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6 INSIDE THE GAME: UNLOCKING THE CONSUMER ISSUES 

7 SURROUNDING LOOT BOXES

8 AUGUST 7, 2019

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1 C O N T E N T S

2 PAGE

3 Welcome and Opening Remarks 7

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5 Panel 1: Treasure or Trifle? A Macro Look

6 at Microtransactions 13

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8 Panel 2: Head in the Game - What Drives Loot

9 Box Spending? 112

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11 Panel 3: A Level Playing Field - What’s Fair

12 Game 167

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14 Closing Remarks 232

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1 P R O C E E D I N G S

2 INSIDE THE GAME: UNLOCKING THE CONSUMER ISSUES 

3 SURROUNDING LOOT BOXES

4 MS. JOHNSON: Good morning, everyone. My

5 name is Mary Johnson. I’m an attorney in the Division

6 of Advertising Practices in FTC’s Bureau of Consumer

7 Protection. Thank you for your interest in today’s

8 topic, “Consumer Issues Related to Video Game Loot

9 Boxes and Microtransactions.” 

10 Before we get started with the program, I

11 need to review some administrative details. I don’t

12 have a catchy video to hold your attention, so please

13 listen carefully. Please silence any mobile phones

14 and other electronic devices. If you must use them

15 during the workshop, please be respectful of the

16 speakers and your fellow audience members. 

17 Please be aware that if you leave the

18 Constitution Center building for any reason during the

19 workshop, you will have to go back through security

20 screening again when you return. So bear this in mind

21 and plan ahead, especially if you are participating on

22 a panel, so we can do our best to remain on schedule. 

23 If you received a lanyard with a plastic FTC

24 event security badge, please return your badge to

25 security when you leave for the day. We do reuse
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1 those for multiple events. 

2 So now some important emergency procedures. 

3 If an emergency occurs that requires evacuation of the

4 building, an alarm will sound. Everyone should leave

5 the building in an orderly manner through the main 7th

6 Street exit. After leaving the building, turn left

7 and proceed down 7th Street to E Street to the FTC

8 emergency assembly area. Please remain in the

9 assembly area until instructed to return to the

10 building. 

11 If an emergency occurs that requires you to

12 leave this conference center but remain in the

13 building, please follow the instructions provided over

14 the building PA system. And if you notice any

15 suspicious activity, please alert building security. 

16 Now a little bit about photos and recordings. 

17 Please be advised, this event may be photographed and

18 it is being webcast and recorded. So by participating

19 in this event, you’re agreeing that your image and

20 anything you say or submit may be posted indefinitely

21 at FTC.gov or on one of the Commission’s publicly

22 available social media sites. 

23 Please also note that the microphones in this

24 room on the stage are live. They will remain live

25 throughout the day, even during breaks. 
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1 We certainly hope that you will have

2 questions for panelists during the day. So please

3 feel free to submit written questions for the

4 panelists during the Q&A segments of each panel. 

5 Question cards are available in the hallway on the

6 information table immediately outside the conference

7 room. Also, FTC volunteers will be walking around the

8 room with question cards. So if you need a blank card

9 or you have a written question to submit, just raise

10 your hand and an FTC volunteer will assist. 

11 You may also submit questions for panelists

12 via Twitter to @FTC using the hashtag, #LootBoxFTC. 

13 Food, drink and other necessities, lunch is

14 available here in the building from 11:30 to 2:00 p.m. 

15 And after 2:00, between 2:00 and 3:00, there’s some

16 limited hours and services. After 3:00, it will be

17 closed. 

18 The restrooms are located in the hallway just

19 outside this conference room. 

20 Finally, thank you to everyone who helped put

21 together this event. That includes the staff of the

22 Bureau of Consumer Protection’s Division of

23 Advertising Practices, Division of Financial

24 Practices, Division of Litigation Technology and

25 Analysis, and Division of Consumer and Business
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1 Education. It also includes staff of the Bureau of

2 Economics and FTC’s event planning team, Office of

3 Public Affairs, media team, and security management

4 team. 

5 And now, I am pleased to introduce our bureau

6 director to give opening remarks for today’s workshop. 

7 Andrew Smith is Director of the FTC’s Bureau of

8 Consumer Protection. He came to the FTC from the law

9 firm of Covington & Burling, where he co-chaired the

10 Financial Services Practice Group. Earlier in his

11 career, Mr. Smith was a staff attorney at the FTC,

12 where he focused on consumer financial protection

13 issues and led the agency’s efforts to make several

14 rules under the Fair Credit Reporting Act. 

15 Please join me in welcoming BPP Director

16 Andrew Smith to the podium. 

17 (Applause.) 

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1 WELCOME AND OPENING REMARKS

2 MR. SMITH: Thank you, Mary. 

3 So good morning, everybody. It’s my pleasure

4 to welcome you to our workshop, “Inside the Game: 

5 Unlocking the Consumer Issues Surrounding Loot Boxes.”

6 I probably should give our standard disclaimer that I

7 speak only for myself and not for the Commission or

8 any individual commissioner. But thank you for being

9 here at the Constitution Center or for joining us

10 through the FTC’s live webcast. And, also, thanks to

11 those of you following on Twitter. 

12 We also thank the individuals and

13 organizations who have taken the time to submit public

14 comments or make suggestions for today’s workshop

15 panels. The comment period will be open until October

16 11 and we encourage you to submit written comments on

17 issues discussed in the workshop. You’ll find details

18 on how to submit comments on our Loot Box Workshop

19 event web page. 

20 So everyone -- children and adults -- plays

21 video games. There’s a video game out there for

22 almost any interest, from action and adventure to

23 sports and strategy. The video game landscape has

24 changed dramatically over the last several years. 

25 Games today offer rich graphics, sophisticated
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1 storylines, and can be accessed through mobile

2 devices, computers, and console systems. By one

3 estimate, more than half of game players play on more

4 than one platform, with mobile being the most common. 

5 The popularity of gaming is such that it has

6 become something -- not just something that people do,

7 but an activity that people watch, discuss, debate. 

8 Players livestream their video game play, YouTubers

9 and others broadcast shows about gaming, and eSports

10 competitions attract hundreds of millions of viewers

11 worldwide and have prizes in the millions of dollars. 

12 But let’s get to the issue that brings us

13 here today, the purchase of loot boxes and other

14 in-game items. The ability to make in-game purchases

15 isn’t new. It’s a feature available over multiple

16 platforms. These purchase options, often referred to

17 as microtransactions, encompass a range of digital

18 items, such as cosmetic skins to outfit an avatar,

19 in-game currency, bundles, upgrades, bonus levels, and

20 containers with random assortments of mystery rewards

21 called loot boxes, loot crates, or loot chests. 

22 Alternatively, players may earn virtual items

23 or in-game currency by investing time rather than

24 money, such as hours of gameplay, competing in timed

25 challenges within the game, or racking up bonuses for
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1 logging into the game daily. 

2 While the rewards may be virtual,

3 microtransactions are a very real revenue stream for

4 game developers and publishers. Game companies report

5 billions of dollars in revenue from such transactions. 

6 When it comes to loot boxes and other randomized

7 digital rewards, these so-called surprise mechanics --

8 surprise, here I am -- are not always welcome

9 surprises. There have been anecdotal reports of

10 consumers spending hundreds to thousands of dollars in

11 pursuit of coveted items. 

12 Many people have expressed serious concern

13 about whether these mechanics are predatory or

14 contribute to gambling-like behavior, particularly as

15 to children or with people who already struggle with

16 gambling or addictive problems. In addition, do

17 consumers, especially children or adolescents,

18 adequately understand what they’re purchasing and how

19 much time or money they’re spending? Are the

20 disclosures adequate? For example, disclosures about

21 the odds of obtaining specific loot box items,

22 especially if those odds may change depending on game

23 behavior. 

24 The FTC has a long history of looking at

25 consumer issues involving the video game marketplace. 
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1 We’ve issued several reports on marketing violent

2 entertainment to children; we’ve published guidance

3 for parents about video games and kids; and we’ve

4 carefully examined cases in which there is a potential

5 for consumer injury. Video game microtransactions

6 raise important consumer issues and ones that we look

7 forward to discussing today. 

8 So here’s today’s lineup. This morning,

9 we’re going to explore the in-game microtransaction

10 landscape; who plays video games; the history of loot

11 boxes and game monetization more generally; what is a

12 loot box and what are the different types of in-game

13 purchases; how do players make these purchases; what’s

14 the role of in-game microtransactions in video games;

15 and other considerations from a developer’s

16 perspective, including a small or an independent

17 developer. We’ll also hear about what consumers,

18 including gamers, think about loot boxes and concerns

19 about how they are being marketed. 

20 To walk us through these issues, we will hear

21 from representatives of two gaming industry

22 associations and an attorney who represents companies

23 in the video game industry. We also will hear from

24 representatives of two consumer groups and from a

25 talent agent who represents online performers and
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1 influencers in the video game space. 

2 After lunch, we will turn to academic

3 research by four professors, each of whom has

4 approached the subject of loot boxes and digital media

5 from a different angle. A media effects specialist

6 will discuss his research on the associations between

7 loot boxes and problem gaming. A marketing professor

8 will present research exploring whether people who buy

9 loot boxes do so to enjoy the game or to advance in

10 the game. 

11 An industrial engineering professor will talk

12 about how to design and optimally price loot boxes

13 from the perspective of the gaming company. We also

14 will hear from a clinical child psychologist who helps

15 parents and children address excessive and problematic

16 digital media use. 

17 Our final panel of the day will examine what

18 role self-regulatory initiatives and consumer

19 education can play in addressing concerns about loot

20 boxes and microtransactions. You will hear from the

21 organization that establishes ratings for video games,

22 two consumer groups, and an organization that focuses

23 on problem gambling. They will discuss video game

24 ratings, tools that consumers can use to restrict or

25 monitor in-game purchases, ways to improve consumer
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1 understanding and awareness, and suggestions for

2 industry best practices. 

3 Our panelists today have a wealth of

4 experience and represent a variety of viewpoints when

5 it comes to loot boxes. We look forward to a frank

6 discussion of these issues and to using the

7 information shared today and on the public docket to

8 inform regulatory priorities, as well as industry and

9 consumer guidance. We have a lot to cover. 

10 Before we do that, I want to single out a

11 couple of folks for special thanks for organizing

12 today’s program, Mary Johnson, Andrew Wone, Will

13 Ducklow, Rick Quaresima, Patrick -- oh, Patrick, this

14 is going to be tough -- McAlvanah, and Brittany

15 Frassetto from our Bureau of Consumer Protection and

16 our Bureau of Economics. 

17 So without further ado, let me turn the

18 podium over to Brittany Frassetto and Andrew Wone to

19 introduce the first panel. 

20 Thank you very much. 

21 (Applause.) 

