Self-regulate loot box mechanisms - while you still can

Back at the start of January, prompted for a prediction for a major event that would hit the games business in 2018, I pointed at the slow but steady rumbling about loot boxes and real-money transactions that's been coming from various different governments around the world. As the industry has cast about for new business models to fund its products, it was inevitable that it would try out some things consumers detested, and fairly likely that it would hit upon some ideas that would give legislators and regulators pause; with loot boxes, it seems, we have reached the crucial point where those two things intersect.

This week both the Netherlands and Belgium ruled that certain implementations of loot boxes in high-profile console games are in breach of gambling regulations, and made note of being pretty unhappy with other implementations, too, even though those don't technically breach the rules at present. Investigations in other European countries are underway; the similarity in the Dutch and Belgian rulings suggest that the outcomes in many other countries will be equally unfavourable.

"The similarity in the Dutch and Belgian rulings suggest that the outcomes in many other countries will be equally unfavourable"

There is absolutely no joy in an "I told you so" at this juncture, because for all that a vocal set of consumers despise these business models - and even acknowledging that I personally find them distasteful and exploitative - it's a sobering reality that quite a lot of games industry jobs, and even some entire studios, rely on the revenue these systems create. It's not as simple as saying, "if these systems are banned, X number of jobs will be lost"; there are ways to mitigate the impact, options studios and publishers can pursue, backup plans wise managers will be working on now. That doesn't change the fact that the Dutch and Belgian rulings, and the likelihood of these rocks preceding an avalanche, are very serious indeed and are going to create instability, stress and heartache for plenty of people across the industry.

Taken in isolation, the judgements don't seem all that troubling - a headache for certain companies and products, sure, but nothing earth-shaking. The Netherlands and Belgium are decent-sized markets, but not so big that being banned from them would seriously impact a major publisher's bottom line. And the rulings are specific to a sub-set of console games implementing loot boxes in very specific ways.

The real fear, of course, is that these judgements precede the emergence of a cross-European consensus against loot box mechanisms, something which both governments hinted at in their statements. While regulations on gambling differ significantly across EU member states, there are points of commonality both in law and in political will. And with the United Kingdom, often a strong advocate for a more laissez-faire approach to business regulation, losing its voice within the EU next March, the possibility of European regulation of industry business models needs to be taken very seriously.

There are two key aspects of the judgements that should give the industry particular pause. The first is that while they refer specifically to a small number of console games - reflecting the fact that legislative and regulatory interest in these systems has been spurred by consumer backlash to these systems in console games such as last year's Star Wars: Battlefront 2 - the adjudications could be applied pretty seamlessly to a lot of smartphone games. Certainly, the core reasoning being applied here is threatening to a lot of smartphone game business models, and it's likely that any cross-European consensus on regulation would end up ensnaring mobile games alongside the console games that are the current target.

"It's time to get cracking on Plan B... Know how you would step away, if you suddenly found yourself forced to do so"

The second aspect is less technical and specific, but arguably far more worrying for the industry. Both adjudications made a very prominent point of calling out the appeal of these systems to minors, the lack of any major effort on the part of game companies to keep gambling-like systems out of reach of minors, and the fact that this greatly deepens the seriousness of the issue from a regulatory point of view.

Moreover, it was emphasised in both cases that even where games didn't technically step over the line of "gambling", the regulators were concerned about the potential impact on minors of the "gambling-esque" systems being employed - implying that there is scope for tougher rules on these kind of random-draw gameplay systems and business models for titles which are accessible to children. That in itself is concerning; what is perhaps more concerning is that the judgements in both jurisdictions were very much in sync on this point, suggesting that other regulators around Europe are quite likely to reach similar conclusions.

That's where this issue starts to cross over from being a potential legal headache into being a potential political minefield. The games industry will lobby to protect its business interests, and it'll have some reasonable points to make; after all, while loot boxes may cross lines in a few places, there's scope for self-regulation (though realistically, that should already have happened, and the industry's frankly dismissive response to these issues thus far - especially in the United States - bears much of the blame for this situation having reached the point of government intervention).

Games are a big business in Europe, with many countries having successful development industries that employ a lot of skilled staff (though again, the loss of the UK's voice in this regard is unhelpful at this juncture, as it's the country with by far the most to lose from regulations that harm the games industry). A compromise solution that essentially amounts to the EU avoiding potential commercial damage to the games business in return for industry promising to regulate its own behaviour seems like something that could be accomplished, especially since the Netherlands' adjudication seemed to be strongly hinting in that direction already.

"The window for agreeing a code of self-regulation before regulations are imposed from above is rapidly closing"

The problem is that both judgements make this explicitly about minors, and that's where the politics starts to look very thorny. Here's the reality: if this is escalated to the point where governments and the EU itself start to get seriously involved in the question of regulation or legislation, they're going to get trapped in a political situation in which acceptance of industry self-regulation simply will not fly. The narrative will be, 'here are these businesses, primarily American businesses, which were making money by getting European kids addicted to gambling'. It will permeate the media discourse around the topic, and leave politicians with no choice but to take firmer stances than they might personally wish or than might be economically sensible.

As much as we may all fret about the danger posed to industry jobs by heavy-handed regulation, there's simply no way that some games industry jobs being lost is ever going to outweigh the political expediency of making a strong example of the business if and when this ever becomes a political rather than a legal (and bureaucratic) question.

What this means for the industry is twofold. Firstly, it's a little late in coming, but the industry's bodies need to get their damned act together and start working on a genuinely solid set of self-regulation rules and frameworks, because the best (and possibly only) way to get ahead of this mess before the stones Holland and Belgium have sent rolling downhill turn into a landslide is to have a good, firm self-regulation system in place and dealing with the problem before the EU's regulators come knocking.

Secondly, for individual companies who have skin in the game - those whose games depend to some degree on loot boxes or on any random-draw mechanisms that look like gambling when squinted at in a dim light - it's time to get cracking on Plan B. Perhaps the regulations (imposed from within or without the industry) will give your games a pass; but perhaps they won't, especially if this turns into a politically contentious topic. Even if you don't step away from those mechanisms now (and it would be sensible to at least make them optional or secondary in new games being brought to market over the next year or two), at least have a plan of action. Know how you would step away, if you suddenly found yourself forced to do so.

I maintain that this may, ultimately, be a positive for the games business. Constraints breed innovation, and all too much of the industry's output in recent years has been narrowly focused on pursuing this very specific set of tightly targeted monetisation models down what is quite likely a blind alley, especially in terms of audience growth and diversity. In the short to medium term, however, this has the prospect of escalating into a full-blown crisis for many companies.

The window for agreeing a code of self-regulation before regulations are imposed from above is rapidly closing. The industry needs to act now.