Loot Boxes Legality, Concerns, Market Size and Growth Forecasts

One way to describe loot boxes is as rewards that players can enjoy after unlocking some type of achievement or after they have made a purchase with real money. Many describe loot boxes as games of chance as you are paying a certain price but you typically receive random items of uncertain value. For others, loot boxes are just the video game equivalent of mystery boxes that can be found in different consumer markets.

There are many critics who disapprove of loot boxes as they consider them tools that can turn players into gamblers. Others believe that there is nothing wrong with purchasing loot boxes to unlock special items that may help you advance in your gameplay.

• Functioning of loot boxes
• Loot boxes and gambling
• Legality of loot boxes
• Australia pushes for regulation
• Belgium considers loot boxes gambling
• The Netherlands declares war on EA
• How China regulates loot boxes
• Loot boxes in the USA
• Loot boxes concerns
• How much gamers spend on loot boxes
• Current market size and revenue
• Growth forecast

Simply put, loot boxes can be defined as rewards that are featured in video games and can be accessed either via gameplay or through real-money purchases. The items included in loot boxes are randomly picked so players are unaware of the awards they will receive until they open the box.

Loot boxes are a fairly new addition to the gaming industry but they have evolved into a sector that generated revenue of about $30 billion in 2018. Microtransactions made to obtain items in video games are not a novelty, with games like SimCityBuildit, Dynasty Warriors 7, and Tales of Xillia having players pay a small amount to unlock exclusive items, new levels, or other special features ever since 2011. These types of purchases, however, were made knowing exactly what you buy. Meanwhile, the items that you will receive via a loot box are unknown until you open the box.

Numerous children enjoy their time playing video games which means they might also decide to spend real money on loot box purchases. According to research conducted by the Children’s Commissioner for England, the monetization of video games can often lead to gambling tendencies among children. As some experts worry about the harm that these types of video gaming rewards can cause to underage players, loot boxes have become quite controversial in the last few years.

Functioning of Loot Boxes

Loot boxes can be found in several different genres of video games like sports, shooting, card, and role-play gaming variations. As the gaming industry has evolved in the last few years, loot boxes became available across all different platforms, including PC, consoles, and mobile devices. Depending on the game, loot boxes can be referred to as mystery boxes, chests, or crates.

Typically, players need to either unlock an achievement or make a real-money purchase to get access to a loot box. When that happens, the items that will be granted to the player are chosen on a random basis. The last step of the process is the opening of the box, awarding the player with an item that can be used in the specific game.

There are different ways to become eligible to obtain the items in a loot box. One of the most common ways is through gameplay or waiting times. Often, to gain access to the next level of a game, you will have to wait a certain period of time. Sometimes, it is possible to skip the waiting time if you decide to pay real money or watch advertisements.

Making an in-play payment is also another way to access exclusive items or unlock the next levels. Usually, players can make purchases either via real money or currency used in the game. This currency can also be earned either through gameplay or by paying real money.

The price of a loot box may vary according to the game or the items that you wish to gain access to. Since you cannot predict the exact rewards you will be purchasing, it is possible to have to buy several loot boxes until you obtain the desired item. Some games will offer loot boxes that may reward rare items that are not easy to obtain. This may mean that one player must purchase several loot boxes before they can win the rare item they desire. Sometimes, such purchases may cost up to $170, which is definitely a high price for a video game item.

The items that will be revealed in a loot box are randomly selected, often with the help of an algorithmic draw. Although many games will have all items that can be unlocked with a loot box being equally common. However, other games will have rare items that are not that common and the chance of winning them is smaller compared to the regular awards. Most often, rare items have a higher value for players.

The probability of receiving different loot box items was not something that was publicly shared with players. In recent years, however, Apple and Google require mobile game developers to clearly display the probabilities of obtaining various items from loot boxes. Gaming companies that develop games for platforms other than mobile ones have also become more transparent in the last few years. This being said, there are still gaming options that would not expose the probability of winning the items they offer via loot boxes.

According to the European Games Developer Federation (EGDF), gaming developers use a draw mechanism known as ‘pity timers’. This means that if a player opens the same loot box 99 times to get a rare item with a winning probability of 1%, the 100th time will guarantee the specific rare item if it has not been won before that.

There are various items that can be obtained thanks to loot boxes. Some of them fall under the category of so-called cosmetic items. Those include skins or new avatars that players can use in their gameplay. Other game-specific items include weapons, maps, levels, currency, and various tools. These items can affect one’s gameplay and are often harder to obtain.