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1 PANEL 1: TREASURE OR TRIFLE? A MACRO LOOK AT 

2 MICROTRANSACTIONS

3 MR. WONE: Okay. My name is Andrew Wone and

4 I’m an attorney in the Division of Advertising

5 Practices. And co-moderating this panel with me is

6 Brittany Frassetto, who’s in our Division of Financial

7 Practices. 

8 Our first panel today, as Andrew mentioned,

9 is entitled “Treasure or Trifle? A Macro Look at

10 Microtransactions.” The panel will explore the role

11 of loot boxes and similar mechanics in the video game

12 ecosystem and the impact of these monetization models

13 on end users. 

14 You’ll hear from six panelists who will

15 present for approximately 15 minutes. After all of

16 the presentations, we’ll take a short break and then

17 proceed with the moderated discussion. 

18 And now, I’ll turn the microphone over to

19 Brittany who will introduce the panelists. 

20 MS. FRASSETTO: Good morning, everyone. 

21 So starting to my left and then going down

22 the line is Sean Kane. Sean is a partner at the law

23 firm of Frankfurt Kurnit Klein & Selz and is a

24 founding member of the Video Game Bar Association. 

25 Next to him is Jeff Haynes, Senior Editor of
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1 Video Games and Websites at Common Sense Media. 

2 To his left is Mike Warnecke, Senior Policy

3 Counsel for the Entertainment Software Association, or

4 ESA. 

5 Next is John Breyault, Vice President for

6 Public Policy Telecommunications and Fraud at the

7 National Consumers League. 

8 To his left is Renee Gittins, Executive

9 Director of the International Game Developers

10 Association. 

11 And, finally, we have Omeed Dariani, the

12 co-founder and CEO of Online Performers Group, which

13 represents content creators in the video game space. 

14 And Sean will be starting us off this

15 morning. 

16 MR. KANE: Thank you. 

17 Well, initially, I wanted to thank Mary,

18 Will, Andrew, Brittany, and the rest of the FTC team

19 for inviting me here this morning. 

20 So in a way, this is what I call somewhat my

21 mandatory waffle slide. I’m here today really to

22 speak about my own opinions. I’ve worked in the video

23 gaming industry for over 15 years. I represent more

24 than 100 video game companies, and those companies

25 range from literally one or two people that are
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1 creating apps for the app store all the way up to the

2 largest video game publishers and developers in the

3 world. 

4 I’ve literally wrote the book on video game

5 law, so I was thankful to be able to come here today

6 and just talk a little bit about my experience and try

7 to give some background on the history of the games

8 industry when it comes to monetization. 

9 So I really wanted to start by just talking a

10 little bit about where we’ve come because I don’t

11 think we can understand the modern concept of loot

12 boxes and microtransactions without understanding what

13 the history of this industry looks like. 

14 So the games industry really became in the

15 forefront of, I think, popular culture starting back

16 in the 1970s. I was lucky enough to know the

17 gentleman who basically created the home video game

18 system, a gentleman named Ralph Baer who passed away a

19 couple of years ago. He created the first home game

20 system back in the ‘60s. 

21 At the time, they really had no idea what

22 they created and how it was going to really change

23 popular culture. But once it was created, someone

24 began to start to market it and they began to try to

25 figure out, how can we build an industry around this. 
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1 Initially, the industry really wasn’t

2 home-based. I’m old enough to remember arcades. I

3 spent many, many, many an hour and many a quarter

4 playing games like Pacman and Galaga, and I did it

5 fondly because there was a social aspect of it, there

6 was an entertainment aspect of it. And these

7 particular arcades were a place that people went to

8 have community with like-minded individuals. And we

9 played on very low tech games, and we pumped billions

10 and billions of quarters into this industry. If you

11 look back on it and you adjusted for today’s

12 inflation, it’s almost $10 billion was pumped in by

13 the end of the 1970s. 

14 But things changed. The consoles that we all

15 went and used at arcades, in some cases, were still

16 there. However, it was the dawn of really home video

17 game systems. There was a shift. If we look at the

18 late ‘70s into the ‘80s, there were more than a dozen

19 home video game systems that were launched. 

20 I will mention a few of them and I’ll be

21 shocked if people remember some of these. But there

22 was the Fairchild Channel F, which came out in 1976;

23 RCA Studio 11, that’s 1977; Bally Astrocade, 1977; my

24 favorite and the one that I spent too many hours on,

25 the Atari 2600, also 1977; the Magnavox Odyssey came
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1 out in ‘78; Intelevision, 1980; and ColecoVision 1982. 

2 So the shift became from the concept of an arcade, a

3 place that you would go to see these games, to the

4 home. 

5 Now, initially, some of these games were more

6 analog, they were actually built into the systems. So

7 when you purchased that console, you pretty much got

8 all of the games. That quickly changed. Games

9 started to be sold on cartridges and disks as time

10 went on. And those things replaced the concept of

11 putting a quarter in every time you would play. 

12 Now, you were paying for those particular discs, you

13 were playing for the particular game that you wanted

14 to play. No one was forced to buy all of them. You

15 bought the game that you felt was going to be most

16 interesting to you, most exciting to you, most

17 entertaining to you. I spent a lot of time trying to

18 jump over crocodiles in Pitfall because that was

19 entertaining to me. 

20 Now, in the ‘90s, we saw things shift even

21 further because the technology increased, the

22 bandwidth started to populate, and we got to a point

23 where we could -- you didn’t necessarily have to go

24 buy that disk, buy that cartridge. You can basically

25 start, in a way, downloading certain games. 
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1 And it was really a wonderful opportunity for

2 hobbyists, people that liked games but wanted to

3 actually create their own games. In fact, there are

4 certain popular games that are out there today that

5 really were launched as modifications to other

6 existing games. 

7 And so the downloadable aspect of games

8 launched an entire culture of hobbyist gamers, many of

9 whom stopped becoming hobbyist and became

10 professionals. I’m sure Renee probably has many

11 stories of people that started out modding games or

12 started out creating their own simple games, and then

13 have moved on to create other very popular games, both

14 as independents or potentially going to move to one of

15 the larger publishers or developers. But we also saw

16 the PC market expand significantly as things like the

17 PC culture in the US grew, Windows grew. 

18 Now, we get to the 2000s. This was

19 interesting because PC games started to deal more with

20 multiplayer issues. We started initially just with

21 the LAN culture, which basically meant people were

22 coming together and they were all plugging into a

23 local network and they were all playing together in

24 one space. Now, that changed and expanded to also

25 internet-based multiplayer. So people didn’t have to
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1 be in the same place. They could still be playing,

2 they could still be socializing. 

3 We also became, in the 2000s, kind of the

4 beginning of really browser-based games. Now, those

5 were really some of the first free-to-play games. 

6 Before that, as I said, the games and discs, they were

7 sold individually. Now, we have a rise of a business

8 model where the games were free. You could go on,

9 anyone could play them that had an internet

10 connection. A lot of those games might have been

11 backed by banner ads or other sort of advertising

12 revenue models. 

13 We also then launched into the arrival of

14 really online multiplayer games. I think World of

15 Warcraft is a great example of that. That was

16 probably one of the first that most people, even those

17 who weren’t gamers, weren’t in the gaming culture,

18 really had heard of. In that particular case, they

19 would still sell an original, the initial game, and

20 then there was expansion packs or subscription models

21 that survived out of that. And that’s how the

22 monetization was going for those mostly online

23 multiplayer games. And it was really the debut of a

24 subscription model, people deciding that I’m going to

25 play this game almost daily. 
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1 Prior to that, there were games that charged

2 by the minute when you were playing or by the hour. 

3 That model changed and people started to realize,

4 well, I can pay one set fee and play as much as I want

5 over the course of a month or two months. I know

6 people that have been playing World of Warcraft still

7 for almost 15 years, and they have friends in the game

8 and they have people that they consider family in the

9 game, which are part of their guilds or their clans. 

10 Now, we get into the late 2000s and we see

11 the rise of the smartphones as game platforms. 

12 Initially, most of the games that were

13 smartphone-based were pay-to-play. You spent 99

14 cents, you spent $2, you spent $4.99 to download that

15 game, and then you were able to play that game as much

16 as you want. But we also then had the concept of the

17 “freemium” game, which, again, was a game that was

18 free to play and anyone can play it. Whether or not

19 you choose to spend or not spend is within your

20 decision. And they’re monetized by in-app

21 microtransactions. 

22 Some of the other panelists are going to

23 really get into what the nature of some of these

24 microtransactions are. So I’m not going to delve too

25 much into them because I don’t want to steal their
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1 thunder. But, basically, what some of it was there

2 were things like power-ups, there were things like

3 extra lives mechanisms. If there were cool-down

4 timers built into the games, these were ways to bypass

5 them. 

6 Really, one of the first games to make the

7 “freemium” model popular was a massively multiplayer,

8 online role-playing game called Maple Story. It

9 released in the US in 2005. So we’ve been seeing

10 these things as part of our kind of culture now for

11 about 15 years. 

12 Once we get past the 2010s, we’re getting

13 into more of what the modern situation looks like in

14 the gaming industry, and it was really more games as a

15 service. And they were designed basically to be

16 workable when there was always an internet connection. 

17 Because some of the earlier mobile games, really you

18 downloaded them. You could play them. You didn’t

19 need to have an internet connection. You didn’t need

20 to be connected in any way to the servers once you

21 downloaded it really to continue to play those games. 

22 But, now, we have games that are much more

23 interactive and so that consistent connection is

24 necessary. These games have actually started to offer

25 digital assets. These can be consumables and
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1 nonconsumables. As the name would suggest,

2 consumables are limited time, maybe one use. They’re

3 something that you can use; once you use it, it is

4 gone. Nonconsumable items, as was already mentioned,

5 you have skins, you have different cosmetics, things

6 that once you acquire, your characters, your avatars

7 continue to use them. It allows for customization. 

8 And I can tell you, as the son of a

9 14-year-old, customization in games is exceedingly

10 popular and it’s something that they do to really

11 interact with their friends. They love to be able to

12 show off some sort of new element that allows their

13 game character to more reflect their own personality. 

14 And I think we live in a world right now where being

15 able to reflect your personality is very important. 

16 So a new generation is finding new ways to do that. 

17 But one of the things that’s also come out of

18 this now is loot boxes, and that’s one of the reasons

19 we’re here to talk about. Loot boxes are interesting

20 because loot boxes are not just things that are paid

21 for; loot boxes can be earned in-game as well. Most

22 games have different sorts of currencies, currencies

23 that are earned and then currencies that can be

24 purchased. And in many games, loot boxes can be

25 accessed using either one of those currencies. 
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1 Now, the content of a loot box -- in some

2 respects, they talked about surprise. That’s a little

3 bit of a misnomer. Not all loot boxes have a surprise

4 element to them. There are definitely loot boxes

5 where players have a very good sense, if not complete

6 knowledge, of what’s inside that loot box when they

7 decide to open it. So certain games do have an

8 element of them where there is an aspect of the

9 unknown involving the loot box. But many other games

10 make this known. 

