TheMarketForIdeas

Over the course of the last few decades, video games have evolved from being a niche of the entertainment industry to being a major pillar, generating revenues greater than even blockbuster films (Zackariasson & Wilson, 2010). Multinational companies invest tens or even hundreds of millions of dollars into developing the most technologically advanced video games they possibly can. These companies compete primarily on an international level, since only a global market can generate the returns that make such investment worthwhile. There is virtually no such thing as national gaming markets, outside of niched East Asian segments that are culturally alien to the globalized pastiche of Western culture. Another aspect worth pointing out is that the gaming market is increasingly of the “winner takes all” variety, where a product must, without exception, come up to the highest standards of quality for the category that it belongs to in order to have any chance against those offered by the competition (Nieborg, 2011a). These two factors combined mean that any game that is not good enough to achieve international success can be considered a failure.

And, as with any industry that has achieved mainstream popularity, state authorities have been getting more and more involved in the commercial process. For a while now, lawmakers have had a say in which kinds of games can be commercialised in their countries and which cannot, or whether they must be censored first, their justifications ranging from consumer protection to cultural issues. For example, the game Injustice: Gods Among Us was temporarily banned in Kuwait and in the United Arab Emirates upon its release because of the designs of the female characters and the use of the word Gods in the title (Fakhruddin, 2013).

There are numerous reasons why state authorities choose to ban or censor certain games, including depictions of extreme violence, references to controversial events, and, particularly in the United States, issues of political correctness. By far, the most widespread reason, not to mention the one that has the most alarming implications for video game producers, is consumer protection. In order to understand how authorities are currently attempting to protect video game consumers from business practices that they deem predatory and abusive, first, we need to take a look at how video game developers and publishers make money. 

Press X to pay 

The best known and most intuitive business model used in the video gaming industry is the premium model, also known as pay to play. To put it simply, producers who use the premium model sell access to the game’s content. Nowadays, the premium model is used mostly by Triple-A gaming companies. Without going into too many details, Triple-A video games are the gaming industry’s equivalent to A-list blockbuster films. It is a category of video games defined by the high level of professionalism, designed to be played on and to make full use of the most advanced gaming hardware that is widely available. The current market value of a Triple-A video game is around 50 US dollars, most often 60. Triple-A game producers usually sell additional content for their games, called downloadable content (abbreviated as DLC). The cumulated prices of all DLC for one game can equal or sometimes even exceed the price of the base game (Nieborg, 2011b). It is very important to note that the pay to play model is predominantly used by Triple-A developers and publishers primarily because they are the only ones who can afford it. Given that we are talking about premium products, the quality needs to justify the price. At the same time, the competition on the Triple-A gaming market is fierce. Any title that does not have a strong marketing campaign, which may end up costing as much as development, risks going unnoticed by potential buyers. (Tomic, 2017).

As a result, in recent years, a new trend has emerged in the market segment represented by games that are not exactly top of the line, a category of games known by some as Double-A. This was an organic development, in line with advances in payment systems security and adoption rates, or with the development of trusted middlemen like Steam that take over much of the logistics that gaming companies previously had to handle. There were also intermediate fads, such as episodic gaming, that eventually all but disappeared. The freemium model, or free to play, allows consumers to access and play the game free of charge. Producers of free to play games obtain revenues not by selling the game, but by selling privileges within the game through processes called microtransactions, or in-game purchases. Through microtransactions, players can purchase virtual items to use in the game. These items can have purely aesthetic functions (for example, different clothes for the characters) or they can give the player a practical advantage (for example, more powerful weapons). This helps smaller gaming companies deal with constantly rising game development costs, reduces the need for strong marketing of the game (Tomic, 2017) and ensures a steadier stream of revenue.

However, this business practice created a new problem. It is much easier to convince the consumer to use microtransactions when the digital item they are buying gives them a gameplay advantage, so most producers who use the free to play model go for that option. In this case, the more you pay, the easier the game becomes. This is especially problematic in games that have a competitive aspect. Microtransactions create an imbalance between players that many consider unfair, because competitive gaming is supposed to be a test of skill, not a test of disposable income (Tomic, 2017). Customer rebellion in this instance may lead to reduced populations of players and, therefore, lower revenues than with a more balanced strategy. This resulted in the creation of yet another business practice and of yet another problem. 

Skinner box^TM 

One particular form of in-game revenue streams has players purchasing randomly generated selections of digital items, as opposed to items that they get to choose. This type of microtransaction is called loot box, also known as mystery box or loot crate. The name comes from the fact that the randomly selected digital items come “packaged” in a digital box. Granted, the best, most sought-after items are the rarest, but by and large, loot boxes seek to reduce the extent to which microtransactions privilege those who pay the largest sums of money, and thus, the degree to which they are unfair, by adding luck into the equation. The result is that players pay, but do not know what they are going to get in return. For this reason, many consumers have compared loot boxes to gambling (and to issues of addiction and abetting pathologies), and this has prompted governments to investigate the issue. 