The Link Between Loot Boxes and Gambling

Value conversion is another feature of loot boxes that should be mentioned. Some games will allow players to convert the rewards they have obtained through loot boxes. If value conversion is possible, this allows players to enjoy the value of their items outside the specific game.

Typically, the rewards won from loot boxes are credited to players’ accounts and cannot be used outside the specific game. This being said, often it is possible to trade the items with another fellow-player. Sometimes it is also possible to convert the obtained items into an in-play currency that can also be converted into ‘platform money’. These funds can be used for other games or features offered by the respective platform.

Value conversion is the action that is most often linking loot boxes to gambling as players can convert virtual items into something with value outside the game. Items obtained by loot boxes, as well as the pathway to get a loot box can be either embedded or isolated. Embedded items are the ones with value outside the game and can participate in the everyday economy, Meanwhile, isolated items have value only for the specific game and are not part of the everyday economy.

While some argue that loot boxes are no different than other types of in-game purchases that can be made in various games, some argue that loot boxes are more closely related to gambling. Since players are unaware of the item they can obtain by purchasing a loot box, some experts have deemed them similar to games of chance. Many players end up spending much more than the real value of the items that they obtain via loot boxes. This is why loot boxes have been heavily criticized in the past few years and many experts believe that they can turn many players into gamblers.

Some experts believe that the design mechanism of some games, offering rewards and punishments, prompts problematic gameplay. Since such a design increases the screen time, some believe that such games may create tension in players who find solace only while playing. This is often a common trait among problem gamblers who cannot control their urge to continue gambling. Loot boxes are also included as a design tool that is often used to increase the screen time of players.

While it cannot be deducted that loot boxes will always lead to problem gambling, researchers often find a link between this type of reward system in games and real-life gambling. One study shows that the average amount non-gamblers spend on loot boxes in the game Zendle and Cairns stands at around $11.14. Meanwhile, players who tend to have gambling issues spent around $38.24 on average on loot boxes.

Another problematic side of loot boxes is the design that some games are using. The rewards that are received via loot boxes are compared by some to the rewards that slot machines offer. Prizes that are associated with winning often stimulate gamblers to spend more money than they have previously intended to. The rewards obtained from loot boxes can also prompt players to increase their screen time and potentially lead to even more purchases of loot boxes.

Some pricing and offer strategies used with loot boxes in video games can also often be found at virtual casino games. Baiting offers are typically time-limited free plays that require players to make purchases to continue playing. Some games will require signing up that will later on automatically upgrade one’s account to premium unless the player unsubscribes before that.

Time-limited offers usually represent loot boxes that are available to purchase only for a limited time. Since many think of time-limited deals as offering rare and valuable items, players are often tempted to spend money on such loot boxes. In many cases, players feel the need to quickly make use of this rare deal and often end up spending more money than they originally intended to.

In addition to purchasing loot boxes with real money, some games will have players use in-play currencies to pay for crates. Virtual currencies can be won through gameplay or they can be paid with real money. Some players are confused by the conversion of real money into virtual currency and often cannot grasp the true amount they spend on loot boxes. Virtual currencies are often associated with overspending and problem gambling.

Legality of Loot Boxes

Since many researchers see the link between loot boxes and gambling, some countries like China and Belgium have completely banned loot boxes in certain video games. Meanwhile, other countries are constantly researching the impact of loot boxes on players with gambling tendencies. While some jurisdictions have handled this sector with stern bans and regulations, other countries are still on the fence about whether loot boxes should be banned or not.

The stance of the UKGC

While some countries have deemed loot boxes illegal, the UK does not consider them a form of gambling and is still allowing games to include loot boxes. This is why they do not fall under the category of games that are regulated by the UK Gambling Commission and the 2005 Gambling Act.

Despite that, the concerns about the link between loot boxes and gambling are increasing. This is why in 2020, the government launched a further investigation on the effect of loot boxes in video games and the potential problem gambling that they may cause.

The government was prompted to initiate the investigation as the number of players who spend money on loot boxes is steadily increasing. Since it is unknown what type of item you can receive by purchasing a loot box, there is a chance element that is very similar to one of the factors that define gambling.

The research concentrated on the gameplay of players, as well as the experience of their family. The investigation further extended to video gaming companies and any organizations that are related to the issues and benefits of loot boxes. The goal of the investigation was to determine the scope of loot boxes and in-play purchases and whether they have a negative impact on players.

