# Lentis/Microtransactions in Videogames
## Introduction

In video games, a microtransaction, also known as in-game or in-app purchases, is a transaction where consumers exchange real-life currency for virtual currency or goods, such as unique characters, weapons, mounts, and pets that may have superior stats or only cosmetic differences. While storefronts disclose whether microtransactions exist in the game, individuals may purchase a game without realizing how prevalent microtransactions are in that game. Once a credit or debit card is used to purchase a microtransaction, the storefront or game offers to store their card, which can cause consumers to be less mindful about future purchases. Video game companies employ psychological tactics, such as loss aversion and sunk costs, to keep consumers buying microtransactions. As with gambling, certain groups of people are more susceptible to the influences of microtransactions. This investigation will explain the incidence of microtransactions in video games; explore their psychological effects on addicts and youth; document criticisms and justifications from the perspectives of the gaming community, companies, trade associations, and governments; and cover lawsuit cases that call for the regulation of microtransactions due to its harmful effects. While video games are the focus, microtransactions are an example of when lack of regulation can lead to exploitation for financial gain.

## History

In the late 1990s with the rise of popularity in the Internet, people began downloading video game content online. Video game developers and hobbyists would sell or share expansions to PC games as downloadable content (DLC). In 2002, Microsoft released Xbox Live, an online platform for the Xbox, which allowed players to purchase DLC on it. The first microtransaction sold by a major publisher was in 2006 when Bethesda sold horse armor in The Elder Scrolls IV: Oblivion for $2.50. It was made as an experiment to test the market’s reaction to DLC. Most players reacted negatively, claiming that $2.50 for an in-game cosmetic item was too much. Despite the negativity, the horse armor became the ninth best selling DLC in Oblivion and was still being purchased more than two years after its release. Bethesda and other game studios began using microtransactions more as an extra stream of revenue. In 2008, the iOS store launched on Apple iPhones, and games there used microtransactions as their main source of funding. In the first three years after its launch, iOS apps made over $3.6 billion in revenue with over 15 billion downloads, and 80% of that revenue coming from mobile games. In an attempt to capture the success of microtransactions in mobile games, developers have added more microtransactions in PC and console games.

## Implementation Strategies

Developers experiment with different microtransaction models in order to appease their shareholders and consumers. These are the three most prevalent ways developers integrate microtransactions in their games.

### Loot Boxes

Loot boxes are sets of purchasable randomized items that can vary in rarity. These items are generally small additions to the game and are intended to be purchased more than once. Some video games sell loot boxes that contain power upgrades, while other games’ loot boxes only have cosmetic items. This type of microtransaction has been massively profitable and, as a result, has been adopted by several gaming companies, such as EA, Activision, Blizzard, and Capcom. Loot boxes have been estimated to generate up to $30 billion dollars in 2018 alone, with this amount rising to $50 billion by 2022.
Since the usage of loot boxes has allowed gaming companies to earn high profits in an unregulated market, this has lead video game companies to adopt malpractices to exploit its player base. For example, since loot boxes feature gambling-like mechanics but are not regulated as much by governmental organizations, gaming companies have been able to avoid the legality issues concerning loot boxes. Another issue with loot boxes is that they are highly addictive, as it provides gamers with a sense of accomplishment when “winning” an item. Also, because opening loot boxes are addictive by the way they are presented, such as through the use of glittering, cheerful sound effects, and other animations, this compels players to keep purchasing these microtransactions until they get what they want, because it is seen as exciting. In response to their addictive aspects, some countries have regulated how loot boxes can be sold. In 2016, China announced legislation that required companies to publish the draw probability of all virtual items. While there are many games out there with loot boxes that can be earned through gameplay, several issues arise when randomly dropped items require purchases in order to be obtained. This is because in-game items tend to become limited, which encourages grinding and pushes players to purchase microtransactions to skip these steps and save time. This also leads to cases where customizability options within the game are limited, as game companies are motivated to lock content behind loot boxes to earn more profit.
Due to the concern of the gambling like mechanics of loot boxes, some governments and citizens have begun to step up and file charges and lawsuits against their use. For example, after a legal battle between the Gambling Authority and Electronic Arts (EA) in Netherlands late October 2020, the court ruled that the Netherlands Gambling Authority will be allowed to fine EA €500,000 every week up to a maximum penalty of €10 million until it stops selling loot boxes in FIFA Ultimate Team, after the feature was deemed in violation of gambling rules. Another lawsuit case that was brought up against EA was in the US District Court of Northern California for a feature which artificially adjusts the difficulty to encourage players to purchase loot boxes to advance. There was also another class action suit brought up against EA in Canada on October 2020, where the plaintiffs argued that randomized loot boxes should be considered illegal gambling. Due to the multiple ongoing cases questioning the legality of loot boxes, regulation may soon be widely adopted to control the aggressive monetization scheme behind loot boxes.

