Canada: Shocking U.S. "Loot Box" Bill Should Surprise No One: The Video Game Industry Under Attack

Last Updated: July 10 2019
Article by Ryan J. Black and Tyson Gratton

Video games are big business: from the latest blockbuster, an indie hit, a mobile time-passer for your transit ride, or a packed esports arena with massive online viewership, there's good money in creating engaging and immersive entertainment products. However, game economics have changed, particularly in the internet era, and developers and publishers have had to pursue revenue by adopting more creative and sustainable monetization models, including up-front, service-based, microtransaction-based, or even ad-based revenue streams. Against this backdrop, and against a negative media and political bias towards video games,1 we have seen an increasing appetite worldwide for governments to step in and regulate the games industry.

So it comes as no surprise that, even in the United States, the federal government has made a move to protect the populace from perceived exploitation, even if the new legislation, a bill from Republican Senator Josh Hawley and endorsed by two Democratic senators, is shockingly broad in its application.

Background — The Current State of Games and the Rise of In-Game Monetization

In 2018, digital games and interactive media revenues grew 13% to reach USD$119.6 billion. To put that in perspective, that is more than ten times the global recorded music industry (USD$19 billion [+9.7%]) and rapidly approaches the vaunted global film industry (USD$135.6 billion [+2.5%]).

With competition for consumers' entertainment time at a fever pitch across many converging industries,2 game developers are under immense pressure to deliver immersive, compelling, perfectly-executed games that take full advantage of the latest technology. In the past twenty years, average game development costs have increased approximately ten times to USD$90 million while retail prices for AAA console and PC games have remained relatively stagnant (drastically decreasing when taking into account inflation) at approximately USD$60. Further, these development costs do not take into account marketing costs which are regularly 80-100% of the development budget for console and PC games and 300%-1,000% of the development budget for mobile games.

These competitive pressures combined with rising costs and the remarkable persistence in the general price for AAA titles has driven developers and publishers to seek alternative business models and creative revenue streams to remain profitable. In fact, one such alternative model is known as "free-to-play" or "freemium", defers the traditional up-front cost of acquiring a game for revenue is generated via a collection of other methods such as in-game advertisements and microtransactions that can include controversial "pay-to-win" mechanics and "loot boxes".3 Many games that have an up-front or subscription fee also deploy these microtransactions.

For the uninitiated, microtransactions are in-game transactions using real currency (or by either watching an in-game advertisement or spending virtual currency that was acquired through effort or real currency) whereby users can purchase virtual goods ranging from purely cosmetic items, to boosts or gameplay advantages, to additional playable content. When those virtual goods afford the user with some advantage over those users who do not purchase the item, this is considered a "pay-to-win" mechanic. "Loot boxes", on the other hand, are a type of in-game microtransaction whereby a user effectively purchases (again, with virtual currency, real world money or by watching advertisements) a chance to win a virtual good, or some other advantage (though the term is sometimes more broadly defined to include any random or "black box" set of virtual goods or advantages that, through microtransaction or in game effort, can be acquired by players).

Developers have employed psychologists, economists, and human behaviour experts to maximize player engagement with their products via high pressure, data driven, and arguably addictive methodologies. These methodologies spread quickly throughout the industry as developers follow the examples set by the highest grossing titles. Free-to-play titles accounted for over 80% of all digital games revenue in 2018 and it is no coincidence that the highest grossing game of 2018, Fortnite (USD$2.4B), is one such title. In fact, of the 10 titles that grossed over USD$1B in 2018, 9 were free-to-play. This, of course, encourages other companies to follow suit with their own games.

It is no surprise that, now that in-game monetization has reached this level of success, the business practices of the game distributors and publishers have come under the close scrutiny of regulators and consumer organizations around the world.

The Proposed Legislation — Much More than Just Protecting Children from "Loot Boxes"

Hawley's bill purports to "regulate certain pay-to-win microtransactions and sales of loot boxes in interactive digital entertainment products", and would make it illegal for a game publisher or distributor to make available a "minor-oriented video game" containing pay-to-win microtransactions or loot boxes. It also prohibits making available an "interactive digital entertainment product" even if it is not minor-oriented, if the game contains microtransactions that are pay-to-win or loot boxes, in situations where the publisher or distributor has "constructive knowledge that any of its users are under the age of 18".

