Loot boxes and the European fight on parallel markets: a bias against online videogames?

, by Afonso Ferreira

Loot boxes and the European fight on parallel markets: a bias against online videogames?
CC Blizzard Entertainment

Our author Afonso Ferreira develops the economic models of the video games industry, and how and why it could inspire the EU and European digital economy.

The online videogame industry is a big one. Games like League of Legends pull around 27 million players to Summoners’ Rift every single day. Although certainly past their prime, massive role-playing games like World of Warcraft are still going strong, with the biggest titles carrying around 5 million monthly subscribers. And the phenomenon is not stopping.

In 2016, Blizzard Entertainment released Overwatch, an incredibly popular cartoonish first-person shooter. This October, Blizzard proudly announced that they had sold 35 million copies of the game. At 40€ per copy, the math becomes easy. High-budget online videogames are highly profitable.

Europe is no exception. In the second quarter of 2017, 47% of people were expected to have played a videogame. Gamers between 11 and 64 years spent, on average, somewhere between 6 and 9 hours per week playing games. In 2015, European consumers spent around 20 billion euros on videogames – around 30% of videogames sales worldwide.

Of course, and even with good sales, games still must make a profit, especially considering the high costs for development. In fact, most online videogames are F2P, or free to play. This means users will freely download them and access most areas of the game without ever needing to spend a single euro. However, studios keep producing fresh content to satisfy the masses. This happens because of a relatively new technique of game selling – the existence of microtransactions.

A new source of profit for videogame studios

Microtransactions are the purchasing of in-game items with real currency. Commonly, the user will only be purchasing cosmetic items – so-called “skins” – which bear no gameplay advantage but allow the character to present themselves in a certain way to the rest of the gaming community.

However, some games allow the purchasing of items which do give out a specific advantage to their users, effectively undermining the principle of F2P on which some of these games are based. Middle-earth: Shadow of War, an AAA-title released this year based on JRR Tolkien’s hugely popular Lord of the Rings franchise, allows players to purchase orc soldiers for their armies which may give them huge advantages in gameplay.

These items – whether merely cosmetic or advantageous for the player – are divided by levels of rarity. As such, they may attain high values in actual currency in secondary marketplaces. In games like DOTA 2, for example, it is quite common to see some skins being sold at more than 200€ apiece.

In games like World of Warcraft, skilled players may craft items which are then sold in marketplaces for in-game currency which can be easily traded for actual, “real life” money. It is easy to see, then, the potential for parallel marketing in this situation. Players can sell their items at inflated prices, and buyers will likely purchase them, considering the rarity level of the products.

This system is further abused by the phenomenon of loot boxes. A loot box is a bundle of items that players can purchase in games like Overwatch, League of Legends or Hearthstone, typically low priced. A system derived from Japan, where it receives the name of “gacha” in honour of the popular Pokemon-like toy vending machines, each loot box has a small chance of containing an item of higher rarity than most. As such, in cases like “legendary” items which are only obtainable during seasonal events, it is not uncommon to see people buying fifty or one hundred loot boxes in the hopes of obtaining that sweet, special item. If they do not get it, those who do will later sell the items in secondary marketplaces, profiting immensely from what is a purely chance-based system.

What could the European Union do?

Abuse is obvious – videogame studios can control the rate at which rare items are found, thus ensuring steady purchases of loot boxes and the existence of high prices in secondary marketplaces, from where they take a cut of the profits. It is due to these worries that China announced last year they would require online videogames seeking to set servers in Chinese territory to publicly state the “rarity rates” in their loot box systems.

By doing so, the country seeks to fight this phenomenon of non-traditionally taxable, parallel marketing in what is essentially a fully-fledged digital economy. In fact, some in the videogame industry have pointed out that this measure may not have practical effects outside China, since studios are freely able to increase the rate for the finding of rare items in China, where disclosure is mandatory, and keep it variable according to secondary market policies in other territories, where users play in different servers and are thus subject to a different economy.

I fully believe that the European Union should adopt similar measures. Firstly, because the Juncker Commission described as one of its goals the regulation and strengthening of the European digital economy. In this domain, the Commission has worked with the other European institutions to pass measures relating to geo-blocking, copyright reform and digital taxation.

This last problem is particularly important, and it is here where most regulation will be needed. Member States have been trying to encounter new ways to lawfully tax digital commerce. Considering the intrinsically transnational nature of digital economy, European regulation in these issues is logical. As such, and if the European Union also wants to fight parallel markets, then the regulation of microtransactions – or at least the adoption of measures seeking to guarantee their independence – makes sense.

Western culture highly penalizes videogame players

Why, then, has nothing happened yet? In my opinion, the answer is largely cultural. Videogames are still very frowned upon as a means of entertainment, and to say that they merit market regulation will more than likely elicit a few nervous chuckles from your audience.

The problem is not only with the typical, false and profoundly sexist imagery of the videogame consumer as a male teenage nerd who is a shut-in in his parents’ basement, and, as such, as a person without buying power and no effect on the economy.

Of course, and contrary to popular opinion, this is not true. Studies show that most videogame players are between 45 and 64 years old; and, in countries such as France, there are actually more female videogame players than male.

It is also an issue of where to place videogames in national economies. One recalls, for example, when, in 2011, Donald Tusk, at the time prime minister of Poland, gifted a copy of The Witcher 2 – a videogame entirely produced in Poland, and based on the works of a popular Polish author, which has sold around 8 million copies worldwide – to Barack Obama during a state visit. Obama was understandably surprised when Tusk described CD Projekt RED, the Polish studio responsible for development, as an example of the stronghold that Poland wished to be in the digital economy.

He was not alone. The most common reactions were of surprise – surprise that a videogame could play such an important role in the economy of a country as to be awarded to a head of state during a state visit. And yet, culturally, we keep undermining this incredibly important industry, even as we describe, somewhat futuristically, a “sharing economy” based upon ideas which were commonplace in World of Warcraft, with its crafting and selling system, when the game launched in 2004.

The European institutions would likely be derided by Member States, the media and political actors, were it to attribute meaningful resources to the regulation of online videogame marketplaces. And yet, we are not regulating an issue which potentially moves millions of euros every single year, on online videogames with servers based in European territories, possibly causing a parallel market issue which completely disregards any kind of effective and lawful taxation, as well as allowing predatory pricing behaviours from industry titans.

Nothing will, however, likely happen. It seems much more exciting for the European Commission to focus itself on the “futuristic” world of driverless cars and the sharing economy than in issues which, at least in the mainstream public eye, affect only a sub-culture of easily mocked teenagers.

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