Referral and terms of reference
On 28 June 2018, the Senate referred the following matter to the
Environment and Communications References Committee for inquiry and report by 17 September 2018:
The extent to which gaming micro-transactions
for chance-based items, sometimes referred to as 'loot boxes', may be harmful,
with particular reference to:
- whether the purchase of chance-based items, combined with the ability to
monetise these items on third-party platforms, constitutes a form of gambling;
- the adequacy of the current consumer protection and regulatory framework
for in-game micro transactions for chance-based items, including international
comparisons, age requirements and disclosure of odds.
On 17 September 2018, the Senate granted an extension of time to report
until 17 October 2018.
On 15 October 2018, the Senate granted an extension of time to report
until 27 November 2018.
Conduct of the inquiry
In accordance with its usual practice, the committee advertised the
inquiry on its website and wrote to relevant individuals and organisations
inviting submissions. The date for receipt of submissions was 27 July 2018. The
committee received 42 submissions, which are listed at Appendix 1.
The committee held public hearings in Melbourne on 17 August 2018, and
Canberra on 17 September 2018.
The list of witnesses who participated in public hearings is at Appendix
The public submissions, additional information received and Hansard transcript are available on the committee's website at: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Environment_and_Communications/Gamingmicro-transactions
The committee would like to thank the organisations and individuals who
provided evidence to the inquiry.
Structure of the report
This report comprises 5 chapters as follows:
- Chapter 1 provides an introduction and overview of gaming
micro-transactions for chance-based items, recent public concern regarding the
issue, and international responses;
- Chapter 2 explores whether gaming micro-transactions for
chance-based items constitute gambling under Australian regulatory frameworks;
- Chapter 3 examines the evidence received that gaming
micro-transactions for chance-based items meet the psychological definition of
gambling, and the potential for harms associated with interaction with these
- Chapter 4 outlines possible government responses to the issue;
- Chapter 5 provides a committee view and recommendations.
Introduction to gaming micro-transactions for chance-based items
Many video games incorporate 'micro-transactions', a broad concept
extending to any model that provides a consumer with the option of making small
purchases within a game or other application. Micro-transactions are typically
made using game points, real-world money, or both.
Micro-transactions may involve the direct purchase of specific in-game
content or features, including items (i.e. outfits, vehicles, weapons, tools,
etc.), mission or quest packs, new game modes and extra play time, among other
things. Micro-transactions may also involve the purchase of a virtual item that
contains a variable selection of other virtual items (chance-based items),
which are sometimes called 'loot boxes', 'loot crates, 'mystery boxes', 'prize
crates' and other similar names.
Gaming micro-transactions for chance-based items, called loot boxes for
the purposes of this inquiry, are included in some video games to provide
players with a way to obtain virtual items for in-game use. The items in loot
boxes vary, but typically include collectibles, character outfits, game points,
player bonuses, and weapon camouflages or 'skins'. Some virtual items are
functional 'sidegrades' or upgrades that players may use functionally in game
play (i.e. useful tools, armour, weapons or abilities), whereas others are
simply cosmetic items.
A list of possible items contained in a loot box may be, but is not
always provided to players. The specific item received is randomly selected
once payment is authorised. A common variation is to periodically provide
players with boxes for free but require them to purchase a 'key' to open the
box. Virtual items can hold significant value to players based on their
potential to facilitate or assist game play, or provide desirable cosmetic
There are a number of types of loot boxes available in games. These can
be categorised according to the method of acquisition, and whether the items
contained within the loot box can be monetised. Methods of acquisition are as
- Game-play – loot boxes are awarded to players as a result
of game-play achievements, such as hours played or missions completed.
- Game-play with purchasable key – loot boxes are provided
to players during game-play, but players must purchase a key to open the loot
- Purchase – players purchase a loot box and are able to
open it to obtain the (random) items within.
Loot boxes have been available in a number of social games (largely free
to play mobile games) as well as video games produced by mid-sized or major
publishers (so called AAA games) for a number of years. For example, Team Fortress 2 released in 2011, introduced the concept of crates and item trading, while Counter-Strike:
Global Offensive (CS:GO) introduced weapon crates in 2013. Since then,
there has been an increase in the inclusion of loot boxes in games, most
notably since the release of the beta version of Overwatch in 2016. Mr
Blake Mizzi, Board Member, Game Developers' Association of Australia (GDAA)
For decades, a lot of games have been offering a loot box or
similar mechanic. Some of the earliest games in gaming history, for the last 20
years, have been offering a similar system of juicy rewards for players in
digital games. It is only recently, however, that they have been allowed to be
purchased with real-world money beyond the initial game purchase. The most
popular games identified these days almost all include a loot box mechanic of
some sort, and this is about making digital items available. But most of them
don't make digital items available for sale outside the game.