11 We also have things that have come out like

12 battle passes and season passes. Now, these are

13 somewhat similar, but battle passes, generally, we

14 look at it from the context of you really know what’s

15 in that. You’re buying kind of a whole stream of

16 content. It’s known content. You have a very good

17 sense of what each one of those things are. They’ll

18 be unlocked at different points in the game. So as

19 you progress, as you play more, your character, your

20 account will unlock these different rewards. And

21 those rewards can run the gamut from consumables, from

22 skins, to wholly different aspects of the game that 

23 you can then play. 

24 One of the first, I think, games that really

25 had that was Valve’s game Dota 2. Back in 2013, they
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1 released something called “The Compendium,” which

2 provided unique in-game content and kind of features. 

3 So that was one of the first times we’ve seen these

4 things. So we’re looking at this now -- it’s already

5 been in the industry for over 6 years. 

6 Now, season passes, the concept behind there

7 is usually more of a discounted package for current or

8 future content. And that content, again, may be

9 unknown. But, again, it’ll be unlocked as things

10 progress. One of the games that really started that

11 or put that out pretty early was Rockstar’s L.A. Noire

12 back in 2011. So again, that’s another thing that’s

13 been around in the industry now for quite some time. 

14 So one of the things I want to just hit

15 before I run out of time here is, basically, games

16 have really changed over the last 15 or 20 years. 

17 Really, these things were much more simplistic, they

18 were linear. Now, they’re open worlds. If we look

19 just at something like this, to see the changes just

20 in the imagery of games has expanded to a level that’s

21 almost photorealistic. 

22 But with that, the cost of games has

23 skyrocketed. Over the last 15 years, your average AAA

24 game, the cost has risen from, say, maybe $20 to $30

25 million to over $100 million, and in some cases, over
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1 $200 million. Because the cost of developing a game

2 with hundreds if not thousands of hours of play and

3 then marketing that game is immense. We put together

4 a slide chart just showing some of the costs of some

5 of the top movies recently and putting them up against

6 some of the top games, the most expensive games, to at

7 least give a level of understanding. 

8 And mobile games as well. My first mobile

9 game deals were very small. They were $5 million, a

10 couple million, in some cases, a couple hundred

11 thousand. And now, they can be $50 million or more

12 because it’s not just the development, it’s the live

13 operations of games that costs a lot for companies to

14 create. A quick chart just to show some concept of if

15 we looked at inflation, how much the cost of some of

16 these games would have been even back when they were

17 launched. 

18 So the average game today costs about $60. 

19 The average game in June of 2000 was about $49. If we

20 take that number and look at it for inflation, it

21 really would be much, much higher. That $49 would be

22 worth about $120. 

23 But, really, in the last 13 years or so, the

24 price of games has not changed. The cost has gone up

25 by about 1,000 percent, but the price of games has
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1 remained steady, which is why microtransactions has

2 populated in the industry quite a lot. “Freemium”

3 games, games as a service, they went out there to stop

4 piracy, but they also went out there to try to help

5 bridge the gap between the cost of games and the sales

6 price of games. 

7 And I want to basically close by just saying

8 some of the concept of these microtransactions gives

9 players a choice. No one is forced to spend money in

10 a video game that is free to play. They choose what

11 they want to spend and when they want to spend it and

12 how they want to spend it. Effectively, it’s a try13 before-you-buy model. You get to get out there and

14 play a game. If you like the game and you want to

15 spend money in the game, well, then do so. And the

16 percentage that does is very small compared to the

17 entire percentage of players in that particular game. 

18 Microtransactions also means lower costs for

19 everyone around the board and makes these things open

20 to more people who may not have the ability to spend

21 even $60 right now. Or if we were going to charge the

22 actual cost of development, that number might be more

23 like $300, $400, $500 a game to cover a budget of $200

24 million. 

25 And it also provides parental oversight
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1 because, to the extent that people don’t realize it,

2 every one of the consoles has parental locks. 

3 If parents choose, they can learn more about the

4 consoles, they can learn more about the games their

5 kids are playing, and they can make decisions on what

6 games children should play and whether or not they

7 should spend in it. 

8 I wanted to basically stop at that point and

9 just say thank you again very much for having me. I’m

10 happy to answer any questions that we have later on. 

11 And I will turn it back over to our wonderful FTC

12 moderators. 

13 MR. WONE: Thank you, Sean. 

14 Next, we’ll hear from Jeff Haynes. 

15 (Applause.)

16 MR. HAYNES: Good morning, ladies and

17 gentlemen. My name is Jeff Haynes and I’m the Senior

18 Editor of Video Games at Common Sense Media. It’s an

19 honor to be here today to talk about loot boxes,

20 microtransactions, and advocating for consumers trying

21 to navigate this digital landscape of games and apps. 

22 This is something that my writers and I deal with on a

23 daily basis when we’re evaluating the latest products

24 that are released, so it’s great to be able to share

25 some of the expertise and insights on this digital
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1 content, which might seem a little odd or confusing to

2 some non-gamers. But don’t worry because it’s a

3 little confusing at times to some gamers as well. 

4 So to try to reduce this confusion, let’s try

5 to unpack loot boxes, shall we? So what are loot

6 boxes? The simplest definition that could be used is

7 that they’re containers of randomized digital content

8 that hold items of varying degrees of in-game value. 

9 That could cover everything from weapons and items to

10 virtual cash, customizable costumes, game characters,

11 and much more. The rarity or associated value of each

12 item within a loot box will vary from game to game and

13 even from mode to mode. So that can make them

14 somewhat unique. It’s also one of the reasons why

15 they’re known by many different names, like loot

16 crates, price crates, booster packs, lock boxes, and

17 many more.

18 These are frequently earned rewards that are

19 provided to gamers for their in-game play, and they

20 often provide bonuses based on victories or

21 particularly skilled moves demonstrated during a

22 match. Loot boxes can also be purchased by gamers

23 with in-game currency or with real money through

24 in-game stores. 

25
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1 Now, unlike most video game genres, the

2 current concept of loot boxes, as they’re thought of

3 today, is still somewhat relatively new, having really

4 developed over the past 15 years or so. They’re

5 descended from treasure chests that were typically

6 found in role-playing games, like Diablo, or massively

7 multiplayer online games, like World of Warcraft, and

8 even earlier, things like Dungeons and Dragons. As

9 players will complete quests, defeat bosses, or

10 accomplish certain tasks, they’d be rewarded with

11 chests that players could use to enhance and improve

12 their in-game character. 

13 But it was the inclusion of online access in

14 games, as well as regularly updated content, that

15 helped drive the expansion of loot boxes from this

16 niche feature to where they currently are today. 

17 Nowadays, loot boxes can be found in just about every

18 single game genre, especially because developers made

19 a heavy investment into these mechanics in the past

20 decade. Now, that being said, the genres that

21 typically include these systems more than others are

22 collectible card games, first person shooters, sports

23 games, action titles, and role-playing games. 

24 But while loot boxes spread across multiple

25 genres, not all of them were handled very well. 
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1 Unfortunately, poorly-implemented boxes raised a lot

2 of user complaints and issues because some players

3 felt that they had already paid for a game and were

4 getting gimmicky play or were being squeezed for

5 additional content that they had already paid for,

6 meaning that over a few years, a lot of complaints

7 were being levied in forums and other locations. 

8 As a result, the video game industry started

9 to move away from this as a response to consumer

10 outrage. As a matter of fact, at this past E3 a few

11 months ago, a lot of developers were announcing that

12 their upcoming games would not feature loot boxes or

13 microtransactions. On the other hand, the mobile

14 industry, which produces dozens of apps a week for

15 phones and tablets, has fully embraced loot boxes as a

16 way to additionally make some cash from consumers. 

17 Now, to help simplify some of the loot box

18 distinctions, I’m going to group them into three

19 categories. Before I break them down, I do want to

20 point out something important. Since developers can

21 update and tweak the mechanics of these features at

22 any point in time with a simple update, any or all of

23 these categories could apply to a game with a loot box

24 system at any point in time. 

25 So the first category is the cosmetic loot
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1 box, which typically provides optional content to

2 gamers that they can choose to use or ignore for their

3 gameplay. Cosmetic loot boxes don’t provide an edge

4 to players over their opponents, but, instead, it

5 gives them ways to customize characters, weapons, and

6 in-game expressions, which are also known as emotes. 

7 Those are the dances or the faces that are made that

8 you often see in internet videos. 

9 Games like Overwatch frequently indicated the

10 kind of item that you received based on an easy-to11 understand color scheme. The more colorful the item,

12 the rarer the item happened to be. What’s more, some

13 games even let you redeem duplicate items to earn

14 additional in-game currency, so that you could claim

15 gear that you didn’t actually have, which would reduce

16 the amount of game time that you would have to play or

17 even cash that you would spend on other content. 

18 The second category are mode specific loot

19 boxes. Now, these are usually tied to specific

20 sections of games, like fantasy sports team management

21 modes, and often use baseball card pack presentations

22 to govern the provided content. By opening these

23 packs, gamers acquire characters or athletes, gear,

24 and items of varying quality. These can be used to

25 build their teams or squads into the best possible
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1 lineup to play against online opponents or computer2 controlled teams. Duplicate items can be saved and

3 used in later matches or sold for in-game credits in

4 the game’s auction house. 

5 Now, on the plus side, this kind of loot box

6 is entirely optional. You can avoid it entirely if

7 you want to. But that said, some games will award

8 in-game points for packs so slowly that it takes

9 forever for players to actually acquire higher-powered

10 or rarer items. Star Wars Battlefront II is notorious

11 for this, requiring the equivalent of days of

12 consistent play to unlock one character or vehicle if

13 players didn’t spend real money to unlock them sooner. 

14 The last category is sarcastically known as

15 “pay to loot,” and it requires players to pay money to

16 ultimately be successful with the gameplay. This

17 typically occurs in collectible card games, like

18 Hearthstone or Magic: The Gathering, in which players

19 who are willing to spend lots of money on higher20 tiered cards or packs, will frequently get a better

21 chance of having more powerful units than other

22 gamers. In other titles, like Call of Duty: Black

23 Ops, some game modes, like “blackout,” even restrict

24 access to certain types of gear in the blackjack

25 stashes unless you’ve already paid for them through
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1 the store. 

2 In many cases, the options to unlock these

3 items are limited, reduced, or removed, which leads to

4 one of the biggest problems with the “pay to loot”

5 mechanics. These are kind of slot machine style

6 mechanics where paying extra possibly gives players

7 more chances to earn higher rewards. But the

8 developers control both the odds as well as the payout

9 for these items. That tempts players into spending

10 more money for additional chances to win rarer items,

11 which could easily trigger people that have compulsive

12 gambling urges. 