Different countries have different takes on this, primarily based on whether the laws consider that customers can lose when they purchase loot boxes. In countries where loot boxes are considered gambling, games that implement them are regulated as such. This depends both on the gambling-related laws of each country and on the particularities the loot boxes system found in each game (McCaffrey, 2019b). In addition, many games that use loot boxes are marketed towards minors, which attracts even further criticism from interest groups, who claim that video game publishers use predatory business practices to exploit an easily impressionable category of consumers (Noonan, 2018) or to profit intentionally from minors abusing payment systems set up in their parents’ names.

Regardless of whether this criticism is justified, loot boxes are a very profitable practice. In 2018, consumers spent a total of 30 billion dollars on loot boxes, and Juniper Research estimates that this number will grow to 50 billion dollars in 2022, despite an ongoing backlash from consumers (Fitch, 2018). So far, the only countries that have taken serious measures to regulate loot boxes are Belgium and the Netherlands. The Belgian Gambling Commission declared that all forms of loot boxes fit the legal definition of gambling and requested that they be removed from the games commercialised in the country. The Netherlands Gaming Authority was a bit more permissive, as it declared that a loot boxes system is gambling only if the game allows the transfer of virtual items received from loot boxes between players. This is because the possibility to transfer a digital item to another player makes way for the possibility to ask for real money in exchange (even if the game’s terms and conditions do not allow this), which leads to in-game items having a real-world market value (McCaffrey, 2019b).

The “loot boxes as gambling” issue does not only affect smaller companies that produce Double-A games. While the free to play model did not carry over strongly to the Triple-A gaming industry (aside from massive multiplayer games with falling subscriber numbers, which switched to a free to play model to survive, or hybrid systems), the practice of microtransactions has. This includes loot boxes. Belgium’s ban on loot boxes caused issues for the Triple-A game publisher Electronic Arts. Their renowned football simulator game series, FIFA, has a feature called FIFA Ultimate Team, that allows players to purchase loot boxes in order to collect digital versions of famous footballers, which they can then use to create a custom team. Initially, Electronic Arts refused to follow the request of the Belgian Gambling Commission, but ultimately accepted in order to avoid a lawsuit. As a result, the Belgian versions of the FIFA games do not have the FIFA Ultimate Team feature. (McCaffrey, 2019b). 

A serious hobby 

So far, I have answered the question “What kinds of trade barriers exist on the video gaming market?”, but an arguably more important question is “Where are video gaming trade barriers headed?”. From the looks of it, the efforts of interest groups seem to still be directed towards microtransactions. Firstly, there is the claim that loot boxes, aside from being similar to gambling (if not legally, then at least morally), also encourage addictive spending (McCaffrey, 2019b). As stated before, when a loot box system is implemented into a game, the most sought-after items are the rarest. As a result, unless they are extremely lucky, consumers are required to make several in-game purchases in order to obtain them.

Then there is the problem of games specifically designed to focus on aggressively extracting maximum value from players. Given that any form of microtransaction that has a practical function makes the game easier, some companies try create unfair incentives to pay. By designing the game’s difficulty in such a way that sustained in-game progress without constantly purchasing in-game items is next to impossible, these companies create what consumers pejoratively refer to as pay to win games. And, again, many of these games are aimed at minors. While it is true that such games tend to do badly on the market (Tomic, 2017), which means that the market is perfectly capable of self-regulation, this has not stopped lawmakers from raising trade barriers concerning other industries in the past. Even though there do not seem to have been any significant pressures from interest groups seeking regulation of pay to win business practices yet, it is not at all far-fetched to assume that there might be in the near future, or at the very least that such regulations might be adopted one way or another. Even with little pressure, there are attempts in this direction – in May 2019, US Senator Josh Hawley announced a bill that aims to ban all loot boxes and pay to win microtransactions from video games “played by minors” (Schreier, 2019). It should be noted that this does not only refer to games specifically made for minors, but also to games that were made for mature audiences and that minors could end up playing (which, to put it straightforwardly, are virtually all games).