The rarity of some virtual items and the emergence of third-party online
sites acting as exchange markets have also led to players selling some in-game
items for thousands of dollars. In this context, virtual items are operating as
de-facto virtual currencies, and have subsequently been used as virtual betting
chips on third-party gambling websites, with significant amounts of real-world
currency being exchanged.
So-called 'skin gambling' refers to the use of in-game items for online
gambling through a variety of mechanisms including third-party websites. It
should be noted that the expansion of these third-party sites has served to
encourage players to stake money on loot boxes for the chance to obtain a rare
Importance of loot boxes
Australia's video game industry largely focuses on the production of
games of 'narrative storytelling, problem solving, puzzle solving, escapism,
role playing, sports games, games about superheroes, board games, card games,
strategy and educational games'. There are over 200 game studios in Australia
and the industry employs approximately 1000 people across the country. It is
estimated to comprise three to four per cent of the global industry which is
worth over $100 billion.
The video game industry, like other creative industries, faces economic
challenges from piracy and arbitrage and as such, has had to develop a range of
revenue streams beyond retail sales. The following sections outline the evidence received by the committee in
relation to the importance of in-game and in-app purchases, including loot
boxes, in ensuring the economic viability of the industry.
Loot boxes represent the evolution of revenue streams in the gaming
industry. Previously, game titles were sold as a complete stand-alone product.
As a title gained popularity, a sequel or 'expansion pack' may have been
offered, however the sale of a title was largely considered a single
transaction without ongoing interaction between the purchaser and the
developer. As the industry evolved, developers began offering Downloadable
Content (DLC) which, though smaller than expansion packs previously offered,
would nevertheless offer new characters, costumes, additional missions or
With the rise of online gaming, developers began charging users a
subscription fee to play online games such as World of Warcraft and
other Massive Multiplayer Online Role-Playing Games (MMORPGs or MMOs). These
games continually add content to keep players engaged.
At the same time, virtual currencies emerged as another means for
developers to earn additional revenue from titles. As such, players were given
the opportunity to purchase in-game virtual currency using real-world currency,
instead of earning virtual currency through game-play. This proved popular with
users who had less time to spend participating in otherwise time-intensive
The profitability of virtual currencies led to the development of
free-to-play (F2P) games which are completely free to play, but players are
encouraged to make in-game purchases using real-world money or face excessive
hours of game play to make progress. Popular examples include Candy Crush, League of Legends, and Team Fortress 2. Mr Mizzi, GDAA, told the committee:
The purest form of the successful in-app purchase game
mechanic comes in the free-to-play model, which is a business model where
players can download a game for free and play it indefinitely. It's at the
player's discretion if they choose to purchase an in-game item or a cosmetic
item that might help them to express their character online or just customise
their character—you could buy a hat! There are also in-game mechanics or in-app
purchases around energy mechanics to allow players to progress through a game
As an alternative revenue stream, in-app and in-game purchases have
proven to be remarkably successful. For example, in 2018, Juniper Research
estimated that the size of the global gaming industry was US$117 billion, and
25 per cent of that value was generated through loot boxes.
Further, Juniper Research estimated that without regulatory
intervention, loot boxes will come to form 47 per cent of industry revenue by
2022. It projected the global video game industry's revenue to be US$160
billion, with US$75 billion being generated by chance-based micro-transactions.
The committee heard evidence that over the past two decades, retail
prices have not increased, however the costs associated with the production and
development of video games have increased significantly. Mr Mizzi, GDAA,
Retail prices have been flat for about two decades so you
could argue that they've gone down while the development budgets for games have
gone into the billions of dollars. In some cases they dwarf the largest film
productions. So AAA games today, for your $60 or $100 outlay, an EB Games [game]
can provide hundreds of hours of game play. But the costs of development have
increased, so too have the online development costs for deployment and the
online support costs because these games now run those games as a service.
As such, 'in-game purchases such as the loot box mechanic have become a
core revenue prop' ensuring the viability of the video game industry. Mr Mizzi explained that developers and publishers now rely on the purchases of a
'very small playing percentage of players' to support the industry.
However, Mr Mizzi told the committee that the in-app or in-game purchase
model is viewed as a 'fairer system' where ongoing revenue is only collected
from 'those willing to pay, and those who have the discretionary income to pay
for these items'.
