United States: FTC Public Workshop on Loot Boxes – So What Now?

With consumers, gamers and lawmakers expressing concerns about whether loot boxes are predatory or contribute to gambling-like behavior, game developers can take steps to minimize the possibility of their games inviting controversy.

The following digest captures highlights from the U.S. Federal Trade Commission's public workshop, "Inside the Game: Unlocking the Consumer Issues Surrounding Loot Boxes." We outline what might be coming next for the industry and include six practical tips for developers who use loot box mechanics.

Background

The August 7, 2019, FTC workshop brought together a variety of contributors, including consumer advocates, industry representatives, academics and government officials. The day was divided into three panels¹ comprised of panelist presentations and discussions covering the marketing and use of loot boxes and other microtransactions, and the potential behavioral impact of these virtual rewards on consumers. Transcripts and video recordings of the workshop are available on the workshop's home page.

The "Who, What and Wow" of Loot Boxes

The workshop opened by addressing the fundamentals of loot boxes as a type of microtransaction and the genesis of such purchase options within video games. ² Presenters answered the question, "What is a loot box?" exploring the definition and the variety of ways the mechanic can be structured. Jeff Haynes, senior editor of video games and websites at Common Sense Media, divided the mechanic into three categories: (1) the "cosmetic loot box" and (2) the "mode specific loot box" (each reflecting optional content which does not give the player an edge in gameplay), compared to (3) the "pay-to-loot" variety of loot box in which the payment of money by the player is essentially required to be successful with the game play.³ Haynes recognized the "pay-to-loot" variety as causing the most problems because these mechanics frequently involve "slot machine-style mechanics where paying extra possibly gives the players more chances to earn high rewards."⁴ Haynes also acknowledged that these several types of loot boxes are not mutually exclusive, and that any or all of the varieties could appear in a game at any one time.

The amount of time spent defining loot boxes and the nuanced discussion about the mechanic's various configurations foreshadows the possible challenge for regulators should any oversight or rulemaking come out of the FTC's investigation process—it may be difficult to avoid affecting benign loot box mechanisms in an attempt to address other structures viewed as problematic.

ESA Announces Video Game Industry Commitment

During the workshop Michael Warnecke, chief counsel of tech policy at the Entertainment Software Association (ESA), announced commitments from Microsoft, Nintendo and Sony to require new games developed for their platforms containing paid loot boxes to disclose the odds of obtaining each of the randomized virtual goods included in the loot box. The policy targeted for implementation in 2020 will also apply updates to existing games that add loot box features.⁵ In addition to these commitments, many of the ESA's game publisher members made a similar pledge to disclose the odds for their game titles, irrespective of the platform (a complete list of the participating entities can be found on the ESA website).⁶ Warnecke noted that along with Apple and Google, which also require disclosure of loot box odds by app developers on their mobile platforms, the commitment by the ESA's members reflects a comprehensive approach by the industry to allow consumers to make educated choices with respect to paid loot box purchases.

Panelists Express Concerns

In addition to educating those who may have been unfamiliar with loot boxes, the workshop provided a platform for presenters to express their concerns about loot boxes as gambling, and the potential impact the mechanics may have on young players.

Dr. David Zendle, a York St. John University researcher, did not mince words with respect to the effects displayed by his study, stating: "[S]pending money on loot boxes is linked to problem gambling. The more money people spend on loot boxes, the more severe the problem gambling is."⁷According to Zendle, his research and that of other research labs have replicated this effect.

Acknowledging that it is unclear what sort of causal relationship may exist between loot boxes and problem gambling, Zendle said the existence of any link is cause for concern and is "not something to be trivialized."⁸ Zendle reported that the same link between problem gambling and loot box spending also exists in adolescents, and the link was "much, much stronger than in adults."⁹ Zendle made a plea to the industry to work together with him and other researchers. He reasoned that access to the "terabytes of data on user interaction and user spending" held by game companies is what researchers need to get to the bottom of what is creating the problematic correlation displayed by the research.¹⁰

