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ESA: We can't go to the "lowest common denominator of government" on loot boxes

Mike Gallagher warns against "over-reactions" to loot boxes influencing the industry

Entertainment Software Association president Mike Gallagher highlighted loot boxes as one of the biggest challenges facing the games industry today. However, Gallagher told the audience at the Nordic Game Conference that recent opposition from gambling authorities in Belgium and the Netherlands shouldn't sway the industry's right to self-regulate.

In his talk, Gallagher focused on loot boxes as "monetisation tools and business models" that have created an issue for the industry to tackle. In terms of importance to the future of the games business, the ESA's president and CEO placed loot boxes alongside the World Health Organisation's attempt to introduce "gaming disorder" as a recognised disease, and the Trump admininstration's investigation into the links between video games and gun violence.

The talk opened with a tribute to growth of gaming, in terms of both audience size and dollars earned. The industry's creativity and innovation around monetisation tools and business models has been absolutely central to that growth, Gallagher argued, but that is now under threat.

"Video games never take money from a player and leave them with nothing. They never do"

"This is something that our industry is really, really good at," he said. "It's one of the hallmarks of our success: how we engage consumers, and build a business model around our products that is dynamic, exciting and, at the end of the day, profitable. But it's done in a way where the gamers are pleased with how we interact with them.

"But today, one particular business model, loot boxes, has come under intense scrutiny, and it has come under that scrutiny because of these forces I've shared with you: intense cultural engagement, relevance, the economic connection; all of these forces, when you align them together, lead to the interest of government."

The notion that the industry always handles business models in a way that leaves gamers "pleased" might be something of a reach, but Gallagher's position is rooted in the ability of companies to respond to issues and refine their practices. Today, though, several governments around the world are seeking to classify loot boxes as gambling, taking power away from the industry. This, Gallagher said, "challenges our industry's freedom to innovate, and impairs our ability to continuously test new business models, which drive creativity and engagement with our audience."

One common aspect between each of the challenges Gallagher laid out was a lack of understanding or education to the opposition view. This is the case with the would-be regulators of loot boxes, he said, who don't understand that similar mechanisms and tools have existed in games for "a long time" - upon saying this, Gallagher elongated the "o" in "long" for effect. They also look past the fact that loot boxes are optional; games with loot boxes can be played and enjoyed in full without the need to interact with those systems.

"The controversy erupted in November, and by April 1 we had implemented significant changes to the ratings system in the US"

"Most importantly, these in-game transactions are not gambling," Gallagher continued. "Video games never take money from a player and leave them with nothing. They never do. Players always receive an in-game feature that aids in customising their experience... When you look at the definitions of gambling throughout the world, and how this is done and how it's regulated in places like Las Vegas and the US, it's quite different to the mechanism with loot boxes in games.

"That conclusion has been reached - in other words, that this game mechanic is not gambling - by the Entertainment Software Ratings Board in the US, by New Zealand's gambling authority, and by the UK's gambling authority."

There are, he conceded, "other views" on this matter, specifically those of gambling commissions in Belgium and the Netherlands - the existence of which do cast some doubt over Gallagher's assertion that "definitions of gambling throughout the world" do not match with any of the current implementations of loot boxes. On this point, Gallagher reasserted the situation in the US, where it is up to the developer to choose their business model, and to shape that model according to "instantaneous feedback" and "the consumer telling you if something is right or wrong by their participation."

"Those that get it right will be rewarded," he said. "Those that don't, won't."

The industry's role now, he continued, is to educate "leaders and policy makers" about the "ratings and parental tools" that exist to protect players, ensuring that content only reaches a suitable audience. He pointed to the International Age Rating Coalition (IARC) as evidence of the industry's commitment to self-regulation, and in particular to the protection of children - a key issue for both the Belgian and Dutch commissions in their positions on loot boxes.

"IARC, and the parental tools in video game hardware, they represent our industry's commitment to children, and to getting it right with policymakers," Gallagher said. "We do this ourselves, we do it proactively and voluntarily, because we know it's how we're going to grow our market responsibly."

Certainly, the ESRB did respond to the burgeoning controversy around loot boxes with the introduction of a label for physical games that contain loot boxes. Speaking to GamesIndustry.biz in the Q&A session after his talk, Gallagher highlighted this as an example of the process of self-regulation that the industry should be free to exercise.

"We can't go to the lowest common denominator of government around the world, and make that the standard the rest of the world has to live by"

"Those were done relatively quickly by ratings history standards," he told us. "The controversy erupted in November, and by April 1 we had implemented significant changes to the ratings system in the US that were designed exactly to address the challenge - which is, what are we doing proactively, on our own as an industry, to respond?"

However, the Dutch and Belgian rulings at least poses the threat of an EU-wide stance that could designate some implementations of loot boxes as gambling. Peter Naessens, director of the Belgian Gambling Commission, told us that, while a "European-wide common approach" is not a guarantee, "there is at least a common concern among regulators about those loot boxes and the use of gambling mechanisms in video games, so it will be up for discussion." Rob Fahey also recognised the danger in a recent column, warning that, "the similarity in the Dutch and Belgian rulings suggest that the outcomes in many other countries will be equally unfavourable."

The General Data Protection Regulation that is currently clogging inboxes everywhere illustrates that, in a global digital marketplace, legislation in the EU can have repercussions for companies all over the world. We asked Gallagher whether, with that in mind, the industry shouldn't regulate loot boxes in the direction of least resistance, based on the definitions of gambling in the countries most clearly opposed.

"When you look at these other decisions, we can't go to the lowest common denominator of government around the world, and make that the standard the rest of the world has to live by, and limit the trajectory of the industry," he said. "That's not the best approach. Instead, we believe it's best to be clear about the facts, and make sure those carry the day around the world, so we drive an outcome that best extends the [games industry's] frontiers and looks after the interests of gamers.

"In the US, [loot boxes are] not gambling for more than the reason I put here. The other one is it's not converted to value in the world. It can only exist in the digital world - that's the component that many of these definitions look at... There's not an exit path, to turn that into something outside of the game.

"We have both of those [reasons] present, predominantly, for loots boxes and in-game transactions around this industry. So going to the one or two isolated over-reactions, seeing how those over-reactions play to one or two governments, and then making that the standard and doing that industry-wide? That's not going to be productive for the industry, or for gamers.

"Let's inform first, continue to self-regulate, and move ahead that way. It's worked great for us over the last 20 years. That's the prescription we should use going forward. There's additional things we can do, and we'll look at those over the course of time... But it's only been since April that we've implemented the change. We should give it a chance and see how it plays out."

GamesIndustry.biz is a media partner of the Nordic Game Conference. We attended the show with assistance from the organiser.

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Matthew Handrahan

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Matthew Handrahan joined GamesIndustry in 2011, bringing long-form feature-writing experience to the team as well as a deep understanding of the video game development business. He previously spent more than five years at award-winning magazine gamesTM.
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