Analyst Op-Ed: EA’s hated Battlefront II Loot Boxes may lead to regulation

Following Battlefront II, gaming executives may be getting a lump of coal in their loot boxes this holiday season

The loot boxes that accompanied the release of Star Wars Battlefront II (NASDAQ: EA) may likely be the last straw for gamers and regulators. Both are fed up with with purchasable “loot boxes” (i.e., packs of random in-game goods). Battlefront II lets players earn or purchase “crates” that contain random items which can have a major impact on gameplay. For example, one item might give players 100% extra health when playing as Darth Vader.

In Battlefront II, the powerful items tend to be rare, likening comparisons to a slot machine. The combination of a kid-friendly IP with luck-based monetization has drawn the attention of authorities. Gambling regulators in the Netherlands and Belgium are now investigating whether to classify loot boxes as online gambling, while in Hawaii, State Representative Chris Lee (D) has called for a ban on the sale of games featuring loot boxes to minors.

Loot boxes have gradually spread from free-to-play games to premium titles because they work. Even though two-thirds of PC gamers in the United States believe loot boxes are likely to give an unfair advantage to spenders, game publishers have yet to see this sentiment affect their bottom line. Overwatch (NASDAQ: ATVI) has sold $395M in loot boxes filled with cosmetic items since its launch last year. In 2017, FIFA and Madden console players have spent roughly half a billion dollars on Ultimate Team, a game mode where users buy packs of random athletes to assemble a dream squad.

Policing the practice of selling loot boxes is a new concept in Western markets whereas  Asian regulators have been taking a hands-on approach to game monetization for years. In 2012, Japan outright banned the practice of ‘Kompu gatcha’, a monetization model where users pay for random items and get a bonus if they complete a certain set. In 2014, South Korea temporarily shut down all Facebook games to investigate the spread of social casino games that contain casino-like gameplay without monetary payouts. Most recently, in May 2017, China forced game makers to publish drop rates, or the likelihood a player has of opening a loot box with any given item.

Considering the mounting pressure to regulate loot boxes, here are three ways this could play out

Nothing changes and publishers gleefully go back to making money off unregulated loot boxes

In this scenario, calls for regulation go nowhere after the holiday season and publishers go back to conducting business as usual. That said, AAA publishers are likely to be more cautious when it comes to charging for loot boxes in premium games in the next 12 months to avoid further backlash. We are also likely to see lootbox-free gameplay become a selling point for some games.

Publishers reign in or disclose loot box monetization willingly or by rule of law

China’s drop rate model, where governments regulate loot boxes but stop short of a ban, is a likely future scenario. Publishers could voluntarily self-police loot boxes to avoid binding government rules. The US games industry created the ESRB in 1994 as a countermeasure to calls for government regulation that stemmed from a campaign against video game violence led by then-Senators Joe Lieberman and Herb Kohl. More recently in 2005, then-Senator Hillary Clinton also proposed a bill outlawing the sale of mature video games to minors. Publishers would likely accept an “ESRB for monetization” as an alternative to government regulation.

Paid loot boxes are classified as online gambling in major Western markets

This is the worst-case scenario for publishers. However, it’s also unlikely to occur as it would open the door for banning kids’ products like trading cards and Kinder Eggs, both of which feature random items.

However, were a ban to happen, it would crush the $1.7B digital collectible card game genre that almost entirely depends on the sale of virtual card packs. It would also force publishers that have gone all in on random items (including EA and Activision Blizzard) to redesign their additional content revenue models from the ground up. These publishers would likely see their revenue drastically fall in the short term.

A ban in small or medium-size markets would still burden developers with creating regional business models, and regulators in an EU member state could push for a union-wide restriction.

The uncertainty surrounding loot boxes is enough to give some industry executives heartburn. Instead of unboxing unlimited riches as planned, game publishers may now need to practice self-restraint or risk a far more painful outcome.