"… the problem is not so much loot boxes as such, but the ways in which they are offered."

Loot boxes in video games and gambling laws – a Norwegian update

| Innsikt

Loot box mechanics in video games have been subject to much debate. Are such mechanics simply "gambling in disguise"? Are loot boxes strictly a gambling issue or a wider consumer protection issue? Should they be regulated at all, and if so, how?

What are loot boxes?
So-called loot boxes offered in video games is a type of ‘microtransaction’. In short, ‘microtransactions’ refer to transactions made by players/consumers for purchasing in-game goods; e.g. virtual items or currency (‘virtual coins’). A further distinction, which is sometimes made, is between ‘pay-to-win’ transactions (e.g. a powerful in-game item which can only be obtained by a real-money purchase) and ‘cosmetic’ transactions (e.g.  in-game ‘skins’).

While it is mainly in the first category where consumer backlash has occurred, the distinction is less relevant from a legal perspective. From a legal perspective, and in relation to gambling laws, the key differentiator is between loot boxes and other ‘microtransactions’, and above all about the randomized nature of loot boxes.

Loot box mechanics have that in common that players can purchase virtual ‘boxes’ containing randomized in-game items etc. for real money. In rare cases, a ‘box’ may reveal powerful items, which are highly desired from the players’ view, for instance, to improve skills or reach new levels.

Historically, ‘microtransactions’ were used as a revenue model for developers and publishers of free-to-play mobile games, but this model has since been introduced in major free-to-play and pay-to-play titles in both the PC and console market. Some of the best known examples include Blizzard Entertainment’s Overwatch, Epic Games’ Fortnite, Valve’s CS:GO and Electronic Arts’ FIFA franchise.

Why do loot boxes matter?
The gradual increase of loot boxes and other ‘microtransactions’ in games is part of a shift where buying games are less than before linked to the ownership of a physical copy. Players do not ‘own’ the games but acquire a right of (often indefinite) use in the End-User License Agreement (EULA). Thus, developers and publishers have moved towards selling ‘games as a service’ (GaaS), a sub-category of ‘software as a service’ (SaaS). In essence, GaaS is a way to monetize video games after the initial sale and has opened for business models based on subscriptions, season passes, cloud gaming (gaming-on-demand), ‘microtransactions’ etc.

A study from DFC Intelligence in 2018 found that Electronic Arts’ value had increased from USD 4 billion to USD 33 billion since 2012, and that Blizzard’s value increased from USD 20 billion to USD 60 billion in the same period; in part due to a shift towards a GaaS model in their games catalogues.

To illustrate the impact of GaaS loot boxes specifically, Electronic Arts’ game mode Ultimate Team – which allows  players to collect professional footballers, hockey players etc. to build and compete as a personalized team – alone accounted for approx. 28 % (USD 1.4 billion) of the company’s total net revenue during 2019.

Should loot boxes be classified as gambling?
A common feature of all loot box systems is the element of uncertainty, or ‘chance’. The player pays for the prospect of ‘unlocking’ highly valuable or much desired in-game items, even if knowing that, most of the time, the ‘pay-out’ will be less desired (generic items). Some suggest that the psychological mechanisms at play are similar to those of traditional lotteries, which could lead to addiction or compulsive gambling.

In the Netherlands and Belgium, the authorities have found that some loot box systems, but not all, violate their national gambling laws. In many jurisdictions, including Norway, the notion of gambling requires (1) a stake (payment); (2) a random outcome (chance); and (3) a prize/reward. Loot box systems will normally fulfill the first two criteria. It is the prize/reward criterion which has been subject to most debate. One could argue that a distinction must be made between those in-game prizes/rewards which can be traded for real money (and therefore hold an actual value in real-life terms, outside of ‘sentimental’ value) and those which cannot. In the Netherlands and Belgium, the national authorities seem to have taken the approach of banning loot boxes without distinguishing between what can be lawfully traded for real money and not. In France, on the other hand, the view seems to be that loot boxes would fall under national gambling laws only where the items etc. obtained by purchasing these ‘boxes’ can be lawfully traded for real money ‘outside the game’.

On the EU level, a July 2020 report prepared for the European Parliament’s committee on Internal Market and Consumer Protection recommends, instead, «to tackle problematic game designs from a wider consumer protection perspective». It also adds that «since gambling is a national competence of the Member States, approaching the issue from this angle may lead to a fragmented market for video games within the EU.»

How are loot boxes regulated in Norway?
While the legal standing of loot boxes in Norway remains unclear, a recent public consultation memo from the Ministry of Culture, issued as part of the public consultation for a new Gambling Act, sheds some light on the matter.

In the memo, the Ministry argues that loot boxes could fall under Norwegian gambling laws if the in-game prize/reward can be traded for real money or anything else of value ‘outside the game’. One problem with such an approach is that ‘black markets’ for trading accounts, items etc. in online games are widespread. Indeed, illicit account trading etc. are said to have existed as early as in Sony/Ubisoft’s EverQuest, the first commercially successful massive multiplayer online role-playing game (MMORPG), released in 1999. Today, about 20 years later, few would dispute that virtual economies are real: A single virtual space ship battle in CCPG’s Eve Online, for instance, has been reported to destroy fleets valued above USD 1 million.

The Ministry is well aware of these virtual economies and thus refines its legal approach by suggesting that developers cannot be responsible under gambling laws for real money trades on ‘black markets’ in violation of their EULA. In an important addition, however, the Ministry notes that «the premise is that the developer itself [actually] enforces possible violations». This would then imply that any ‘black market defense’ would be inadmissible for developers who do not actually strike down on real money trades violating their EULA.

What’s the catch?
The Ministry’s reasoning in the recent consultation is interesting in that it seems to suggest that some loot boxes in video games may indeed already fall under Norwegian gambling laws. While the statements in the memo were prepared with future legislation in mind, the three-step gambling definition remains unchanged. As such, the statements could also be read as an attempt to clarify the scope of the regime already in force.

In that case, the takeaway is that there is, and will likely be, no absolute loot box ban in Norway. However, to fall outside Norwegian gambling laws, developers must prohibit player sales of in-game items etc. for real money and have systems to ensure that such prohibitions are enforced in practice, and not only ‘on paper’. The question is then how much of an actual enforcement is needed in practice for this to be the case.

On the EU level, gambling is likely to remain non-harmonized. A future EU loot box initiative (if any) would thus likely be under a wider consumer protection angle, and not under a gambling angle. Under that same consumer protection angle, absolute loot box bans in national legislation could, in theory, be challenged by the industry under the 2005/29/EC Unfair Commercial Practices Directive (UCPD) if loot boxes could be construed as a «commercial practice». Nonetheless, if the health concerns over loot boxes are as severe as voiced by some, such a challenge could prove difficult, and one would need to turn instead to an assessment under the ‘fundamental freedoms’ in EU/EEA primary law; e.g. by arguing that absolute bans go beyond what is necessary as the problem is not so much loot boxes as such, but the ways in which they are offered.