### Gacha

Originating from Japanese capsule-toy machines called gachapon, gacha is the video game equivalent of these randomized vending machines. While gacha is essentially the same as loot boxes, it is a more commonly used term when referring to mobile games. In fact, gacha is the precursor to loot boxes, which is implied by the name of the first known loot-box system, "Gachapon tickets" in MapleStory. Since gacha games are usually free-to-play, they rely even more on microtransactions to make money. In gacha games especially, there is a small percentage of players, called "whales," who contribute up to 50% or more in revenue sales, which demonstrates its addictive qualities. In 2012, Japan's Consumer Affairs Agency declared "complete gacha" to be illegal, which is a type of gacha where players must collect a set of common items to earn a rare item. In response to this ban, mobile game developers GREE and DeNA formed the Japan Social Game Association, with the goal of using self-regulation instead of government regulation. However, companies continued to use gacha mechanics, resulting in the trade association's disbandment.
One notable example of a gacha game and how it incentivizes microtransactions is Genshin Impact, which made $245 million in its first month on mobile.. In contrast to games that only sell cosmetic items or changes, Genshin Impact locks gameplay elements, such as characters and weapons, behind its gacha system. In particular, five-star prizes (the rarest) only have a 0.6% chance of appearing in one pull. While players can pull for these prizes from regularly playing the game, it requires plenty of time and patience with no guarantee of ever getting the desired prize. As an alternative, each pull can be purchased for about $2. If the player's last 89 pulls did not include a five-star prize, the next pull is guaranteed to have a five-star prize, but it could be any one of them, including duplicates. By offering these "pity pulls," Genshin Impact nudges consumers to pay a little extra when they are close to that point. Furthermore, certain prizes are only available during limited time events of a few weeks in duration. Although these events may reoccur in the future, consumers feel pressured to buy pulls during then, lest they lose out on their chance of getting a particular prize. While pulling a five-star character once is rare enough, the only way to level up a character's talents is by pulling duplicates of the same rarity. With these mechanics Genshin Impact crafts a microtransaction system that is effective at influencing the player to spend.

### Resellable Skins

Resellable skins are low-cost cosmetic changes to game assets that can be purchased and sometimes resold to others while gaming. This type of microtransaction keeps gameplay balanced by not allowing players to buy an advantage. Since skins are tradeable in certain games, gambling sites have been created for users to bet and win skins. Counter-Strike: Global Offensive has been at the center of this controversy, since the game's gun skins are used as tokens on gambling websites. Since the items are not real currency, gambling with them is legal and unregulated. This has given opportunities for people, including minors, to gamble in areas where gambling is illegal. In 2015, more than 3 million people wagered over $2.3 billion on the outcome of sport matches. Countries, such as the United Kingdom, declared gambling with in-game items to be illegal. The Washington State Gambling Commission directed Valve Corporation -- the developer and publisher of Counter-Strike: Global Offensive -- to stop facilitating the use of skins for gambling activities. While Valve has sent cease and desist notices to sites that use items from their games to wager bets, they believe that they are not to blame, since they did not create the gambling sites. Though gambling sites abuse Valve’s microtransaction model, Valve has no intention of making cosmetic items non-tradeable, because they believe it creates more user engagement and adds value to the items. Because Valve has made over $355 million from selling cosmetic skins, it is financially incentivized to continue selling and encouraging microtransactions.