If the results from the research point to a definite link between loot boxes in video games and potential gambling addiction among players, the government is ready to take the needed measures and regulate that sector. Loot boxes will also be considered during a revision of the Gambling Act and they may be added among the sectors that are regulated by the law.

Around half of the population of the UK plays video games, with the video gaming sector generating 2.6 billion pounds in 2018, boosting the UK’s economy and creating jobs for 27,000 employees in 2019.

In addition to investigating the consequences of purchasing loot boxes, the government’s research also looked into the overall effect of playing video games on players’ behavior. After the results from the research became clear, the committee had several recommendations related to loot boxes.

According to the committee, loot boxes that are based on the chance element should not be offered to children. Instead, in-play credits should be earned via gameplay. Another recommendation is for the PEGI Council and all other relevant channels to apply age restrictions and gambling labels to games that offer loot boxes that do not reveal their content before their purchase.

The Committee also recommends that loot boxes should be included in the Gambling Act 2005 as games of chance and be properly regulated. If the government decided not to include loot boxes under the section of games of chance, it should clearly present its reasoning for distinguishing loot boxes as different from games of chance.

Australia Pushes for Regulation

The Australian parliamentary committee has also introduced several recommendations for loot boxes used in video games. One of the six recommendations is to introduce mandatory age checks among players who try to purchase loot boxes.

The Committee made several recommendations in the Protecting The Age Of Innocence report. The age restriction suggestion is for the Office of the eSafety Commissioner to introduce solutions that will ensure age restriction for loot boxes and other similar in-play purchases. One of the recommended options is mandatory age verification that will ensure that only players of the age of 18 or over will be able to purchase loot boxes.

The Committee is also suggesting for additional warnings to be applied to games that use any form of microtransactions for items like loot boxes, skins, weapons, etc. Labor Committee members noted that any restrictive measures should be talked through with companies involved in the gaming industry.

Currently, loot boxes are still not considered a form of gambling and are not regulated by the Interactive Gambling Act 2001. The Committee, however, expresses concerns that loot boxes and similar in-play purchases may expose children and young adults to problem gambling and serious issues related to that. Despite the concerns, the aforementioned recommendations are yet to be accepted and applied in Australia.

Belgium Considers Loot Boxes Gambling

Belgium is known for being the first country to outright ban video games from offering loot boxes to Belgium players. The ban was introduced in August 2018, deeming loot boxes an illegal form of gambling. The ban had the approval of the Belgian Minister of Justice, Koen Geens, who stated that children are the most common players who come across loot boxes in video games, which is not acceptable.

The ban came as a result of an investigation carried out by the Belgian Gaming Commission. It determined the impact of video games on young players and noted several similarities between loot boxes and gambling. The research of the Belgian Gaming Commission is based on the Gaming Act of May 7, 1999, which places huge importance on implementing age restrictions on different forms of gambling.

According to the Gaming Act of May 7, 1999, minors are forbidden to engage in any type of gambling. Individuals who are 18 years of age or older can place bets or participate in lottery games. Meanwhile, only individuals who are 21 years of age or older are allowed to gamble on casino games.

Since the Belgian Gaming Commission considered the techniques to obtain loot boxes in different video games for a form of gambling, it decided that they should also be regulated by the Gaming Act of May 7, 1999. The Commission defines loot boxes as games of chance since players are paying for certain items but are unaware of the content of the loot box until they purchase and open it. Since the Commission concluded that paid loot boxes violate the Gaming Act, it banned video games from providing this type of in-game purchase to Belgian players as it can put them at risk of criminal actions.

The Netherlands Declares War on EA

In 2018, the Netherlands also banned loot boxes in several games, including DOTA 2, FIFA 18, PlayerUnknown’s Battlegrounds, and Rocket League. All of these games usually allow players to earn real money from their items earned by loot boxes. This is possible either by selling them on secondary markets or by selling their accounts.

The district court of Hague ruled loot boxes as games of chance, classifying them as games that should be regulated by the Betting and Gaming Act of the Netherlands. In addition to that, the conversion of virtual items to real-money funds is falling under the Betting and Gambling Act’s definition of ‘prize’ in games of chance. This is yet another reason to consider loot boxes as a form of gambling.

In April 2018, the Netherlands Gambling Authority (Ksa) notified gaming publishers that loot boxes are considered a form of gambling. Following this statement, the gaming companies had 8 weeks to make their games compliant with the Betting and Gaming Act.