As noted above, loot boxes have been included in video games for many
years. However, Electronic Arts (EA) released Star Wars Battlefront II in 2017 containing a new type of loot box with items which provide a player
with advantages such as stronger characters or items which substantially
increase the damage, health and fire rate of the player's characters. The
introduction of this 'pay to win' approach led to widespread outrage in the
gamer community and public pressure influenced EA to remove paid loot boxes
from this game. Mr Mizzi, GDAA explained:
...key iconic Star Wars characters—would be available from the
game purchase; but a lot of those were locked behind further long-form grind
mechanics, where a player would have to complete long tasks, over a long period
of time, to unlock these rewards. But the economy inside the game allowed a
player to shortcut these mechanics with real money—so you could buy Darth Vader
now or you could play 60 hours to unlock Darth Vader. This process, which is
hugely disliked by gamers around the world, is called nickel and diming.
Also, I think the combining of the Star Wars franchise
and the Battlefront franchise—which is huge—was a huge media draw, so it
gained a lot of attention. It is also my belief that the outrage around these
loot boxes really hit a nerve in western audiences. The pay-to-win mechanic is
actually quite accepted in eastern cultures. I am not advocating that that is
right. It is really around that pay-to-win mechanic. So this brought loot boxes
to the wider mass media consciousness and has triggered a lot of this healthy
The criticism of the inclusion of 'pay to win' loot boxes was echoed by
submitters with some describing their inclusion as a decision motivated by
greed. For example, Mr Samuel Drew stated:
Gaming micro-transactions have
been a plague to the online gaming community for a very long time but has
recently gained traction as a result of greedy company decisions that allow
online players to gain an advantage over others by spending extra money on said
Concern was also raised that the inclusion of loot boxes has damaged the
quality of games, with developers focusing on raising revenue rather than
creating engaging content.
Throughout 2017 and 2018, public backlash led to games developers either
removing existing loot boxes from games, or releasing new games without loot
boxes. For example:
- Shadow of War removed its loot boxes;
- Far Cry 5 and Monster Hunter World have
minor micro-transactions, but no loot box elements at all, and God of War and Spider-Man are
using the lack of loot boxes as a marketing tool;
- Fortnite, currently the most popular game globally,
has a micro-transaction system that is entirely loot box-free. The Battle
Pass lets players pay $10 a season for earned cosmetic rewards, and those
cosmetics can also be flat-purchased outright without randomisation; and
- Blizzard games Hearthstone and Overwatch,
dramatically increased the quality of drops for players, disallowing legendary
card/skin duplicates, so players could amass more of the best items more
Public concern has also arisen regarding the popularity of games
containing loot boxes with players under the age of 18. In particular, the
concern that children are being exposed to in-game gambling or simulated
gambling which leaves them vulnerable to gambling-related harms. The Office of
the eSafety Commissioner stated:
Debates have to date centred on the addictive nature of loot
boxes, as well as their exploitative and manipulative
design features. As an Office, we are particularly
aware of growing
community concern and debate that this feature may normalise
and potentially act as a gateway to more traditional forms of 'online gambling'.
The media coverage and public debate regarding loot boxes was also noted
by the Australian Communications and Media Authority (ACMA) with
Ms Jonquil Ritter, Executive Manager, Content Safeguards Branch,
stating that during November 2017, the ACMA received a number of complaints and
inquiries as a result of significant media coverage of the gambling-like
mechanisms in popular games such as Star Wars Battlefront II. Ms Ritter
also stated that since August 2017, 15 per cent of its complaints and
inquiries over the 12 month period to August 2018 were in relation to loot
boxes and skin gambling.
Concern regarding the spread of skin gambling, or the use of virtual
items in online betting, has also driven much of the debate in relation to the
need to regulate loot boxes.
The skin gambling market was estimated to be worth approximately US$7.4 billion
in 2016. It is estimated that tens of thousands of people make bets using in-game items,
particularly those obtained from CS:GO, on third-party websites. The items
which are won and lost have real-world value as they can be bought and sold on
the Steam Community Market offered by CS:GO's publisher, Valve.
There are a range of ways that users are able to skin gamble including:
- esports betting where users can place bets on CS:GO matches using
mystery boxes where players are presented with loot boxes that
mimic the experience of opening a loot box in CS:GO, and where the items can be
sold on the Steam Community Market; and
- public pots where players deposit skins into a shared pot for a
specific amount of time, and where the higher total value of the skins a player
deposits, the greater the chance of winning the pot.
Valve has undertaken a number of legal actions against third-party skin
gambling sites, and there have been a number of controversies regarding betting
on esports using skins including instances of match-fixing.
Much of the public concern however has been regarding the exposure of children
and vulnerable persons to this form of online gambling through engagement with
loot boxes, and the potential for gambling-related harms to be experienced.
