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What happens if loot box regulation passes into UK law? | Opinion

Reed Smith's Emily Daniels and Hunter Thomson offer tips on how to stay ahead of any future legal restrictions

The Children's Commissioner for England is calling for the reclassification of loot box mechanics as gambling, the introduction of spending caps, warning labels, age verification, and more in a report published last month on the impacts of online gaming for children.

The Commissioner's report, Gaming the System, contains a number of recommendations to protect children from the social and financial harm that can be inflicted by online games, adding further pressure on the UK Parliament and other video games industry stakeholders to take action. It closely followed the UK Parliament's Digital, Culture, Media and Sport Committee (DCMS) report on immersive and addictive technologies (Immersive Technologies Report), echoing a number of similar sentiments.

Emily Daniels, Reed Smith

Gaming the System contains a number of extracts from interviews with children, who were given the chance to express their views on a variety of aspects of online gaming such as addictive mechanics, in-game spending, and loot boxes. Some children reported social pressure to keep up with friends' progress in respect of in-game purchases -- "You don't want to be the one left with no skins..." warns a 15-year-old Fortnite player.

As with the Immersive Technologies Report, Gaming the System recommends the regulation of loot boxes under UK gambling laws, but goes further by calling for wider action on in-game harms. Both reports join a chorus of European regulators and politicians (the French consumer protection agency (DGCCRF) and gambling regulator (ARJEL) in 2017, the Spanish gambling regulator in 2018, and several members of the German Parliament in 2019) pushing for greater legal scrutiny of loot boxes.

However, these attitudes are not universal -- countries such as Russia and Poland are currently showing little interest in classifying loot boxes as gambling. We are yet to see which approach the UK will take.

Loot boxes as gambling

"While some will lament the regulation of loot boxes as gambling, others will see opportunity"

It's currently unclear whether the UK's gambling law will be amended to specifically regulate loot boxes in line with the Children's Commissioner's recommendations. Interestingly, neither the Children's Commissioner nor the DCMS recommended (or even discussed) an outright ban on loot boxes. This means that, even if the law is changed within the next few years, it is more likely that these changes will lead to restrictions on the implementation of loot boxes, rather than a blanket ban. The impact on the video game industry of the regulation of loot boxes under gambling laws would, however, have a substantial impact.

Legally defining loot boxes as a form of gambling would require video game companies to obtain and maintain a gambling licence in order to implement or continue using loot box mechanics, unless the mechanics are tweaked to circumvent the requirements -- for example, by introducing a loot box 'minigame' or other element of skill as a prerequisite for obtaining a prize. Even then, as the Gambling Commission enjoys a wide discretion when granting licences, there is no guarantee that a licence application would be successful.

Companies would also need to comply with gambling regulations on transparency, duty of care, and age restrictions -- further increasing compliance costs. Needless to say, these obligations place real economic and administrative burdens on video game developers who may have to think twice about including loot boxes in their games.

The effects of regulating loot box mechanics as a form of gambling would likely hit smaller and indie video game publishers and developers hardest. The significant increase in compliance costs associated with implementing loot boxes would, at best, hinder the growth of nascent businesses and, at worst, raise barriers to entry and impede competition. From a purely economic perspective, the allure of the 'freemium' monetisation model with loot box options is often irresistible, but would likely only be viable to those with pockets deep enough to obtain a gambling licence.

"The 'freemium' model with loot box options is often irresistible, but would likely only be viable to those with pockets deep enough for a gambling licence"

Another issue to consider is that once a physical game is found to include gambling content, the PEGI system imposes a 'gambling' content descriptor. While this content descriptor is intended for simulations of games of chance that are normally carried out in casinos or gambling halls (roulette, blackjack, etc.), the VSC Rating Board (the UK body responsible for applying UK PEGI ratings) may be inclined to apply the 'gambling' content descriptor to video games that include loot box mechanics if these mechanics become classified as gambling under UK law. This is likely to have some impact over consumers' (particularly parents') purchasing decisions, restricting the scope of a title's target market.