The publisher EA was fined 500,000 euros per week and argued that the game mode is not separable from the prize found in loot boxes and they cannot be considered separate games of chance. In addition to that, the publisher stated that players are well aware of the number of items that are included in a loot box and their potential value. This led to the argument that there was no chance involved in the purchase of those types of loot boxes. The court, however, did not agree with EA arguments and permitted the Ksa to impose the maximum fine of 5 million euros to EA, as well as a secondary maximum fine to EA Swiss Sarl.

As of now, only loot boxes that allow transfer to virtual items between players and lead to some sort of value conversion are deemed as a form of gambling and are regulated by the Dutch Betting and Gaming Act. Meanwhile, loot boxes that do not fall under the category of games of chance are still not banned in the Netherlands.

How China Regulates Loot Boxes?

Similar to Belgium, China also started regulating loot boxes pretty recently. The Chinese government, however, took a different approach, requiring gaming publishers to announce the probabilities of getting certain items in loot boxes. Additionally, gaming publishers have to offer other ways of obtaining items, such as through real-money or virtual currency purchases. Blizzard Entertainment was the first company that started allowing Chinese players to obtain Overwatch currency instead of buying loot boxes.

Currently, all forms of gambling are deemed illegal anywhere in China except for Macau, Hong Kong, and Taiwan. Macao has already surpassed Las Vegas as a gambling capital of the world and it has reported the gambling industry as its leading sector that generates the highest revenue.

In addition to Macau being the biggest traditional gambling hub in the world, e-sports betting has also become a leading industry in the Chinese market. A large portion of the Chinese population, however, has shown disapproval of video games, with numerous parents noticing worse school performance after their children have been spending time playing video games.

With the technological advancement in recent years, however, video games have become even more popular in China. This led to research on loot boxes carried out by China’s Ministry of Culture. After the research, the Ministry reported that in-play items that can be obtained via loot boxes should be offered only through the means of virtual currency or real-money purchases.

Despite the ban on loot boxes in China, the new regulation on loot boxes does not define them as a form of gambling. Despite the regulation of loot boxes in video games offered to Chinese players, there are some loopholes that gaming publishers take advantage of. As long as in-play items can be obtained in a different manner, games still found a way to offer loot boxes. In Overwatch, for example, players can use an in-game virtual currency to purchase items. In addition to their purchase, Chinese players can still obtain loot boxes “for free”.

Loot Boxes in the USA

Currently, neither the Federal government of the United States nor any of its individual states are regulating loot boxes as they are not considered a form of gambling. A study of the University of York shows that about 71% of the games on the popular platform for games, Steam, were offering loot boxes.

Meanwhile, some players allow US players to trade some of their items obtained via loot boxes for real money. These so-called microtransactions were reported to have generated about $30 billion in sales and contributed to the revenue of gaming companies.

Despite the various types of research, many believe that there is still no hard evidence that loot boxes are related to problem gambling. This is why legislation is still not possible and loot boxes are still not regulated in the US.

Unlike other countries, the US has different definitions about what falls under the category of gambling and what does not. As every state is independently regulating its gambling sectors, it is difficult to give one definition of gambling in the US. This is why it is also hard to regulate loot boxes as each state may have a different opinion on the matter.

While PEGI is regulating the video gaming industry in Europe, it is the Entertainment Software Rating Board (ESRB) that decides whether certain video games in the US are appropriate for younger players. While the ESRB is appointing the ratings of video games and gaming apps, it still does not provide any reports on the influence of loot boxes. The ESRT stance on the matter is that loot boxes cannot be considered games of chance since players are always guaranteed to receive items for their money.

Loot Boxes Concerns

There are several regulatory authorities that have noted that loot boxes and problem gambling share some similarities. This raises many concerns that if loot boxes are not properly regulated they can have a serious impact on the gambling behavior of young adults.

One of the ways that loot boxes can lead to problem gambling is through exposure. The more players experience the thrill related to gambling, the bigger their desire to expose themselves to similar activities will be. With video games being extremely popular among children and young adults, the concern is that loot boxes can lead to problem gambling behavior among adolescents.

Tactics like using virtual currencies, baiting offers, and time-limited deals are often used to lure players into spending more money on loot boxes. Package offerings are also popular, allowing players to pay for a loot box and unlock several items or features at once. Often this confuses players as they cannot determine the real value of each item and they believe that they will obtain several items of higher value.