Defining "interactive digital entertainment product" and "minor-oriented video game" very broadly, the bill looks substantively at the product in question, for example, determining a game to be "minor-oriented" if its target audience is individuals under the age of 18, as demonstrated by its subject matter, visual content, music/audio, use of animated characters appealing to minors, age of characters or models in the game, presence of celebrities who are under 18 or who appeal to those under 18, the language and content of advertising used, and other empirical evidence about the composition of the product's audience, either actual or intended.

The "minor-oriented video game" prohibitions of the bill may not, themselves, represent a true industry barrier. Despite popular impression, microtransaction games generally do not target their game at children: children are not as likely as adults to stick with a game (and tend to head to the most recent or popular game), and they do not spend as much money adults, whose greater disposable income and brand loyalty makes them a much more attractive audience.

Instead, it is the bill's stretch beyond games targeted towards minors and instead to games that could be played by minors that should cause concern. It is well known that popular games are played by those under the age of 18, as a NewZoo study found that two popular games (Epic's Fortnite and Bluehole's PUBG, both of which heavily feature microtransactions) had majority player populations between the ages of 10 and 30, with between 10 and 20 percent of players identified as "students" (And we note that both games have terms and conditions that anticipate those under 18 must required to obtain parental permission to play).4 Specifically, there are features of this proposed legislation that affect games more broadly than the "children's loot box bill" unofficial moniker would suggest:

  • the bill prohibits games with loot box or pay-to-win microtransactions that are constructively known to have players under 18 (presumably, even if the publisher or distributor takes efforts to exclude them), and while this constructive knowledge is not legislatively defined, merchandising, streaming viewership audiences, third party studies, and forum activity may count towards it5;
  • the bill's definition of transactions includes not just transactions where the player pays the money, but anyone gives value to the distributor or publisher (or an affiliate or anyone for their benefit) if the transaction could also be conducted by the payment of money; and
  • the definition of a "pay-to-win" transaction is incredibly broad, focusing on progression through the game by easing progress, assisting achievements, or obtaining or elongating access to awards that might otherwise taken be away — in each case even if these can be done without purchase.

As such, the bill is very broad in its reach, perhaps to a point where a court would not find it enforceable. We note, for example, that not even adult-oriented businesses are prohibited from offering services where it is constructively known that minors participate (for example, a bar or adult entertainment website must exclude minors if known but must certainly know that minors do participate from time to time). There is a long line of cases in the United States that establish, in the trading card space and under federal racketeering legislation that purchasers who buy a pack of cards without knowing the contents are not aggrieved if they chase rewards, because the purchaser is receiving exactly what they bargained for: a random assignment of cards including a chance for higher-value cards. Finally, while regulating games based on their content is questionable enough under the very strong U.S. First Amendment, we find the definition of "minor-oriented video games" to be problematic on its own, not clearly differentiating games that appeal to minors as opposed to people in general — many games strongly preferred by adults (such as King's Candy Crush Saga) feature many of the listed elements.

Footnotes

1 The World Health Organization, for example, voted on May 26, 2019, to add "gaming disorder" to its international classification of diseases. This addition is very controversial, as the science is definitely out on whether compulsive gaming is its own disorder or simply a symptom of other disorders such as depression, ADHD or anxiety.

2 For example, consider this quote from Netflix's 2018 earnings report: "We compete with (and lose to) [Epic's game] Fortnite more than HBO", also noting that "consumer screen time" is its most valuable metric.

3 Famously, one of the first microtransactions to attract negative consumer attention was a US$2.50 purchase for an offline game, whereby players of Bethesda's The Elder Scrolls IV: Oblivion could acquire armour for their virtual steed, a purely cosmetic item.

4 These statistics ignore the massive and increasing viewership audience for games such as Fortnite, which audience of course includes children. Famously, video game streamers such as Tyler Blevins aka Ninja make 8-figure incomes from streaming gameplay to viewers.

5 Generally, constructive knowledge is defined under case law, at least in Canada, as "knowledge of circumstances which would indicate the facts to an honest person, or knowledge of facts which would put an honest person on inquiry".

Please click here to view the full article.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2019

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions