving to new places entirely. Entertainment has to infiltrate and flow through multiple channels. It also still relies heavily on sponsorship in many cases, which means advertising also has to be integrated across these media.**

There are other ways of adapting, such as just adding alcohol to a bookstore.  Don’t rule anything out, I guess. Especially if you don’t think anyone under 21 even knows about your store or your product, anyway.

 

 

*Not that video games are mainstream yet. My Facebook newsfeed recently informed me that Torbjorn was set to be “‘nerfed’ for consoles in future update.” The word “nerfed” was in quotations, which tells me that mainstream journalists don’t know what it means and don’t think it’s a word. (Or they’re very conscious about not genericizing Hasbro’s trademark, even though that trademark is, strictly speaking, in all-caps.)

**The alternative to advertising is some form of upfront pay-to-play, which is what Overwatch did.