Conversely, the move may lead forward-thinking publishers and developers to create new and innovative monetisation solutions, or improve existing ones. Loot boxes are arguably the most popular monetisation mechanic today, given their compelling and dopamine-inducing combination of anticipation and surprise. However, monetisation mechanics that explore the new science of motivation which draws on ideas of autonomy, mastery, and purpose rather than 'carrot and stick' are currently underdeveloped. The rapid pace of the games industry provides developers with a quick feedback loop to determine player preferences. While some will lament the regulation of loot boxes as gambling, others will see opportunity.

In-game solutions

Gaming the System advocates a special level of protection for children in relation to in-game harm. The Children's Commissioner's recommendations include:

Tighter Age Restrictions
Age ratings on digitally distributed games with strict enforcement, potentially through age verification.

Hunter Thomson, Reed Smith

Age verification is notoriously costly, time consuming, and difficult to implement in practice, partly due to data privacy concerns, with the recently abandoned plans to use age verification for online pornography illustrating these difficulties. This recommendation complements the proposals made in the DCMS Online Harms White Paper, which recommends a code of practice to ensure children are prevented from accessing age-inappropriate content.

Gaming the System also notes that the Information Commissioner's Office (ICO) is currently exploring what (if any) age verification requirements will be imposed on online platforms as part of the forthcoming age appropriate design code targeting the use of personal data by such platforms.

Warning Labels
Labels that alert consumers that a digitally downloaded game contains spending features, similar to the ratings currently used for physical copies of games.

This recommendation appears to be a proportionate measure that will go some way in protecting minors from games that involve additional spending opportunities. Some of the children interviewed in the report expressed regret at "wasting" their money, with one child reportedly buying 50 Fortnite skins in a bid not to stand out as a "poor kid."

"The continued growth and popularity of the video game industry has drawn attention from the regulators who are changing the rules"

Critics are likely to argue that warning labels will have little effect on children's spending habits, particularly given the social pressures involved in playing and maintaining progress in certain titles (which can often involve parting with cash). Given the wide range and prevalence of potential microtransactions (season passes, expansions, DLC, 'insert coin to continue'), warning labels are more likely to achieve their intended goals if they provide sufficient detail on the type of microtransactions players will encounter.

Caps and Tracking Tools
A maximum daily spend limit (enabled by default for children) and tools enabling users to track their historic in-game spend.

Loot box mechanics are estimated to generate over £700m of revenue in the UK alone. If spending caps and spending trackers are mandated, video game profitability would likely take a significant hit. This effect was clearly illustrated by the dent in online gambling operator share prices following the recent publication of the All-Party Parliamentary Group for Gambling Related Harm's 'Interim report into the Online Gambling Sector', which calls for an upper limit on the stakes for online slot machines (similar to the £2 limit introduced for physical fixed-odds betting terminals earlier this year) as well as a "root and branch" overhaul of the Gambling Act 2005 to ensure it is fit for purpose in the digital era.

Spending caps may also be difficult to implement in practice: unless applied irrespective of age, video game publishers and developers will encounter the same problems that arise with age verification (i.e., how do I know if a gamer is underage?). Poor implementation could lead to quantifiable upper limits on the in-game purchase revenues derived from a particular game, potentially handicapping UK publishers and offsetting the benefits of the UK Video Games Tax Relief scheme.

Striking a balance

Parliament will face a number of challenges if it decides to implement the Children's Commissioner's recommendations. A deft touch and stakeholder engagement will be crucial to ensure the Children's Commissioner's laudable goals are achieved in a proportionate and balanced way that avoids imposing high barriers to entry for new indie developers or stifling the UK video games industry's competitive edge.

Video game developers, publishers, and platforms must now join the gaming and gambling service operators in keeping a vigilant eye on the wide range of proposals and developments being introduced on the subjects of gambling and the Gambling Act, Online Harms, protection of children, and data privacy. Arguably the most important development will be the ICO's forthcoming Age Appropriate Design Code which will include guidance on how to communicate game content, including age-restricted settings, to child players. Stakeholders will benefit from participating in lobbying efforts and the conversation more generally at an early stage, but also by internally considering the potential impacts of implementation on their current business models.

The continued growth and popularity of the video game industry has drawn attention from the regulators who are changing the rules of the game. Developers and publishers who keep up will do well. Those who stay two steps ahead will reap the biggest rewards.