## Psychology
### Fail State Fallacies

In a 1998 study led by S. W. Kim, researchers discovered that individuals awaiting the results of a gamble often experienced pleasure-inducing endorphins. With loot boxes, this effect is amplified due to the extravagant colors, animations, and sounds that accompany each box-opening. Furthermore, due to the player being able to open as many boxes at one time, the player can experience this rush of excitement numerous times in a short period of time. Consequently, if the player is left disappointed after a few boxes, his brain may come to unreasonable conclusions in order to purchase more boxes. There are three logical fallacies that will lead an individual to continue purchasing boxes, despite having previously failed multiple times.

#### The Gambler's Fallacy

The Gambler's Fallacy refers to the belief that the more a particular outcome occurs in the present, the less likely it will occur in the future. In regards to loot boxes, it leads individuals to believe each bad box removes the chances of experiencing that particular event again, but that is not true. The probability of a specific loot box drop is independent of previously received rewards.

#### Self-Correction & Fairness

Similar to the Gambler's Fallacy is the belief that gambling is inherently fair. Whenever an individual experiences poor luck, he is eventually due for a massive win to make up for all prior negative outcomes. This is not true for gambling, and it is not true for loot boxes. The probability of a specific loot box drop is independent of previously received rewards.

#### Sunk Cost Fallacy

The Sunk Cost Fallacy, otherwise known as loss aversion or the entrapment effect, refers to the human disposition of preventing losses rather than attempting to acquire an equivalent amount. In regards to loot boxes, loss aversion typically takes the form of chasing. For example, this fallacy may lead a person who does not get his desired item after five boxes to buy five more. It would be far more satisfying for said individual to purchase ten boxes and get his desired drop, rather than failing to acquire it after five. The negative effects of this mindset can be intensified by items that can only be acquired during a specific event.

#### The Fear of Missing Out

One of the primary ways studios encourage players to purchase loot boxes is through the fear of missing out(FOMO). When an item is only available for a limited time, it leads to artificial scarcity. There's no reason for the item to no longer be available other than to incentivize players into purchasing loot boxes. If the item is highly desired amongst by a player, giving them a limited time to earn said item may intensify unreasonable thoughts that lead to the aforementioned fallacies. No player wants to feel like they've missed out on an enjoyable experience. Furthermore, other players who own the desired items essentially act as walking advertisements for those who don't. If a player doesn't want to continue buying loot boxes, he may never attain his desired item and be envious of the individuals who did. This phenomenon is further worsened by other in-game advertisements that prominently display the rarest items, rather than the lower tier items that are far more common. This convinces individuals that the odds are in their favor since they're only exposed to the items they most want.

## Additional Examination
### Reactions to Microtransactions in Star Wars Battlefront II

Microtransactions have received a clear response from the gaming community. Video game company EA experienced an 8.5% drop in stock value after releasing its most recent game Star Wars Battlefront II. Shortly after the game’s beta release, Reddit user TheHotterPotato posted an analysis in which he determined that it took about 40 hours of gameplay to unlock loot boxes, which contain heroes, such as Luke Skywalker and Darth Vader. He also included a spreadsheet with statistics for gameplay minutes required to unlock various other perks as well. The post quickly gained popularity, with more than 10,500 upvotes in Reddit’s Star Wars Battlefront II community forum until EA’s community team responded: the extended gameplay is meant to “provide players with a sense of pride and accomplishment for unlocking different heroes.” Gamers within the community critiqued EA’s response and made it the most downvoted post in the history of Reddit with over 683,000 downvotes. As a response to outcry from the gaming community, EA removed the loot box system. Hours before the game’s international debut, EA spokesman Oskar Gabrielson issued a statement: “We’ve heard the concerns about potentially giving players unfair advantages . . . this was never our intention. Sorry we didn’t get this right.”