13 But even people with restraint can find

14 themselves in fiscal trouble thanks to a separate

15 issue tied innately to loot boxes, which is that of

16 microtransactions. It’s important to note that while

17 all loot boxes are microtransactions, not all

18 microtransactions are loot boxes. But consumers that

19 don’t pay attention to how much they spend on these

20 smaller purchases can quickly and surprisingly charge

21 hundreds or even thousands of dollars on digital

22 items. 

23 So let’s quickly explore what these are. 

24 Microtransactions are, in their most basic sense,

25 optional virtual goods or downloadable content that
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1 can be added to any game for a nominal fee. These

2 include expansion levels, new characters, enemies,

3 game modes, and bonus items. One of the earliest

4 examples of a microtransaction dates back to 2006,

5 where The Elder Scrolls IV: Oblivion offered gamers

6 the chance to buy horse armor for in-game steeds for

7 $2.50. Nowadays, this content can be sold separately

8 or even packaged together in bundles of like-themed

9 content, such as costumes for characters or bonus

10 materials to give players a head start in their

11 titles. 

12 It also covers what’s known as season passes,

13 which is something that Sean mentioned, which gives

14 users a chance to buy upcoming content that will be

15 released by a developer at a discounted price. 

16 Like loot boxes, these microtransactions can

17 also be broken down into three main categories as

18 well. The first is the optional microtransaction,

19 which gives players the choice to include or exclude

20 content as they see fit. 

21 The one area where this gets a little bit

22 dicey is when some games charge a little extra to

23 unlock content that’s already on a game disk or

24 included in a downloadable title. Some fighting

25 games, like Ultimate Marvel vs. Capcom, or role-
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1 playing games, like Persona 5, kept content locked

2 unless a purchased download code was recognized on a

3 user’s account, at which point, the game would reveal

4 those bonus items. 

5 That tactic really wasn’t popular with gamers

6 and companies were frequently taken to task on the

7 internet. So a lot of games have started to move away

8 from this as a feature because of the negative

9 response from the consumers. 

10 The next kind are the pay-to-progress

11 microtransactions. These are mainly baked into free12 to-play games, where the basic game is free, but

13 players are charged extra for incentives, in-game

14 items, or to continue playing portions of games. Some

15 people also refer to this as gatekeeping or metered

16 play because developers can sometimes put arbitrary

17 limits on gameplay, like limited turns, character

18 energy, or limited moves that you have before you have

19 to stop playing. 

20 If you use up your allotted time, you’re

21 sometimes offered the chance to use in-game currency

22 to buy more play. More than likely, you’re basically

23 urged to pay real world cash to get additional time

24 sooner. 

25 Parents might recognize this tactic from
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1 games like Pokemon Go and Harry Potter Wizards Unite,

2 in which you’re constantly controlled by how much

3 energy you have to cast your spells or gather your

4 Pokemon unless you go to real world locations to

5 virtually check into areas, like gyms or inns that 

6 are designated by the game to gain additional power. 

7 Hidden object games also take this tactic by selling

8 more time to solve additional puzzles. 

9 The issues here are obvious. Metering the

10 amount of available gameplay time might get some

11 players to put the game down, but these limits don’t

12 always have a logical purpose aside from making

13 additional money or slowing some players down that

14 might fly through the available content within a game. 

15 Players with these games are also frequently

16 hounded by in-game offers of extra energy or items for

17 gameplay, prices of which can range from 99 cents up

18 to $100 in some bundles. Worse, these games

19 frequently include ads for other products to gain more

20 time to play. This garners more cash for the

21 developer because of the number of ads viewed, but it

22 also allows them to gather info on the kinds of games

23 that players are engaged in to serve up more ads. 

24 Finally, there are the pay-to-win

25 microtransactions, which is a variation of the free-
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1 to-play, or “freemium,” concept. The most successful

2 games that use this approach, like Clash of Clans,

3 Game of War, or Mobile Strike, tend to have very easy

4 mechanics, which help to get players into the game

5 experience quickly. These include detailed tutorials,

6 colorful characters, and simple controls. The

7 difficulty level ramps up at a relatively slow pace,

8 so players understand how the game play works and how

9 to succeed. 

10 Frequently, they offer a couple of practice

11 rounds to build up your confidence about the single12 player experience, and then they add in multiplayer

13 after a few rounds, which is where the bait-and-switch

14 starts to occur because this is when they start to

15 offer you the option to buy things to help you win. 

16 The problem with this is that instead of setting up a

17 level playing field for all gamers, it blatantly skews

18 the odds in favor of those players willing to pay for

19 a clear advantage. 

20 Players who are hardcore fans of a game that

21 are willing to collect everything that is offered,

22 players that have deep pockets or are willing to get

23 themselves in financial trouble, and players looking

24 for an unfair edge will always exploit these options

25 instead of relying upon skill. 
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1 Plus, these games frequently start by

2 offering limited content for free and charging for

3 more. Developers try to squeeze players, in some

4 cases, as much as they can, while limiting access to

5 new characters, content, or items in some cases. 

6 They might also restrict access to players who haven’t

7 chosen to buy certain items for certain game modes. 

8 So how should consumers protect themselves

9 from these issues? While not all of these options

10 that I’m going to give are foolproof and they can be

11 limited in some scope, there are some steps that are

12 available. First and foremost, consumers should

13 realize that they don’t really need to buy any of this

14 content to play a game. There are plenty of great

15 games out there that don’t use loot boxes or

16 microtransactions at all and others that include them

17 as options instead of necessities to succeed. And if

18 you feel that someone is getting greedy for your cash

19 as a developer, you can simply choose to delete the

20 game. 

21 It’s also worth noting that free games seem

22 to have most of the most problematic microtransactions

23 and loot boxes. So easily, paying for games can help

24 minimize some of these concerns. Being a paid

25 customer also gives consumers a better position when
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1 it comes to complaining to companies. Both EA and

2 Warner Brothers wound up changing their

3 microtransaction formats in certain titles after

4 players who bought those games had problems with some

5 of the microtransaction and loot box mechanics. 

6 And if you’re a parent, you can also enable

7 parental controls on devices to reduce the option of

8 one-button payments. Or even better, you can remove

9 the save payment information from your devices

10 altogether. That way, anyone who’s tempted to buy

11 something will have to manually input purchasing info. 

12 For parents, this would reduce or eliminate surprise

13 or sudden charges on their credit cards. And for

14 other adults, it would provide a moment to step back

15 and decide whether they really need to buy that

16 downloadable content or if they can let it go for that

17 day by itself. 

18 Finally, parents can talk to their kids about

19 why they feel that they have to have a certain item or

20 want to spend money on a particular loot box. Not

21 only can this help kids learn valuable monetary

22 lessons, but it might further discussion about what

23 makes a particular game so appealing. From there,

24 parents can establish a plan or even a contract with

25 kids, which can cover everything from screen time
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1 limits on a particular game to purchasing sought-after

2 game items as a reward for doing well in school, say,

3 or handling certain chores. 

4 I hope I’ve been able to shed a little light

5 on this complex topic with a quick overview of loot

6 boxes and microtransactions. Thank you for your time

7 and the opportunity to be here today. And I look

8 forward to participating in the roundtable discussion

9 on this topic and other pressing topics in gaming. 

10 (Applause.) 

11 MS. FRASSETTO: Thank you, Jeff. 

12 Next up, we’ll hear from Mike Warnecke from

13 ESA. 

14 MR. WARNECKE: Good morning. 

15 In my presentation today, I would like to

16 share with you what loot boxes are, how they work, why

17 they’re in video games, and the steps that the video

18 game industry has taken to make sure that consumers

19 are informed and are able to make good purchase

20 decisions about their gameplay experience. And with

21 this, we hope to provide a good experience not only

22 for consumers, but also to make sure that the wider

23 consumer population is aware of the steps that the

24 video game industry is taking in that regard. 

25 So who is ESA? If you go into a Target or
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1 Best Buy and you look in the video game aisle, the

2 people that publish those games are our members. We

3 mostly represent the publishers of the AAA titles, the

4 very popular games you play on your console systems,

5 such as the ones on Microsoft, Sony, and Nintendo who

6 are ESA members, as well as those that publish for

7 PCs. We also represent a few publishers in the

8 “freemium” area, although that is a smaller part of

9 ESA’s membership. 

10 So who plays video games? As was mentioned

11 earlier today, most Americans do. In fact, about half

12 the country does and about half of adults play video

13 games. When I was growing up, one of my earliest

14 experiences in playing video games was with my brother

15 playing Sonic the Hedgehog on the Sega Genesis system. 

16 And back then, a game console was essentially a box

17 with an AV cable. It didn’t have internet

18 connectivity. And it was a gift you would get from

19 your parents for holidays or for a birthday, and it

20 was something you plugged into the TV. It was

21 essentially an elaborate toy, and that’s what many

22 parents viewed it as. It wasn’t something that a lot

23 of people played beyond a certain age. 

24 But flash forward to today and it’s a much

25 different situation. Today, the average gamer is 33
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1 years old. And while kids are and always will be an

2 important part of the demographic of our industry,

3 they actually represent a smaller part than maybe

4 people may realize. Only about less than a quarter of

5 the game-playing population is under 18. Most of the

6 game-playing population are adults. 

7 So let’s talk about what loot boxes are. 

8 Loot boxes are a game mechanic where players can

9 obtain virtual items for use within the game. And the

10 way it works is that the player may know the general

11 type of item, but they don’t know the specific item

12 until they open the box. Now, if this sounds

13 familiar, it’s because it’s a mechanic that we’ve seen

14 before in other contexts. 

15 For 75 years or more, Americans have been

16 opening up millions of packages of baseball cards to

17 put together their dream team, to get the players that

18 they root for on their home teams, and to build their

19 collections with their friends. It’s a common

20 mechanic that people are very familiar with. 

21 So why are loot boxes and in-game purchases

22 in games? As Sean mentioned earlier, games today are

23 not a static item anymore. They are constantly being

24 refreshed and enhanced with online services. When I

25 was a kid growing up and bought a game -- and back
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1 then it was Toys “R” Us, when that was a thing --

2 whatever that game was, good or bad, it was only going

3 to be what was in that box. It was not going to be

4 updated; it was not going to be enhanced. It was only

5 what came in that box when you walked out of the

6 store. 

7 That is not the case today. Today, games are

8 continually refreshed with new content, with online

9 interactive features, with new experiences. And this

10 is in response to what consumers want. When they get

11 attached to a particular game, they want to continue

12 to have new experiences with it and they want the

13 publisher to keep it fresh and exciting. And

14 microtransactions, such as loot boxes and other

15 in-game purchases, help make that possible because

16 there is a lot of back-end infrastructure to make all

17 that magic happen, so that when a consumer sits down

18 to the game, they get a wonderful engaging experience. 

19 And it’s important to keep in mind, as Sean

20 also mentioned, that pulling this off is really hard

21 and really expensive. If you look at other forms of

22 entertainment, such as reading a book or going to a

23 movie, there’s this concept called forced perspective,

24 where you experience the world based on how the author

25 or filmmaker is directing you to experience it. And
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1 that also, of course, applies in many video games. 

