Free-to-play (F2P) games have become one of the biggest earners in the video game industry.
Yes, you read that correctly. Games that cost absolutely nothing to download and play are earning developers billions every year with ease.
How? Through a variety of microtransactions, of course. These are often small purchases that can include anything from cosmetics, such as skins, to battle passes,experience boosts, and more. Often, buying these things gives busy gamers a shortcut to success or a fancy item they can show off.
But quite often, loot boxes are the primary cash cow. These are like digital lucky bags that bundle together a variety of rewards, which players purchase in the hope of obtaining rare, exclusive things.
Rewards are randomised and luck-based. You don't know what you're getting until you commit to the purchase. And the odds of getting what you want (or anything useful for that matter) can be pretty abysmal, depending on the game.
Some games offer as little as a 0.3% chance of getting the exclusive items from boxes, a figure that isn't as prominently advertised as it should be. All the while, your screen will burst with colours, animations and sounds, making the opening of said boxes almost like a celebration or ceremony.
The rise of loot boxes has continued to plague the industry, with most gamers deeming them anti-consumer. The concern that they may promote gambling is also on the minds of many policymakers, researchers, and parents.
Thankfully, recent fines and legislation in both the United States and Europe may signal a change in the level of fairness in-game purchases offer.
How can a free game make billions every year?
Almost all free-to-play games are live service, meaning they receive continuous updates either daily, weekly, or monthly. With no endgame in sight, you never truly 'finish' them.
Because they are free and found on many platforms, including smartphones, the barrier to entry is low, and virtually anyone with a handheld device or console can try them out.
This format has become incredibly successful in a very short period of time. A prime example is Genshin Impact. Released back in 2020, Genshin is estimated to earn developers Cognosphere up to $1.56 billion annually through in-app purchases from its vast player base. Not too bad for a free game, right?
Genshin's success is primarily due to its monetisation of new characters and weapons. Players must engage with luck-based 'wishing' to unlock new items on a near-constant basis.
So, how lucky do you have to be to get the new character or weapon you want?
Players have a 0.6% chance of 'pulling' the highest quality 5-star character for that current cycle. As rewards are randomised, there's no telling when (or if) you get what you want. You could get that coveted character on the first try or the 100th.
These types of games often have a 'pity system', whereby if you don't get a 5-star item by a certain stage, the odds increase ever so slightly until you do. Is this a helpful consumer thing? Or to incentivise you to keep going till the very end, despite the low chance of success? I'll let you be the judge of that.
To incentivise engagement, characters and weapons are only available for a specific time. This sense of FOMO (fear of missing out) can pressure many into trying their best to secure content when they can. If you aren't lucky with whatever resources you've gathered in-game, then your only immediate option is to reach for your wallet.
Could a $20 million fine be the start of change?
Genshin's immense popularity has brought the practice of loot boxes to the attention of regulators. Earlier this year, the Federal Trade Commission issued a $20 million fine against developers Cognosphere and said they would be banned from "selling loot boxes to teens under 16 without parental consent."
In a statement, the Director of the FTC's Bureau of Consumer Protection, Samuel Levine, said: "Genshin Impact deceived children, teens, and other players into spending hundreds of dollars on prizes they stood little chance of winning."
"Companies that deploy these dark-pattern tactics will be held accountable if they deceive players, particularly kids and teens, about the true costs of in-game transactions."
The complaint also highlighted violations of the Children's Online Privacy Protection Rule (COPPA) and noted that the game employed a "confusing virtual currency system," which obscured the reality that consumers often had to pay substantial amounts of real money to obtain high-quality items and characters through loot boxes.
Given the profits these games can make, $20 million in regulatory fines is a drop in the ocean. However, it sets a precedent for existing and future games considering this type of funding model.
Especially since many popular franchises, such as League of Legends or EA Sports FC (which, let's remember, is not free-to-play), are embracing randomised loot box rewards in big ways.
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The challenges of regulating loot boxes
Loot boxes and gacha games are relatively new phenomena in the fast-paced world of gaming. And it can be challenging to know right now what effect (if any) they may have on players.
"The problem for social science and policymaking is that there is simply not enough longitudinal research available so far on the actual harms caused by games containing chance-based elements", says Dr Deirdre Leahy, researcher in gambling and gaming regulation and lecturer in IT Law.
For Leahy, it's not that regulatory responses have been poor but that "effective and justified interventions have been difficult to frame in the absence of scientific evidence of harm."
"At the moment, the research is framed around identifying harms and inherent risks, assessing contributory factors and potential interventions," she says.
"While the precautionary principle could justify intervention without absolute scientific proof, this is a highly complex regulatory area with a lot of moving parts, diverse stakeholders and regulatory impacts to take into consideration."
"Alongside this is an emerging discourse on the social dimension of games, their educational and cultural functions, making for an interesting environment of positive and potentially negative online interactions," she adds.
So what is it about loot boxes that are finally attracting the attention of policymakers now?
"This is an interesting question because potentially negative impacts of online games are coming under the radar of EU policy makers, and at the same time, they are being brought to their attention by consumer groups," Leahy says.
"I will answer this question from the perspective of EU law and policy. So, in 2021, the EU Commission published a guidance on the Unfair Commercial Practices Directive, which for the first time raised the question of unfair trading practises within online games, especially games containing loot boxes."
"The guidance reminded traders of the consumer law prohibitions against misleading and deceptive information, unfair trading practises through non-disclosure of essential information, and the use of aggressive trading practises," Leahy adds.
"An important element of the EU's approach is to support a uniformly regulated EU market for online games. This means that EU policy makers would prefer that the potentially harmful aspects of online games would be addressed by a uniformly applicable legislative and policy stance."
As gambling is regulated separately in each member state, Leahy notes that the focus of EU attention has "leaned against" member states relying on gambling law for control of chance-based elements in online games.
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"This does not mean that member states cannot use gambling law to regulate loot boxes- indeed Belgium has done so, and the Netherlands attempted to do so - but EU preference is that a common harmonised solution would be found," she says.
"For example, an EU parliament resolution on online video games adopted in 2023 points towards a common solution as the preferred option.
"In the meantime, the EU has undertaken an enormous project in the review of existing consumer legislation to assess whether it provides an environment of digital fairness and published its findings in late 2024.
"Loot boxes and chance-based games were a case study in this digital fairness fitness check. The conclusion of the review was that a legislative intervention was justified to ensure fairness in digital games, not just in respect of loot boxes but to deal with overall game architecture.
"Other issues that have been drawn to the attention of EU policy makers include the use of virtual currencies in online games creating an unfair transactional environment which can be misleading and create opaqueness around the cost of in game purchases.
"At the moment, it is unclear what steps (if any) the EU will take and we will have to wait until later this year before the Commission's strategy in this area will be published."
The European Union begins a crackdown on virtual currencies
To make purchases in a game, players often exchange real-world money for virtual currency. And this has become a focus of European consumer policy.
Earlier this month, Europe's Consumer Protection Cooperation Network (CPC) launched an enforcement action against Star Stable Entertainment AB, the developers behind Star Stable Online, a horse game available on PC, Mac, iOS and Android.
The CPC Network found that the company had several practices that violated EU consumer protection legislation, including pressuring children to buy in-game currency or content. The developers have one month to provide a written response addressing the issues raised and propose commitments to remedy them.
While free-to-play games will likely remain a dominant force across the industry, the recent crackdowns on potentially shady practices are a step in the right direction.
This may prompt developers to become more transparent about their monetisation strategies. It could also mean that if consumers decide to spend money, they do so with a better understanding of the content's true value and what odds they're actually up against.