### Reception on YouTube

Content creators, such as Dark Jak Gaming, The Act Man, and The Angry Joe Show, regularly denounce the use of microtransactions and downloadable content. The comments section of these channels are often flooded with comments from gamers condemning monetization strategies within video games. In a popular post made by Angry Joe, he debates the use of microtransactions in Star Wars Battlefront II while live on camera with EA representative Paul Keslin. Keslin expresses how EA has been receptive to the gaming communities' responses and how they are influencing the future of their games. The caption of the video reads, “Baby steps guys, we are having an effect.”

### Addiction

As countless people succumb to addiction to microtransactions, the World Health Organization classified "gaming disorder" as a behavioral addiction in their International Classification of Diseases. An example of how extreme this addiction can become is the story of Reddit user nothing024. Despite being a father with children to support, he slowly went from spending $20 to as much as $2,500 for a single character. While he desired to stop, the release of new characters pulled him back in. Though he felt guilty each time this happened, he justified his addiction by vowing to stop after getting the current desired character, which proved ineffective. This cycle repeated until his wife noticed his credit card balance, forcing him to come clean and quit. As a consequence, he ended up $16,000 in debt, rivaling the magnitude of gambling addiction cases.

### Exploitation of a Younger Audience

An issue that arises from loot boxes is the exploitation of a younger audience. For example, on September 27, 2020, EA placed an advertisement in a kid’s toys magazine in the UK that taught kids how to buy FIFA Ultimate Team packs through points by spending real world money to get their favorite football players through loot boxes. EA received significant backlash from the gaming community and from several gaming news outlets, as this advertisement encouraged children to buy loot boxes. By doing so, EA was teaching children how to gamble for a family-friendly game. As a result, EA removed the controversial FIFA microtransactions advertisement from the magazine on September 30, 2020, responding with the following statement, "In spite of this, we're aware that advertising for FIFA Points has appeared in environments it shouldn't have . . . and are working to ensure each of our marketing efforts better reflects the responsibility we take for the experience of our younger players."

### Justification

Due to inflation, consumers spend about half of what they used to on video games than they did in the 1980s. Financial analyst Evan Wingren argues that "Videogame publishers are actually charging gamers at a relatively inexpensive rate, and should probably raise prices." While game publishers have avoided elaborating on whether microtransactions are a necessity, it can be attributed to rising development costs. As production costs have increased by 200% to 300% for certain Xbox Series X and PlayStation 5 games, some game publishers, such as Sony, have opted to increase the price of individual games from $60 to $70. Despite this price increase, games, such as NBA 2K21, have kept microtransactions. In response to the Federal Trade Commission (FTC) announcing an investigation on loot boxes in 2018, the Entertainment Software Association (ESA), a trade association comprised of many major game companies, asserts that "Loot boxes are not gambling . . . they have no real-world value, players always receive something that enhances their experience, and they are entirely optional to purchase." It continued, "[Loot boxes] can enhance the experience for those who choose to use them, but have no impact on those who do not." In 2020, the FTC conducted a workshop on loot boxes, which had mixed views on increased government regulation. Some panelists said that "Self-regulation is adaptable and effective . . . poorly crafted regulation could harm the industry and inadequately protect consumers." On the same day as the workshop, the ESA explained how their publisher members "already disclose the relative rarity or probability of obtaining in-game virtual items from purchased loot boxes, and other major publishers have agreed to do so no later than the end of 2020."

## Conclusion

Since microtransactions, such as loot boxes, cannot be converted to real-world money by legitimate means, comparisons to gambling remain contentious. While regulation on microtransactions has been minimal, governments have been slowly taking notice, with some opting to let the industry self-regulate. As the relatively young video game industry matures and strives to maximize profits, other types of microtransactions will inevitably emerge, which may prompt future regulatory action that could be observed in further work. Additionally, there are many psychological, genetic, biological, and environmental factors that may lead to addiction to microtransactions. Microtransactions in video games represent a case where new digital forms of currency and recreation can push the boundaries of legal and moral definitions, leaving regulatory agencies struggling to keep up.

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