2 But there’s also another type of video game,

3 and those are free world games where you can roam and

4 explore the world all around you. And to be able to

5 pull that off is really hard because you could wander

6 from one territory to another, and you’ve got to

7 create a credible virtual world that’s believable and

8 authentic and fun. And doing that involves a lot of

9 people and involves a lot of time. 

10 In fact, the production teams for these games

11 can stretch into the hundreds of people and involve

12 computer engineers, animators, programmers,

13 historians, voiceover actors, writers. It just runs

14 the gamut. In fact, some of our member companies have

15 motion capture studios that rival that used in

16 Hollywood, as motion capture is an important part of

17 some of the high-end animations that you will see in

18 some games. 

19 There’s also the free-to-play market. It was

20 the summer of 2007 and I was with some of my friends

21 on the National Mall and we were sitting on the grass

22 near the Washington Monument. And one of my friends

23 turned to me and he pulled out his backpack and he

24 showed me this black rectangle. He said, Mike, have

25 you seen one of these? It was the first week that the
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1 Apple iPhone had come out and none of us had seen it. 

2 We were all excited. We looked at this thing with the

3 colorful icons. I don’t think 12 years ago, any of us

4 sitting around there on the lawn near the Washington

5 Monument could have anticipated that free-to-play

6 would be such a huge thing as it is today. 

7 It’s important to note, though, that just

8 because a game is free to play doesn’t mean it’s free

9 to make. These games can cost millions and millions

10 of dollars to make. But the nice thing about

11 free-to-play is it gives gamers another opportunity to

12 experience gameplay. 

13 There was a demographic of people who would

14 never play, who would never invest the time to figure

15 out the controllers or want to get a game rig to be

16 able to play PC games. But everyone can swipe left

17 and right. And the simple controls that are on a

18 mobile phone suddenly open up an opportunity for

19 people to experience a lot of different games. 

20 But what we also discovered, too, is that

21 when people experience games, they want to be able to

22 kick the tires on it and not get caught up in buying

23 something until they have a chance to experience it. 

24 So that’s one reason why we have these free mobile

25 apps, where it gives you the opportunity to experience
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1 that, but also, you have the chance to expand the

2 content if you decide to like it. 

3 So what are some common misconceptions about

4 loot boxes? One is myth one, players must buy loot

5 boxes to play. That’s not correct; they don’t. Paid

6 loot boxes are optional. You can get many of the same

7 or comparable items through diligent game play or

8 through direct purchase of in-game items. 

9 Myth number two, all in-game purchases are

10 loot boxes. As has been mentioned earlier, that’s not

11 the case. Loot boxes are actually just one form of

12 in-game purchase. 

13 And myth number three, loot boxes are unique

14 to the video game industry. As I mentioned earlier,

15 that underlying mechanic is common in baseball cards. 

16 And if you go to Amazon, there are literally hundreds

17 of products that have a similar sort of underlying

18 mechanism to them. 

19 So what I’d like to do in this next part of

20 the presentation is go through the mechanics of, like,

21 okay, how do you get a loot box, what’s it look like,

22 and what’s going on. And so what I’m going to do is

23 walk through a few examples and then, hopefully, after

24 the end of that, you’ll have a better idea. 

25 So loot boxes, you can acquire -- you can
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1 purchase loot boxes in basically two key ways. One is

2 with money and the other is with in-game currency. 

3 With money, it may be, say, you’re playing a

4 free-to-play game. There’s the loot box opportunity. 

5 It’ll be a pop-up, do you want to spend 99 cents to

6 get a loot box? You hit yes, and then it goes ahead

7 and your app store account will be debited for that

8 amount. 

9 Now, another approach is with in-game

10 currency. And with this approach, the publisher

11 essentially sells a bucket of play money to the user,

12 and then the user uses that play money to acquire

13 items within the game. And there are a couple of

14 practical reasons for why it’s done this way. One is,

15 it would be impractical every time someone does a 99-

16 cent or a $1 transaction, to have that go to their

17 account because it just would be annoying to have that

18 constantly happen if you wanted to buy a few of them

19 and to deal with all that. And, also, for the

20 publisher. The transaction cost, if credit cards are

21 getting used, would be significant if every time there

22 was a small transaction like that, that that was a new

23 transaction. 

24 But there’s another reason, too, and that’s

25 to preserve narrative integrity. When you have a
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1 game, our members try to create games that are

2 engaging and that are true to their world. It would

3 be very weird -- for instance, say you had a game set

4 in ancient Egypt and you wanted to buy a chariot for a

5 big combat that was going to come up and you went to

6 the marketplace in Thebes. You would not want to be

7 buying a chariot for $2.50 US. It would be a little

8 bit jolting and a little bit odd. So instead, the

9 publisher will make it with a historically appropriate

10 currency, such as a deben of copper, which would fit

11 in more with the narrative of the game. 

12 So what I’d like to do now is walk through a

13 few examples of loot boxes in the wild, so you can see

14 what that experience would look like. So the first

15 game is MLB: The Show ‘19 by Sony Interactive

16 Entertainment. It takes America’s favorite pastime,

17 baseball, and provides you the opportunity to manage

18 your own baseball team and all the fun that goes with

19 that, from selecting your manager to building your

20 roster to deciding what features your stadium may

21 have. And in this game, there is an opportunity to

22 get digital packs. And these digital packs allow you

23 to build out your roster. They’re not the only way,

24 but they’re one way. 

25 And so here’s an example of -- I’ll show how
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1 it works a little bit, and then you’ll see a video

2 briefly to see the walkthrough. So we’re going to

3 select this pack, and you can see it says S 1500 and

4 that’s for Stubs, the in-game currency. So if you

5 select that, you can go ahead and then you can see on

6 the far side, you see what we call in the industry

7 drop rates, you can see the ratios or the

8 probabilities of getting certain players. And the

9 players that are more desirable, the diamond level,

10 those would be a little bit harder to get than the

11 ones who are more common. 

12 Okay. And so you go ahead and select it. 

13 And you can also see right next to that there’s

14 another button you could push to get the odds

15 disclosure as well. So there’s multiple ways of

16 getting that information. 

17 It asks if you want to confirm the purchase. 

18 You indicate yes. And then there you go, the digital

19 pack, you’ve now acquired it and it’s showing you what

20 you’ve got, and then you can go ahead and open it. 

21 And there, you see the cards you have, and the flip

22 side of that card, you can see the player’s stats. 

23 And, also, you can see there’s an opportunity

24 there to sell it for in-game currency or go to the

25 marketplace. And what that means is, basically, one
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1 of the features of the game is you can go ahead and

2 trade cards within the contours of the game, within

3 the game space, not going outside of it, to build your

4 team. And so that’s a feature of this particular

5 game. 

6 And now, we’ll see a short video of that in

7 play. 

8 (Video played.)

9 MR. WARNECKE: Okay. So this next one is

10 Forza Street, a game by Microsoft for Windows 10, and

11 it’s a racing game. And as you can imagine with a

12 racing game, one of the cool features is being able to

13 acquire a vehicle or upgrade your vehicle to do new

14 things and different things and to impress your other

15 friends in the game. And so there’s a mechanic in the

16 game that allows you to -- what are called spins,

17 where you can get a new car for use in the game and

18 you can use the in-game currency to acquire these

19 spins. And so we’ll see an example of what that looks

20 like now.

21 (Video played.)

22 MR. WARNECKE: You can see at the end there

23 where the car, it will indicate what you’re getting

24 when you get the spin or what it costs. And then here

25 we go with the selection process. And there we are. 
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1 I’d gladly trade my old Honda Civic for that

2 car. Maybe Microsoft can help me with that. 

3 So this last example is from The Sims, which

4 is an iconic property in the video game industry. 

5 It’s been around for nearly two decades and it’s a

6 game where you can become whoever you want to be

7 online and, basically, just go through daily life with

8 other avatars. And it allows for a lot of

9 personalization. 

10 And one of the charming features of this game

11 is Izzy’s Design Studio, where he will help you look

12 fabulous through developing an outfit for you. And

13 one of the ways he can do that is through new designs. 

14 And, basically, this uses a similar mechanic to a loot

15 box. It’s not a loot box, but it has the same

16 underlying aspect of buying an opportunity to get

17 content that you know the general type of, but not the

18 specific items of until you go forward. So here you

19 can create a new design. And if you click on the

20 question mark there, it will show you the probability

21 rates of getting various items of rarity. 

22 And then we go ahead with the design. And

23 there you go. You could see the fabric and the type

24 of article of clothing, some stars to add some

25 decoration. And then that other thumbs up is for a
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1 power or attribute that would apply to the clothing. 

2 And if you decide you like some of the clothing but

3 you -- oh, and also, you can see the color bars in

4 there indicate the probability levels in terms of how

5 rare the item is. 

6 Now, you can decide that you want to -- maybe

7 you don’t like that, you want to keep the dress, but

8 you want to get some other articles or the other

9 features you want changed. You can then get another

10 design with these fashion gems and go ahead from

11 there. 

12 So in the last part of my presentation, I

13 would like to talk about transparency and control and

14 what the video game industry is doing to help ensure

15 that consumers have a good gameplay purchase

16 experience and to provide them the information they

17 want as to what in-game transactions they encounter. 

18 Now, a little bit later this afternoon, Pat

19 Vance from the ESRB will be going into some of this in

20 a little more detail, particularly the in-game

21 purchases label. But I think it’s useful to lay out a

22 little bit of this now, given the conversations we’re

23 going to be having between now and then. 

24 So ESRB is the game industry’s rating

25 authority. And besides having the age ratings, they
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1 also provide a number of enhancements to the

2 information they provide to help parents make informed

3 purchase decisions. And last year, they rolled out

4 the in-game purchases label. And basically what this

5 is is if a game has microtransactions and if there’s

6 money you spend post-game on things within the game,

7 this in-game purchases label would be disclosed on the

8 box or when you download the game. So it’s a signal

9 to parents, who -- for this may be something that they

10 might be interested in. 

11 Now, this ties in very well with the spending

12 control features that are on the game consoles. All

13 three of the game consoles have the ability to set

14 spending controls. And that may include, for

15 instance, setting a limit on the amount or blocking

16 purchasing altogether. In addition to the game

17 consoles, I should also note that EA’s Origin platform

18 for PC games also has spending control features. 

19 And one of the interesting features of the EA

20 approach is that in addition to being able to create a

21 child account, you can also create a separate account

22 for a player account, for instance, for older users,

23 if you want to set spending limits for those

24 individuals. 

25 That said, we are doing more. I’m pleased to
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1 announce this morning that Microsoft, Nintendo, and

2 Sony have indicated to ESA a commitment to new

3 platform policies with respect to the use of paid loot

4 boxes in games that are developed for their platform. 

5 Specifically, this would apply to new games and game

6 updates that add loot box features and it would

7 require the disclosure of the relative rarity or

8 probabilities of obtaining randomized virtual items in

9 games that are available on their platforms. 