Some games allow players to obtain loot boxes through gameplay but require a key to be unlocked. Typically, the key is purchased with real money and it is yet another technique used to lure players into spending more money to unlock a loot box with unknown content. All of the methods used to offer players the content of loot boxes are often similar to techniques used to lure gamblers into making wagers. This is why many believe that loot boxes are in a way connected to gambling and can often lead to gambling issues, especially among young adults.

How Much Gamers Spend on Loot Boxes

While some believe that there is no certain correlation between loot boxes and problem gambling, there is a definite profit generated by this sector. As some studies show, players who are prone to gambling tend to spend more on loot boxes offered in video games.

In 2017, the reported amount that global gamers spent on loot boxes and skins amounted to $30 billion. The second-quarter results for the industry in the US show consumer spending on gaming of $11.6 billion. As the industry continues to grow and loot boxes become even more widely popular among gamers all over the world, the estimates for this industry for 2022 predict global consumer spending on loot boxes and skins around $50 billion.

The average annual amount that US gamers have spent on gaming downloadable content in 2019 includes $98 on virtual currency, $75 on skins and other cosmetic upgrades, $69 on weapons, $56 on expansion packs, $56 on maps, and $45 pm travel vessels, vehicles, and essential items.

Studies show that adult gamers who also have gambling addictions also see an increase in their loot boxes spendings in video games and apps. Such research shows that although there is not enough evidence showing that loot boxes may lead to problem gambling, players who are 18 years of age or older and have gambling problems tend to spend more on loot boxes than non-gamblers. Unfortunately, gaming publishers capitalize on the gambling tendencies of numerous gamers and are pushing for new ways to lure players to spend even more on loot boxes.

Current Market Size and Revenue of the Gaming Industry

The global gaming market is a force to be reckoned with and the forecast for this industry is to continue growing in the upcoming years. The value of the US video game market in 2020 is $60.4 billion, while the predictions for the global video market in 2023 is to reach over $200 billion.

In 2011, the digitally distributed video game market value amounted to $5.3 billion, while the packaged market value was $22.4 billion. In the following years, there is a decline in the packaged video game market but the digitally distributed market value steadily increased with every year. In 2018, the packaged market value showed a decrease of $10.9 billion compared to $11.2 billion the previous year. Meanwhile, the digitally distributed video game market value reached $19 billion, showing growth from $13.2 billion in 2017. The estimates for 2019 are $9.8 billion for the packaged video game market and $22.1 billion for the digitally distributed video game market.

In 2020, the global video gaming industry is estimated to worth $159.3 billion, marking a 9.3% increase from 2019. Currently, the predictions for 2023 are for the industry to reach $200 billion. The highest growth is expected in the Latin America and the Asia Pacific (APAC) regions, predicted to grow respectively by 10.3% and 9.9% by the end of 2020.

As of August 2020, there are roughly around 3.1 billion gamers all over the world, with 48% of them based in the Asia Pacific region. The second place is for North America, with a market share of 19% in 2020. When comparing the industry by countries, China is the leader, followed by the USA and Japan.

The global pandemic also contributed to the increase of gamers all over the world. Between March and June, there was a 46% increase in the number of active US players. Meanwhile, the number of gamers in France, the UK, and Germany during these months jumped respectively by 41%, 28%, and 23%. In the past year, almost 50% of global gamers have made at least one microtransaction.

Growth Forecast

Based on the numbers in 2019 and 2020, it is predicted that the global video gaming market will reach $196 billion, while the mobile gaming market will grow to $95.4 billion by 2022. Meanwhile, the prediction for 2023 is for the global video gaming market to generate more than $200 billion. By the end of 2020, players are expected to spend about $4.5 billion on VR games.

The forecast for the global video game market is to increase at 12.9% Compound Annual Growth Rate (CAGR) between 2020 and 2027. The main factors that will most likely prompt this growth include innovations in both hardware and software technology. Internet penetration and easy access to games across the world will also boost the growth of the industry in the years to come.

By the year 2027, the console market share is expected to experience a significant CAGR. The reason for the expected higher demand for consoles is due to the constant improvements in technology that ensure a higher quality of graphics, sound effects, and overall gaming experience. As video game streaming has also become popular in the past years, the console segment will most likely enjoy huge growth. The reason for that is consoles allow players easy streaming and sharing of gameplay footage.