International regulatory responses
As a result of public concern, regulators around the world have begun to
consider whether loot boxes should be considered a form of gambling, and
regulated accordingly. International regulators have come to differing
conclusions and implemented a range of responses.
The following sections outline the approaches taken in a number of
The Danish Gambling Authority, in response to an increased number of
public inquiries, issued a public statement on loot boxes clarifying when a
game would fall under the auspices of the Danish Gambling Act. The
statement noted that games must be licensed when three criteria are met: there
must be a deposit; there must be an element of coincidence; and there must be a
prize. Where the prize is a virtual item, it must be 'able to translate into
The Danish Gambling Authority examined a number of well-known video
games containing loot boxes and observed that where virtual items cannot be
sold or otherwise converted into money, the Gambling Act would not
apply. However, it stated that where items can be sold on third-party websites
and 'thus converted into money' then the Gambling Act would apply.
The Gambling Authority concluded that loot boxes must be considered
'individually as it is not possible to generally assess whether the items won
in a loot box can be converted into money. Therefore, it cannot be excluded
that loot boxes may in some cases be covered by the Act on Gambling'.
The Danish Gambling Authority also recognised the importance of
protecting children and young people, and emphasised the importance of parents
taking an interest in the games played by their children and discussing
responsible gaming behaviour.
The Belgium Gaming Commission's Secretariat, Mr Peter Naessens,
published a research report on loot boxes in April 2018. The report applied the
definition of a game of chance as established under the Belgium Gaming and
Betting Act. Mr Naessens concluded that:
The paid loot boxes in the
examined games Overwatch, FIFA 18 and Counterstrike: Global Offensive fit the description of a game of chance because all of the constitutive elements of gambling are
present (game, wager, chance, win/loss).
The loot box system in Star Wars Battlefront 2 prior to the official release of the game
also fits this definition, but this is no longer the case today.
Mr Naessens made a suite of recommendations to the Belgium Gaming
Commission, distributors and game developers, and entities which license brands
to game developers (e.g. FIFA and Disney). These recommendations included a ban
on minors buying games containing paid for loot-boxes, age verifications for
in-game purchases, permits be developed for games of chance in video games,
education for parents and children, and the regulator having the power to
inspect games following complaints.
Mr Naessens also recommended increased transparency regarding odds,
giving the Belgium Gaming Commission complete control of the number generator
used for loot boxes, and the introduction of spending limits.
The Netherlands Gaming Authority (NGA) also conducted a study into loot
boxes. It found that four of ten games assessed contravened Dutch law. It
These are the loot boxes in
games where the in-game goods from the loot
boxes are transferable. When opening loot
boxes, the consumer cannot influence the outcome.
Those games that feature a combination of
in-game goods that can be traded and the obtaining
of these goods through loot boxes fall under Article 1 of the Betting and Gaming Act.
As a licence cannot
be issued for this offering under the
applicable legislation, these loot· boxes are prohibited
in the Netherlands.
The Dutch Betting and Gambling Act defines gambling as activities
where there is an opportunity to compete for prizes and premiums, and where
participants are unable to exercise a dominant influence. The NGA determined
that when opening loot boxes, players cannot influence the outcome.
It also assessed that where virtual items are transferable, they have
potential economic value and this meets the first requirement that players
compete for prizes or premiums. The NGA told the committee that:
Prizes are defined as all goods to which economic value can
be assigned that accrues to the participants in the games of chance by virtue
of their participation. Where they do not exist in cash, prizes shall be taken
into consideration at their economic value. Prizes can also be intangible game
outcomes (items) that represent an economic value. When trading of items
between players is possible, items represent a potential economic value. In
practice, we see that items sometimes represent a value of thousands of euros.
The NGA also noted the addiction risk potential associated with loot
boxes and described the integration of loot boxes into games of skill without
the corresponding addition prevention measures and provisions to be
inconsistent with Dutch gambling policy. The NGA stated:
According to our analyses, loot boxes have, on average, an
addiction potential between moderate and high. A lot of loot boxes have
integral elements that are similar to slot machines. Loot boxes with a higher
score are often comparable with blackjack or roulette in terms of addiction
potential. Loot boxes with a lower score are comparable with small-scale bingo
in terms of addiction potential.
A very large group of minors (75% - 95%) play video games.
This group can currently be exposed to loot boxes. The risk of gambling
addiction in this group is higher than in other groups.
The integration of loot boxes into games of skill provides a
low threshold for playing a game of chance. This integration creates a mixture
of games of chance and games of skill in an environment that is comparable, in
physical terms, with the low threshold of the hotel and catering industry. Such
mixing at these locations was prohibited in the Netherlands in the 1990s to
reduce exposure to games of chance and to protect minors.