10 As well, many of the leading video game

11 publishers of the Entertainment Software Association

12 have decided that they are going to implement a

13 similar approach at the publisher level to provide

14 consumers this information and to give them enhanced

15 information to make purchase decisions. And many of

16 the features of those two approaches are quite

17 similar. Again, they would apply to new games and

18 game updates and they would require the disclosure of

19 the odds or the relative probabilities. 

20 Now, this approach would also be compatible

21 with the Apple and Google approach on the mobile

22 platform. And we believe that taken together, this

23 provides a comprehensive approach to ensuring that

24 consumers get the information they need so they can

25 make informed purchase decisions when it comes to paid
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1 loot boxes. 

2 Thank you for your time. 

3 (Applause)

4 MR. WONE: Thank you, Mike. 

5 Next, we’ll hear from John Breyault from the

6 National Consumers League. 

7 MR. BREYAULT: Good morning. 

8 I’d just like to add my thanks to the Federal

9 Trade Commission for putting together today’s event

10 and for inviting NCL to be a part of this event. 

11 So the title of my presentation is called

12 “Making Money From GAAS, or Games As A Service.” And

13 I would like to talk about consumer protection

14 priorities and issues that we’d like to see the

15 Federal Trade Commission explore. 

16 So as was mentioned, I’m with the National

17 Consumers League. I handle our tech and telecom

18 advocacy portfolio. But NCL has been around for 120

19 years. And our mission focuses on everything from

20 food safety, health care, child labor. You name it,

21 NCL has probably advocated for it at some time or

22 another. And this probably dates me, but I have been

23 a gamer since my first console, which was the Atari

24 2600. And so this gives you some idea of how long

25 I’ve been playing games. 
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1 So what are we going to look at today? First

2 of all, we’re going to look at, what are games as a

3 service? We’re going to talk about the scale of

4 microtransactions you’ve been hearing a lot about from

5 my other panelists. We’re going to explore some ways

6 that monetization of games as a service can become

7 predatory, explore some of the concerns we have around

8 the use of in-game currency. And then we’ll turn to

9 eSports streaming and how that relates to the FTC’s

10 endorsement guide. And, finally, we’ll talk about

11 some questions that we hope the FTC will explore as it

12 continues to look into this matter. 

13 So first off, what are games as a service?

14 This is a slide helpfully provided by Ubisoft, which

15 is one of the big game publishing houses, in their

16 earnings slides. First of all, in the past, games

17 were hit-driven and cyclical. You saw a few games

18 came out that were big hits and others that were

19 flops. But, typically, consumers would play with them

20 for a few months, and then sort of move on to the next

21 game. 

22 What you have now is a recurring revenue

23 business where there are opportunities for recurring

24 purchases through microtransactions, through season

25 passes, et cetera, that you’ve heard about. 
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1 In the past, there was low user engagement. 

2 The players weren’t really interacting between

3 themselves, they weren’t engaging on Twitch streams,

4 you didn’t have eSports leagues. Today, you have high

5 user engagement where consumers are doing all of these

6 things. 

7 You had a console focus. Many of us can

8 remember fondly sort of opening up on Christmas

9 morning that NES or Sega Genesis, in my case, and that

10 was how you experienced games. Well, today, the game

11 is a multiplatform business. 

12 I was at a barbecue on Saturday night with

13 some friends and there was 10 kids or so playing

14 Minecraft with each other. Some of them were on the

15 console, one of them was on the PC, the others were on

16 their mobile devices, and they were all playing the

17 same game. That’s emblematic of how the multiplatform

18 business model has evolved. 

19 We went from being a developer-centric

20 industry, where basically you had developers have a

21 vision for a game and they spend however long they’re

22 going to do to develop the game and they put it out

23 there and hope it’s a hit. Today, you have a

24 player-centric model, where the games are being driven

25 by feedback from gameplay itself, from attention paid
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1 by publishers and developers to the chatter around

2 these games online. And then they are using that to

3 iterate on the game after it’s already been shipped. 

4 You went from having an experience where you

5 basically interacted with the game itself to a

6 platform experience, where most of the interactions,

7 purchasing of payments, et cetera, are managed by the

8 platforms, the Xboxes and Playstations and Googles and

9 iOSs of the world, not necessarily the publishers. 

10 And, finally, the success of games used to be

11 calculated in terms of the number of units shipped. 

12 Today, they’re being evaluated by the lifetime value. 

13 So not only how much you pay to acquire the game, or

14 in the case of free-to-play games, not at all, but

15 then how much value is delivered over the life of the

16 game through things like microtransactions. And these

17 are measured in years, not months. 

18 So let’s talk a little bit about the scale of

19 microtransactions. This is some research from Juniper

20 Research, who had a very helpful paper called “In-Game

21 Gambling: The Next Cash Cow for Publishers” that came

22 out last year. But total spending on loot boxes and

23 skin gambling is forecast to go up to $50 billion by

24 2022, and that’s up by -- nearly doubling since last

25 year. 
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1 The chart on the right shows you breakdowns

2 in recurring investment as a percentage of total sales

3 from three of the biggest publishers out there,

4 Ubisoft, EA, and Activision Blizzard. And the yellow

5 part of those charts shows you how much is coming in

6 from player recurring investment. This is the money

7 that consumers pay after they’ve already acquired the

8 game through loot boxes and microtransactions and

9 other events. You can see that it makes up a very

10 substantial portion of the money that they have coming

11 in. 

12 And this is just additional data supporting

13 that point. On the left, you have EA’s net bookings

14 for Q4 2018. And you can see the green part of that

15 chart is the live services, the bookings they’re

16 getting from microtransactions and et cetera. And you

17 can see that it’s grown now for EA to 31 percent of

18 net bookings just over the past three years. 

19 Similarly with Ubisoft, you can see it’s the purple

20 part of that chart, which shows that these sort of

21 recurring purchases are generating about 69 percent of

22 their digital split and net bookings. And Activision

23 Blizzard, it’s very similar. It’s not shown here, but

24 nearly 70 percent of their FY 2018 net revenue came

25 from nonproduct sales revenue, microtransactions, DLC,
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1 World of Warcraft subscriptions, et cetera.

2 Unsurprisingly, this shift away from that old

3 business model I’ve talked about earlier to the new

4 business model of games as a service has been

5 incredibly profitable. What you see here is the

6 percentage of EBIT margin for four of the biggest

7 publishers out there, Ubisoft, EA, Take-Two, and

8 Activision, since 2005. 

9 So you can see in the first part of this

10 chart that cyclical business model I was talking

11 about. And then what you see is, in 2010, sort of a

12 shift to an unbroken line and increase in

13 profitability. Unsurprisingly, that was when one of

14 the biggest multiplayer games out there, Team Fortress

15 2, started to employ loot box mechanics in North

16 America and Europe. 

17 So we’ve established now that it’s a changing

18 industry, that this shift to games as a service has

19 been very good for the industry. So the question is,

20 when does this become predatory? So here in the next

21 few slides, I’m going to apologize because I’m

22 violating the cardinal rule of PowerPoint by putting

23 up word-dense slides. But this is research from Dr. 

24 Daniel King and Professor Paul Delfabbro at the

25 University of Adelaide in Australia. 
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1 And I direct your attention to the

2 highlighted sections, which talks about how in-game

3 monetization schemes can become predatory. They are

4 talking about how they can often be used to disguise

5 the true long term cost of microtransactions until the

6 player has been financially and psychologically

7 committed to a game. And these monetization schemes

8 are often enabled by information asymmetry between the

9 players and the industry regarding things like game10 related preferences, how much money a consumer may

11 have spent in the past, their spending habits. 

12 Another sign on this, again, is how player

13 data may be used to manipulate the nature and

14 presentation of purchasing offers. For example,

15 publishers in the industry often talk about having a

16 whale. This is someone who is likely to spend a

17 significant amount of money or who has spent a

18 significant amount of money on the game. And so

19 what’s unclear is whether that data on how players are

20 likely to spend more money is being used to do things

21 like manipulate odds on loot box drop rates. 

22 So of particular concern to us is how this

23 kind of information asymmetry is affecting younger

24 players who may be less equipped to accurately apprise

25 the value proposition of such schemes. 
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1 So now you may be wondering, well, so what? 

2 This is the “so what” slide. It’s based on research

3 from David Zendle at York St. John University, who

4 you’ll be hearing from later on today. But, again,

5 the highlighted portion talks about the reason that

6 these monetization schemes can become predatory. 

7 So, for example, his research has found that

8 older adolescents who spend money on loot boxes may be

9 twice as high to show measurements of problem gambling

10 and that when you are exposed to problem gambling

11 earlier in life, this can lead to potentially negative

12 consequences down the line. 

13 So I’d like to turn now to a specific issue

14 that we’re looking at, which is the use of in-game

15 currency. As you’ve heard from the other panelists,

16 in-game currency has proliferated throughout the top

17 games. In FIFA, you’ve got FIFA coins. In NBA 2K19,

18 you’ve got VC. In Overwatch, you’ve got credits. In

19 Fortnite, you’ve got V-Bucks. In Call of Duty Black

20 Ops 3, you’ve got Call of Duty points. 

21 So the currencies obtained via gameplay or

22 purchase, our concern is that they may obscure the

23 true cost of purchasing in-game content. So does it

24 actually tell you how much you’re spending in real

25 money down the line? 
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1 So this is a screenshot from the store in

2 Fortnite. And what I direct you to is some of the

3 common psychological tricks that you may have seen

4 before in the retail context. When something’s priced

5 at $1.99, you may not think that this is $2 and be

6 more likely to spend money on it. This is used

7 throughout Fortnite, and I think you see this in other

8 games as well. 

9 The problem here is that when you combine

10 this with things like these bonuses that are offered

11 here, it puts a lot of cognitive load on the user,

12 creating a complex exchange rate between digital money

13 and real dollars. And it can make it easy to lose

14 track of an object’s real world value. 

15 Sorry, let me go back. So other features

16 that I think have been mentioned a couple times in the

17 panel already that are concerning to us are ones that

18 may make it more difficult or frustrating, such as

19 time investments, if you’ve lost your last life, take

20 something that initially took seconds, like building a

21 new structure in a game, may stretch in the minutes or

22 hours, and it may be impossible to beat the game or

23 even advance without spending money. 

24 So now, that we’ve talked a little bit about

25 our concerns around the use of in-game currency, I
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1 want to turn really quickly to eSports streaming and

2 the FTC’s endorsement guides. So as you can see from

3 the chart, the eSports market revenue has become more

4 than a billion dollar business. By 2022, it’s

5 expected that it’s going to go to $1.8 billion

6 dollars. This is from Newzoo. 

7 And in 2017, the FTC did bring enforcement

8 actions against two influencers who were using their

9 YouTube Gaming channel to endorse a skin trading site

10 called CS:GO Lotto without disclosing that they

11 actually owned CS:GO Lotto. So this is important to

12 look at in what has happened since. 

