How Game Publishers Can Survive Loot Box Regulations

Are loot boxes the same as gambling?

Every day, I squeeze half a lemon in my salad. The remaining half-lemon exudes a zesty fragrance in my fridge, awaiting the next day’s salad. One lemon — two salads. As a long-time salad maker and video game enthusiast, it seems to me that game publishers are squeezing their lemons too hard, leaving no lemon for the next day’s salad. They rely on addictive game-mechanics such as loot boxes to make money despite the looming risk of regulations, e.g. Hawaii’s new bills proposing to forbid the sale of loot-box games to those under 21.

Loot Boxes in Activision Blizzard’s Overwatch.

The Psychology of Loot Boxes

Mobile game publishers harness insights from behavioral psychology to maximize player engagement and increase money spent on in-game purchases. This is probably not quite what psychologist B.F. Skinner had in mind when he discovered reinforcement schedules. Skinner found that a variable-ratio schedule of reinforcement (or reward) is the most resistant to change, i.e. the most addictive. In a variable-ratio reward schedule, an unknown number of attempts may lead to the grand prize. This uncertainty leads us to keep trying, because “just one more” could do the trick. We see this used most prominently in slot machines but research indicates that mobile games may create even greater addiction by giving developers more tools to interact with users. Skinner envisioned his findings leading to a utopia of social justice and well-being realized by the control of our own behavior and expressed his disapproval with gambling.

Loot Box Regulations

While disruption or growth in other industries is led by increasing value or reducing cost, gambling mechanics in mobile games contribute little to users’ experience. Not surprisingly, many in the gaming industry decry this trend. Not least, publishers’ lemon squeezing may have awakened dormant regulators prematurely, placing mobile gaming growth at risk. Mobile gaming growth is already declining — from 30% Y/Y growth in 2017 to 14% in 2018. In March, China began limiting video game releases to alleviate societal ailments of myopia, addiction, and a sedentary lifestyle. The new Chinese censorship left even domestic giant Tencent out to dry with no new releases in 2018, although there are signs that the ban will be lifted soon. Tencent has begun taking measures to appease the Chinese government — by using face recognition and ID card logins to prevent children from overplaying.

China is not alone in its regulatory backlash. The Belgian Gambling commission recently scrutinized the loot box system in EA’s Battlefront, a Playstation 4/X-box One game. Although the proposed sales ban was not enforced, the pivots forced upon EA caused them to miss their sales targets and lose 8% of their stock value over one week. Recently, EA decided to take a stand against Belgian legislators and claim that their loot boxes are not gambling, which could launch a legal battle with important precedents. EA’s stance seems clear as their recently launched massive hit “Apex Legends” is also free-to-play and monetizes with loot boxes.

To summarize, the proliferation of smartphones with app-stores has made it easier for game publishers to reach millions of potential players, which has resulted in an oversupply of mobile games. Even classic PC developer Blizzard is moving Diablo to mobile because it sees an opportunity to expand its audience or simply catch up with the trends. If regulations hit and loot boxes are banned, many publishers, including heavy hitters like EA and Blizzard, will be in trouble.

4 Strategies for Publishers to Prepare

While regulators decide whether loot boxes should be banned, here are four suggestions for game publishers to adjust their strategies and hedge:

  1. Increase transparency into the mechanisms of loot-boxes to gain players’ trust. In tandem with regulations, gamers will become savvier and disdainful of opaque monetization strategies.
  2. Seek durable long-term revenue channels by diversifying value for gamers beyond the thrill of loot boxes. For example, through e-Sports, in-game socialization, or subscription services for high-quality content.
  3. Innovate in the selection of products that are available for purchase in-game. For instance, in large MMORPGs like World of Warcraft, a booming economy of trading in-game items exists. If players could sell virtual items to each other for real currency, Blizzard could monetize by charging a commission on each transaction. Blizzard has chosen to forbid buying virtual goods with real money on WoW but publishers may choose to leverage this option in the future.
  4. Seize the opportunity to tailor content for China. Publishers that satisfy the Chinese government while providing high-quality content to gamers will secure a long-term market position (in China). This approach is bolstered if more countries follow suit with their own gaming regulations. To tackle this, game publishers could think about building games that encourage parents and children to play together since most parents to gaming children in China were raised in a less affluent China than their children, with less internet access.

Thanks for reading!