Needless to say, pay to win games give the free to play gaming market a bad image. Another thing worth mentioning is that because of this, many fans of Triple-A games have an elitist attitude, aimed not only against pay to win practices, but against the free to play model and every business practice associated with it as a whole. It is almost unanimously agreed among consumers that implementing any form of microtransactions into a Triple-A game is a sign of corporate greed, their reasoning being that, on top of premium prices for the games and for the specialised gaming devices (video game consoles or powerful computers) or services (Xbox Live Gold) to play them on, players are also expected to pay for in-game privileges (Tomic, 2017). The other generally accepted belief among the Triple-A gaming consumer base is the idea that all free to play games are “get rich quick” schemes employed by greedy companies (McCaffrey, 2019a). As a result, another likely possibility for the future of video game trade barriers is the forming of interest groups to pressure governments to take measures against all forms of microtransactions, under the pretext of such business practices encouraging corporate greed. In the worst-case scenario, this regulation could come in the form of Senator Josh Hawley’s aforementioned attempt to ban pay to win business practices.

The possible effects of Hawley’s bill do not only depend on how you interpret “games played by minors”, but also on how you interpret “pay to win practices”. For example, one could say that all microtransactions offering gameplay benefits are pay to win in nature because they make the game easier and, thus, help the player to win, or they assist in removing tedious elements of gameplay which mask shortcuts to power in convenience. 

Sequel in the making 

And this is only the beginning. Currently, there is no telling how the war on microtransactions will evolve. Maybe the sale of in-game digital items will end up being regulated in similar ways to the sale of real-world goods, with minimum and maximum prices. Maybe interest groups will succeed in convincing governments to take measures against microtransactions. In this situation, even the governments that would not choose to ban microtransactions outright might still impose taxes or request for each game to have a system preventing players from spending more than a certain amount of money through in-game purchases in a certain time interval.

One thing is for certain. If the Double-A gaming industry were to go in this direction, the consequences it would create would be disastrous for producers. We have already seen how much money gaming companies make from loot boxes alone. If we look at microtransaction revenues as a whole, a single company earned as much as 3.58 billion dollars a year (Thubron, 2018). More than that, on average, half of a company’s microtransaction revenues come from a very small percentage of its total consumer base (Takashi, 2014). Those consumers are referred to as “big spenders” or “whales” by business analysts. There is little evidence on whether these big spenders are addicted spenders or normally functioning people with a lot of disposable income and limited gaming habits, but there is a lot of debate. With that in mind, it cannot even be said whether implementing a system to combat the whales phenomenon in the gaming industry would be for the better or for the worse. 

Photo credit: pxhere.com. 

References 

Fakhruddin, M. (2013, May 9). Injustice: Gods Among Us Banned in UAE, Kuwait [UPDATE: Nope]. Retrieved from https://me.ign.com/en/injustice-gods-among-us-iphone/66694/news/injustice-gods-among-us-banned-in-uae-kuwait-update-nope.

Fitch, A. (2018, April 18). Loot boxes, skins gambling forecast to generate $50 billion by 2022. Retrieved from https://esportsinsider.com/2018/04/loot-boxes-skins-gambling-forecast-to-generate-50-billion-by-2022/.

McCaffrey, M. (2019a, January 4). Microtransactions and Loot Boxes: Can the Video Game Industry Regulate Itself?. Retrieved from https://mises.org/wire/microtransactions-and-loot-boxes-can-video-game-industry-regulate-itself.

McCaffrey, M. (2019b). The macro problem of microtransactions: The self-regulatory challenges of video game loot boxes. Business Horizons, 62(4), 483–495.

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Nieborg, D. B. (2011b). Triple-A: The Political Economy Of The Blockbuster Video Game. Universiteit van Amsterdam.

Noonan, K. (2018, March 31). Can Video Game Companies Count on Microtransactions to Drive Growth? Retrieved from https://www.fool.com/investing/2018/03/30/can-video-game-companies-count-on-microtransaction.aspx.

Schreier, J. (2019, May 8). U.S. Senator Introduces Bill To Ban Loot Boxes And Pay-To-Win Microtransactions. Retrieved from https://kotaku.com/u-s-senator-introduces-bill-to-ban-loot-boxes-and-pay-1834612226.

Takahashi, D. (2014, February 26). Only 0.15 percent of mobile gamers account for 50 percent of all in-game revenue (exclusive). Retrieved from https://venturebeat.com/2014/02/26/only-0-15-of-mobile-gamers-account-for-50-percent-of-all-in-game-revenue-exclusive/.

Thubron, R. (2018, February 12). Over half of Activision Blizzard's $7.16 billion yearly revenue came from microtransactions. Retrieved from https://www.techspot.com/news/73230-over-half-activision-blizzard-716-billion-yearly-revenue.html.

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Zackariasson, P., & Wilson, T. (2010). Paradigm shifts in the video game industry. Competitiveness Review: An International Business Journal, 20(2), 139–151. Retrieved from https://doi.org/10.1108/10595421011029857.