Panelists also discussed concerns about what the speakers referred to as "dark patterns" used with games to get consumers to engage in gameplay and encourage the purchase of loot boxes. Anna Laitin, director of financial policy at Consumer Reports, highlighted pay-to-win, appointment dynamics (i.e., dynamics that build the habit of playing) and the need to engage in excessive "grinding" (i.e., repetitive play) as in-game tactics that may result in players spending much more than they otherwise intend to spend during gameplay.¹¹ Presenters also identified the potential for game companies to use their existing knowledge of a player's individualized habits or game play tendencies to maximize the likelihood that a player may buy a loot box. John Breyault, vice president of public policy, telecommunications and fraud at National Consumers League, expressed concern for monetization schemes becoming predatory and the unknowns regarding the impact these schemes could have on younger players.¹²

Loot Box Disclosures

In addition to noting the availability of parental controls, panelists focused on the current form of game disclosures made available by the industry aimed at helping consumers, and specifically parents, make educated decisions about how much time or money their kids spend on games. According to Patricia Vance of the Entertainment Software Rating Board (ESRB), 75% of parents polled reported that the "in-game purchase" notice labels are "either extremely important or very important in helping them decide which games are appropriate for their kids to play."¹³ As the self-regulatory organization that assigns age and content ratings to video games and apps, the ESRB started assigning the "in-app purchases" notice to games in 2018.¹⁴ Vance acknowledged that the in-app purchase notice on games is broad, covering all types of in-game spending. According to ESRB's research, a general disclosure about whether a game features in-app purchases reflects parents' concerns about all in-game spending, and not just loot boxes.¹⁵

For some panelists, however, the broad "in-app purchase" notice appeared to be insufficient, pointing to the industry research as indicative of the industry failing to provide clear information to consumers about loot boxes. Ariel Fox Johnson, senior counsel at Common Sense Media, noted that if the industry is hearing less from parents specifically about loot boxes, this may be because parents are uninformed, stating: "[Parents] are in the dark. They barely understand in-app purchases in general, let alone specific mechanisms like loot boxes." One reason for parents being so in the dark, Fox Johnson suggested was due to ineffective notices¹⁶ and the need for clear labeling of advertising and other commercial content. As part of the discussion, panelists (Haynes and Breyault) offered options to provide more information to consumers beyond the in-app purchase label. These included exploring modifications to disclosures that would indicate a player's average spend on the game after purchase,¹⁷ and providing access to active webpages available to parents pre-purchase, containing detail regarding the content accessible via the in-app purchase.¹⁸

What's Next?

As of October 11, 2019, the public comment period for the workshop is now closed, with 123 comments received.¹⁹ It is unclear what the FTC will do next. In the near term, the future of loot boxes is now likely to depend largely on the new odds disclosure policy proposed by Microsoft, Nintendo and Sony, and the effect this policy will have on the games industry as a whole. Starting in 2020, we can expect some developers to disclose their odds pursuant to this policy, while other developers may increasingly move away from providing loot boxes and pivot towards other business models such as paid subscription services, which are becoming more popular. We still don't know whether the console and mobile platform owners will aggressively police their new policy, or what the real-world consequences will be for non-compliant games. Developers who use a dynamic drop rate/odds system may struggle to comply with the new disclosure rules; these developers may need to leverage technology to make their systems more transparent.

It is important to remember that loot box mechanics in video games are not new: much of the regulatory interest in regulating loot boxes was a direct result of player backlash against companies whose practices were perceived to be unfair. In light of the themes covered during the workshop and the concerns expressed by participants, below are some practical recommendations for developers who use loot boxes or are considering implementing the mechanics in their games. Following these tips may help ensure players are satisfied, and thus help the developer stay out of future regulators' crosshairs.

• Monitor gaming trends and listen to player feedback when a game or mechanic is criticized as "unfair" or "pay-to-win."
• Avoid any of the "dark patterns" described in the FTC workshop, such as punishing players for missed play sessions, or manipulating loot box odds or contents to be more or less desirable based on an individual player's inferred spending propensity.
• Consider ways to make loot box mechanics more transparent and player-friendly, for instance by disabling duplicate items, or instituting a "buy-back" style program where players can trade in virtual items they don't want for other, rarer items.
• Limit the number of items that can be exclusively obtained through randomized mechanics.
• Take extra caution in games that may be appealing to an underage audience.
• Consider other revenue models, such as subscription programs, which are becoming increasingly popular with gamers.

Footnotes