13 The eSports market has continued to explode.

14 You see some of the biggest events, like the IEM

15 Katowice and CS:GO tournaments, who are attracting

16 tens of millions or hundreds millions of viewers. And

17 this is comparable, in some cases, to what we’re

18 seeing for traditional professional sports. The NBA

19 2018 finals averaged around 17.7 million, and we’re

20 starting to approach Super Bowl levels of interest. 

21 And this is just some additional data on that

22 point. This chart shows the peak viewerships in July

23 for the top 10 Twitch streamers. We’re talking

24 between 150,000 and 300,000 viewers of those Twitch

25 streams at any one point. 
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1 And this is, unsurprisingly, generating big

2 money. So these headlines speak for themselves. And

3 much of the money that is being able to fund these

4 streamers and these events is being generated through

5 money that is being spent by players in

6 microtransactions. 

7 And so in our admittedly unscientific review

8 of top streamers’ content for games like Apex Legends

9 and Fortnite, we rarely heard any of them disclosing

10 connections to the publishers. Even in videos where

11 essentially they were showing off that they were

12 opening loot boxes and getting reactions to that, we

13 did not see evidence where streamers were saying, I

14 was given money to buy these loot boxes by a

15 publisher. So the question is, how are they getting

16 all the money to buy these loot boxes? And is this

17 being adequately disclosed in compliance with the

18 FTC’s endorsement guide? 

19 So I’d like to now turn to some key questions

20 here. Admittedly, there’s probably still more

21 unknowns than knowns when it comes to whether and how

22 any of the practices that I’ve described in this

23 presentation can or should be regulated by the FTC or

24 Congress or anyone else. But I do think that the

25 evidence that’s been presented raises a lot of key
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1 questions that we think is appropriate for the FTC to

2 investigate. 

3 So first of all, are loot box odds being

4 manipulated to incentivize continued play or eventual

5 monetization? I think it’s important to put this in

6 context against the baseball card examples that

7 several of my previous panelists have mentioned. When

8 I buy a Magic: The Gathering pack or a baseball card

9 pack at Target, my odds of getting a rookie card or a

10 rare card there are fixed. It’s a physical thing. 

11 But when you’re opening loot boxes online, those odds

12 can be manipulated based on a variety of factors. 

13 If that is indeed the case, what factors are

14 being used to influence loot box drop odds? Is it

15 things like data on how players are playing the game,

16 how many available funds they may have in their

17 account, whether they’ve purchased things in the past?

18 Does disclosure of the loot box drop odds influence

19 player behavior? I was very pleased to hear Michael

20 talk about the announcements about disclosing loot

21 drop box ads. I’m going to be very interested to see

22 if there’s data that comes out after that about

23 whether that disclosure of such odds is influencing

24 player behavior. 

25 With regards to in-game currency, I think
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1 it’s important to look at whether the disclosure of

2 cumulative in-game spend in a currency that consumers

3 actually understand would address some of the concerns

4 we raised around the difficult exchange rates and the

5 cognitive load that is put on consumers. 

6 And, finally, I think it’s important, even

7 though the FTC has taken a look at this issue to some

8 extent in the past, as the eSports marketplace

9 continues to explode -- I don’t think anybody is

10 predicting that it won’t -- are the leagues, the

11 publishers, and the top streamers complying with the

12 FTC’s enforcement guide? 

13 Thank you very much. 

14 (Applause.) 

15 MS. FRASSETTO: Thank you, John. 

16 Next up is Renee Gittins from IGDA. 

17 MS. GITTINS: Hi. So my name is Renee

18 Gittins, and I’m the Executive Director of the

19 International Game Developers Association. The IGDA

20 is the largest non-profit membership organization

21 representing game developers in the world. And our

22 mission is to support and empower game developers in

23 having fulfilling and sustainable careers. 

24 I, myself, am also a game developer. I have

25 expertise in creative direction in engineering, and,
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1 of course, I’m a gamer as well. 

2 Like our other panelists, I want to help you

3 understand what a loot box is. Unfortunately, there’s

4 actually quite a large range of possible variations of

5 what you can interpret a loot box being. Generally,

6 it is considered a consumable item, an on-use, a

7 single-use item in a video game that contains

8 randomized rewards. However, as you’ll see from my

9 next few slides, there’s a huge range of items and

10 mechanics that can fall under the term “loot box.” 

11 First, let’s look at different ways to

12 acquire these loot boxes. They can be directly

13 purchased for real money. They can be potentially

14 purchased for in-game currency that is either earned

15 or bought. They can also be rewarded for

16 accomplishing feats, for playing the game, for logging

17 in regularly. 

18 Once you achieve one of these loot boxes,

19 they can provide various rewards. These include

20 cosmetics that have no effect on gameplay but provide

21 visual benefits; content, such as mechanically unique

22 characters or access to game modes; consumables, which

23 are items that can be used, such as experience boosts,

24 health potions, and other usable items; upgrades that

25 change the gameplay and your ability within it, such
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1 as weapons and armor; and, finally, they can also

2 contain in-game currency or duplicate items or items

3 you do not want may be traded for in-game currency. 

4 Once you obtain these loot box contents,

5 games handle what you can do with them differently.

6 Some of these contents are locked to your account. 

7 You can no longer sell or trade them once you acquire

8 them. Other games allow you to trade these to others,

9 either as gifts or for exchange of other items or

10 in-game currency. Some games, in fact, allow you to

11 trade some of these items for real money as well. And

12 some of them have limitations on when these items can

13 be traded, if at all. 

14 When you look at these number of variations

15 -- and this was just a few that I listed -- you will

16 find that with these different types, there might be a

17 number of combinations. At first you might think

18 it’s, well, a few hundred. But when you give it a

19 rough statistical analysis, it’s closer to 52 million

20 different types of combinations of what could be

21 considered a loot box. 

22 Here’s an example of complexity in loot boxes

23 in a popular game. This game has two types of loot

24 boxes. One of these loot boxes can be acquired by

25 purchasing an in-game item that gives you access to a
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1 progression. This progression has various rewards,

2 including loot boxes along the progression chain.

3 Progress on this chain can also be directly purchased. 

4 This game also has a second type of loot box. 

5 This loot box is only available through event

6 participation, is provided at random, and cannot be

7 earned or ground out by spending multiple hours or by

8 spending any money. Both of these loot boxes provide

9 permanent cosmetic rewards and ensure that you do not

10 receive duplicate rewards. 

11 This game also allows you to sell the loot

12 that you acquire in the second box, which you cannot

13 directly purchase. However, the cosmetic items that

14 you achieve through the purchased loot box or the

15 indirectly purchased loot box are completely account16 bound and cannot be traded or sold to other players. 

17 Both of the loot boxes do not allow you to have any

18 other method of acquiring that content. 

19 This shows how in a single game, there can be

20 multiple uses of things which would be considered loot

21 boxes, even though they have different mechanics. As

22 you can see, this quickly becomes a very complicated

23 space. 

24 There are many similar mechanics in games

25 that may be considered loot boxes or perhaps fall
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1 under incorrect loot box definitions. As noted by

2 other panelists, loot drops, randomized rewards, are

3 very common in video games and have existed since

4 1980. In fact, random rewards for achievements in

5 games have been in existence prior to video games in

6 pen and paper games as well. And of course, we have

7 seen randomized rewards and physical items as well. 

8 Now, there are monetary motivations for

9 adding loot boxes and other microtransactions. Games

10 have cost approximately the same amount for many

11 decades. The average game price has been about $60

12 for the last two decades. And when you’re looking

13 back at game prices in the 1970s, you’ll see that with

14 inflation, that would cost well over $200 today. 

15 Game development costs, consumer

16 expectations, and team sizes have grown greatly. As

17 cost of living expenses have increased, game

18 developers require better payments to maintain their

19 daily lives. 

20 Also, with the growth of mobile games, we

21 have seen that almost 50 percent of global game

22 revenue comes from mobile games. Consumers do not

23 generally support up-front purchases in mobile games

24 or in any other mobile apps at all. Thus, most mobile

25 apps allow for microtransactions, and that is how they
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1 pay the development teams. 

2 And here’s a graph, as you can see, the

3 comparison of average game price over time with it

4 adjusted for inflation. 

5 Implementation costs of changes to any game

6 system can be expensive. If there were to be changes

7 required for game developers, it could affect game

8 development teams, both by requiring them to spend

9 time and effort changing games, but also affecting

10 consumers that work in these established in-game

11 economies. When you’ve played a game and invested

12 time, money, or emotions in it, having outside changes

13 influence what you’ve invested in can be a disrupting

14 experience. 

15 While large game developers can react rapidly

16 to required changes, small game developers suffer. In

17 fact, I know many developers who released mobile apps

18 on a very quick cadence, and then live off of the

19 backlog of those games slowly trickling in money. If

20 any changes that are made require them to change all

21 of their previous games, then that would cut off their

22 income and require months of development for them to

23 get back on track. 

24 We can also note that there are current

25 protections in place to prevent children from
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1 interacting with these loot boxes and other in-game

2 purchases. I know that children are a deep concern,

3 particularly for vulnerability, but I think that we’ve

4 done a very good job in providing protections for

5 them. 

6 First, we have COPPA, the Children’s Online

7 Privacy Protection Act. This prevents children from

8 under the age of 13 years old for making an account

9 which loot boxes can even be credited. Additionally,

10 online purchases and in-game purchases generally

11 require credit cards, which require you to be an

12 adult, or other 18 plus accounts, such as PayPal. 

13 While there is an exception, such as gift cards, these

14 are not as popular and require other outside-of-online

15 and in-game purchases to acquire. Finally, as noted

16 by other panelists, app stores, and consoles have

17 store parent controls. 

18 I would like to share some game developer

19 opinions on this subject. Game developers are a wide

20 range of people. Some of them support loot boxes and

21 some of them do not. Some of them love loot boxes as

22 gamers and some feel frustrated by them. I would like

23 to share two opinions on either end of the spectrum. 

24 The first will be from someone who supports regulation

25 on loot boxes and the latter will be from someone who
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1 opposes it. 

2 Here’s the first. “Unfortunately, it seems

3 that the industry is having trouble being ethical when

4 there’s profit to be made. If someone cannot be

5 trusted to not exploit someone else, then we must

6 place down a regulation to protect others.” 

7 Here’s the second statement. “I do not think

8 it is the government’s role to regulate. It should be

9 the industry and consumers that do. It could be a

10 slippery slope that could lead to game censorship,

11 since the gaming industry has and will always be an

12 easy scapegoat.” 

13 In summary, game development is a complex

14 space and loot boxes and transactions can span a wide

15 range of definitions. There is also a large overlap

16 between loot boxes and established random reward game

17 mechanics that have been present even before video

18 games. 

19 Monetization, including microtransactions,

20 has been driven by inflation and increasing player

21 willingness to make up-front payments, particularly on

22 mobile platforms. And there are current protections

23 that guard children from microtransactions and loot

24 box abuse. 