The NGA noted that it broadly has the power to impose a fine or other
sanction such as an Administrative Order for incremental penalty payments of €830,000 or 10 per cent
of a company's world-wide turnover in the event of non-compliance with its
determinations. It also noted that if administrative enforcement does not work
then the NGA can appeal to the Public Prosecution Service to prosecute criminal
In November 2017, a French Senator wrote to the Authorité de regulation des jeux
en ligne (ARJEL), the French online gambling regulator, in relation to loot
boxes. In response, the President of ARJEL, Mr Charles Coppolani, outlined
three issues which loot boxes raise. These issues were:
- consumer protection rights with respect to micro-transactions
which are added after the game's original purchase, and of which players are
not clearly informed;
- tracking in-game spending with Coppolani contrasting loot boxes
with pay-to-win micro-transactions where players know what they are purchasing;
the issue of converting virtual items into something of
ARJEL expanded on its position in 2018 and examined the definition of
gambling under French law which requires a stake, chance and a prize. ARJEL
concluded that given the legal definition of gambling, not all loot boxes can
be qualified as gambling, however it is different where it is possible to
monetize virtual items. ARJEL further stated that the 'legality of this type of
game is arguable when the prize may be transferred out of the platform and when
the gaming editor enables the use of prizes won elsewhere than in the
environment of the platform'.
More broadly, ARJEL noted that regardless of meeting legal definitions
of gambling, loot boxes challenge the public policy objectives that underpin
French gambling policy. In particular, ARJEL noted: the lack of age
verification which results in minors being able to play games with loot boxes;
loot boxes introducing minors to gambling-like elements; and a lack of
transparency with respect to the random number generator used in loot boxes.
Germany's Federal Review Board for Media Harmful to Minors (BPjM) issued
a statement regarding loot boxes in October 2017. It noted that risks posed by
loot boxes lie in how game mechanics function rather than the content of games
themselves. BPjM noted that loot boxes pose new challenges to regulators
seeking to protect minors from harm and stated that it was working other
agencies to develop a child and youth policy strategy which would encompass loot
In February 2018, the Commission for the Protection of Youth in the
Media (KJM) also issued a statement on loot boxes. It indicated that some loot
boxes may contravene Germany's prohibition on direct advertisement appeals to
purchase products directed at minors.
In October 2017, the UK's Parliamentary Under Secretary of State for
Sport and Civil Society responded to a written question on notice regarding
protecting children and vulnerable adults from harm associated with gambling
and video games. The answer stated that:
Where items obtained in a computer game can be traded or exchanged
outside the game platform they acquire a monetary value, and where facilities
for gambling with such items are offered to consumers located in Britain a
Gambling Commission licence is required. If no licence is held, the Commission
uses a wide range of regulatory powers to take action.
The UK Gambling Commission issued further guidance on loot boxes in
November 2017 and stated that in determining whether loot boxes meet the
definition of gambling under UK law, the key consideration is:
...whether in-game items
acquired 'via a game of chance' can be considered money or money's worth. In practical terms this
means that where in-game items obtained via loot
boxes are confined for use within the game
and cannot be cashed out it is unlikely to be caught as a licensable gambling activity. In those cases
our legal powers would not allow us to step in.
The UK Gambling Commission also noted that where activities don't meet
the legal definition of gambling, but could still potentially cause harm to
children, it is the job of the regulator to ensure that children are protected
through other measures such as age verification requirements.
Responses to loot boxes in the United States have included
self-regulatory initiatives, as well as state-based legislative proposals.
The Entertainment Software Rating Board (ESRB) is a self-regulatory body
responsible for assigning rating for video games and apps sold in the US and
Canada. In October 2017, it declared that it did not consider loot boxes to be
gambling. However, in February 2018, it launched an initiative to assign an
'in-game purchase' label to physical copies of video games to aid parents. It
also simultaneously launched a website to assist parents in tracking children's
States such as Hawaii, Washington state, Minnesota and California have
introduced bills related to the regulation of loot boxes. These bills have not
been passed to date.
In 2016, it was reported that China's Ministry of Culture requires video
games containing loot boxes to provide information about the odds of receiving
loot box items.
In December 2017, the Department of Internal Affairs' Gambling
Compliance Office issued a media statement to the effect that loot boxes do not
meet the definition of gambling under New Zealand law. The statement noted:
Gamers do not purchase loot boxes seeking to win money or
something that can be converted into money. They buy loot boxes so that they
can use their contents within the game and thereby have a better gaming
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