25 Finally, game developers are worried about
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1 heavy-handed regulation hurting the game industry and

2 their creativity. 

3 In November 2018, the IGDA recommended and

4 continues to recommend industry self-regulation

5 combined with proper enforcement of current

6 regulations and protections. We recommended that game

7 studios confirm a commitment to not market loot boxes

8 to children, that they clearly disclose odds of

9 different rewards, and that they work to educate

10 parents on parental controls available. We are 

11 proud that the industry has begun to heed these

12 recommendations. 

13 I would like to note that game developers, in

14 general, are very passionate people that are working

15 on creating art. I know many game developers, and as

16 a game developer myself, I know that we are interested

17 in exploring empathy and providing emotions to our

18 game players. While there are different monetization

19 strategies, game developers in the end just want to

20 provide joyful and satisfying experiences that make

21 people experience something new in this wonderful

22 medium of games. Thank you. 

23 (Applause.) 

24 MR. WONE: Thank you, Renee. 

25 Now, we’ll hear from Omeed Dariani of the
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1 Online Performers Group. 

2 MR. DARIANI: Hello. So my presentation’s a

3 bit different than everyone else’s today. Let me tell

4 you a bit about my company and why I’m here. 

5 So Online Performers Group is a company that

6 represents content creators. We represent content

7 creators across Twitch.TV, Mixer, YouTube, Facebook,

8 Caffeine. Basically, anywhere that people are playing

9 games and interacting with live content, the talent

10 that’s there, we’re helping them. 

11 So a few of the clients that we manage are on

12 the screen. They’re a very interesting group of

13 folks, including people like CohhCarnage, T-Pain --

14 who does not like to be called rapper T-Pain, by the

15 way -- the heavy metal band DragonForce, professional

16 baseball player Trevor May, and the Angry Joe Show. 

17 In total, we represent about 70 content creators who

18 have over 50 million followers. And each day viewers

19 watch over 60 years of content created by these folks. 

20 So these folks do a tremendous amount of work showing

21 games to people and talking about the game industry,

22 in general. 

23 Some notes: We work for content creators. 

24 I’ve worked in the game industry for a long time

25 myself, but we work for content creators exclusively. 
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1 We don’t take money from game companies. We don’t

2 accept direct compensation from game companies. Our

3 clients do. We’re paid by our clients. Our main

4 goals in the industry are fighting the exploitation of

5 content creators and improving the game industry and

6 creating transparency. 

7 So why are we here? So we represent content

8 creators, and in many ways, content creators represent

9 the gaming community. So content creators are a

10 fairly new phenomenon in the industry and they’re

11 fans. They start as fans of games, they love games,

12 and their work is born out of that love. And because

13 of that, because of their talent and entertainment

14 value, they gather a following. They gather people

15 who are sort of like-minded and interested in what

16 they have to say. And as they develop, they often

17 become opinion leaders or critics or advocates of the

18 industry. And because of the sort of unique place

19 they sit in the game industry, they’re able to speak

20 their opinion very clearly and very transparently. 

21 What’s really interesting to me, as someone

22 who’s worked in the game industry for about 20 years,

23 is that they’re making the game industry better. For

24 a long time, the game industry hasn’t had a really

25 great way to connect directly with their fans. 
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1 There’s lots of fans, lots of people consuming games. 

2 But because these content creators sort of martial

3 millions of fans to one place and their fans tend to

4 agree with them, they become great advocates that can

5 speak directly to game companies. 

6 So why we’re here today talking about loot

7 boxes is because of some controversy surrounding them. 

8 And in many ways, this controversy started with

9 content creators. Content creators, like Angry Joe,

10 who have long been critical of practices that they

11 feel are predatory or not in the best interests of the

12 gaming community, feel a very personal stake in

13 protecting and advocating for content creators. 

14 Star Wars Battlefront II was a flashpoint for

15 this last year. And the outrage around that really

16 brought focus to this issue. And what’s really

17 interesting to me is this isn’t just some angry guy

18 shouting on the internet. People like Angry Joe were

19 able to make change. Very shortly after this video

20 and after this discussion started, EA vowed never to

21 put paid loot boxes in Star Wars Battlefront II. And

22 as you can see, this is what Joe had to say about

23 that. 

24 What I think is most interesting about Joe’s

25 statement is “we will be keeping an eye on these
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1 practices,” “giving us what we suggested.” He’s

2 speaking for the community. That’s what he believes

3 and that’s what his fans want him to do. 

4 So we’ve got a lot of fantastic people, and I

5 thank everyone on the panel for their contributions

6 and everything wonderful that’s been said and will be

7 said later today. We have great advocacy

8 organizations here, but we don’t really have a group

9 representing the gaming community. And so I’ve been

10 asked, which is a really tall order, to represent the

11 gaming community on this panel. 

12 Now, the first thing I want to say is the

13 gaming community is huge. Over half of Americans play

14 games. Virtually everyone plays games. So as you can

15 imagine, the gaming community covers every group of

16 people, every age, every socioeconomic group,

17 everything you can imagine. And as you can imagine,

18 they don’t all agree. So there are a lot of different

19 viewpoints here, and throughout these slides, I’m

20 going to show you a lot of direct feedback that I’ve

21 gotten asking questions and talking to people, both

22 through Twitter and through email. The community

23 wants to be heard. 

24 Now, the number one thing that I’ve heard

25 probably in my career in dealing with the community is
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1 they don’t feel like game companies listen to them. 

2 So you can see from these Google autocompletes when

3 people are searching for Blizzard, Blizzard doesn’t

4 care, Blizzard doesn’t care about customers, EA

5 doesn’t understand, EA doesn’t care, EA doesn’t

6 deserve Star Wars. Ouch. But, really, there’s a lot

7 of frustration in this issue from the game community

8 and it stems from the fact that people don’t believe

9 game companies listen to them. Having worked at game

10 companies, I know that game companies try to listen to

11 them, but it doesn’t always feel that way. 

12 The community mostly thinks loot boxes are

13 gambling. So of the feedback that I got, there was a

14 wide variety. But over and over, we had people coming

15 back to this idea that if it’s not gambling, it feels

16 like gambling. So even though I think we can pretty

17 clearly say that loot boxes are not exactly the same

18 thing as entering the lottery, not the same thing as

19 sitting in front of a slot machine, they do have some

20 of the same feelings that gambling does. And so even

21 though it’s not gambling, it does feel like what I’m

22 calling “gambling within a game system.” 

23 The community wants to keep kids safe, right? 

24 People, I don’t know, they like kids. And a lot of

25 the opinions here are rooted in the fact that we see
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1 easy opportunities for kids to be taken advantage of. 

2 And these are a couple of stories from the BBC talking

3 about exploitation of kids or kids just spending way

4 too much money in games. 

5 And I think one of the real reasons that this

6 hits home is, as a parent, you can’t watch every

7 minute of every show that your kid watches, you can’t

8 sit there while they play every minute of every game. 

9 So you’re making your decisions sort of on the front

10 end. You’re looking at the box, you’re looking at the

11 rating, you’re looking at the review, and you’re

12 saying, okay, this is fine. But then the moment where

13 these sorts of stories happen is inside the game. So

14 it’s at a time that the parent can’t necessarily be

15 there. And obviously, there are controls for this,

16 but the sensitivity of this kind of thing happening is

17 there. So people are very concerned about that. 

18 This is actually an email I received from a

19 guy in Germany. I thought it was really interesting

20 because it really talks through the entire process of

21 the pressures surrounding people. So as was mentioned

22 earlier, a lot of these microtransactions and loot

23 boxes happen in online games. Online games are both

24 competitive and collaborative. And so what he’s

25 talking about here that’s really interesting is the
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1 sort of collaborative nature of pressure. 

2 So in being in a clan or a guild, something

3 like that, he wants to do right by the guild. He

4 wants to hold up his end of the team, that sort of

5 thing. To do that, obviously, you need the best

6 equipment, you need to have everything that the highly

7 competitive people have. And, of course, a lot of

8 those things end up in loot boxes or end up in the

9 ultra premium packages. 

10 So because of the scope of these, which has

11 been talked about as well, you can see how this

12 pressure comes both from wanting to be the best, but

13 also not wanting to let your friends down. 

14 The community wants to get what they paid

15 for. Now, we’ve heard about the horse armor already,

16 but I think this illustration from Forbes really kind

17 of nails the feeling that the game industry has -- or

18 the game community has. When most of us started

19 buying games, there was this covenant, right? I buy

20 the box; I get what’s in the box; that’s the game. 

21 Maybe there’s an expansion, maybe there’s something

22 like that. But, ultimately, I know what I’m paying

23 for. I don’t have to go out and make an additional

24 purchase or I’m not going to be consistently

25 monetized. 
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1 So there’s already this sort of feeling that

2 comes along with that that is pretty negative. And I

3 think that horse armor really kicked us off on the

4 wrong foot because the DLC was included on the disk in

5 some cases, which meant you were literally just paying

6 to unlock something that you already physically owned. 

7 And as we can see, it’s a quick progression

8 here. I know a lot of this has been covered already,

9 so I won’t talk too much about it. But the way we got

10 to today wasn’t overnight, right? You had these

11 microtransactions normalizing through a lot of

12 different games, through a lot of different platforms. 

13 They went from sort of console and online games to

14 Facebook, social media games. Everyone remembers the

15 amount of Farmville spam that used to appear in our

16 feeds. And then when we hit social media, we have a

17 lot more refined ability to monetize people, which has

18 kind of led us here to Star Wars Battlefront II and

19 the other modern games we’re talking about. 

20 I definitely applaud the ESA for that

21 announcement from Sony, Microsoft, and Nintendo as

22 well. That’s really exciting. 

23 The community, they kind of want regulation

24 of loot boxes. So there’s a lot of discussion about

25 how does this happen. One of the things that’s really
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1 interesting is there’s a break between mobile games

2 and other video games. They’re sort of regulated in

3 different spots and so far have not been very

4 consistent. So the people that are frustrated, they

5 also have concerns about government regulation, as our

6 first friend has to say here. But realistically,

7 people are looking for some more structure, they’re

8 looking for some more guidance. They want there to be

9 more definition around this topic. 

10 Now, what do I think? Well, we’ve touched on

11 this a lot, but I think that all of these things feel

12 like gambling. I’ve played Magic my whole life, I

13 collected baseball cards, I bought those stupid eggs,

14 every one of those things. But they are all the same

15 search, right? I’m looking for that rare thing, that

16 special thing. 

17 With the exception of -- I mean, there’s the

18 true surprise mechanic there with the Cracker Jacks. 

19 That was the last time I felt like any of these were a

20 surprise mechanic. When I open a pack of Magic cards

21 or pack of baseball cards, I know exactly what I’m

22 looking for. 

23 Now, how do we go forward from here? Well,

24 this is a pretty complicated issue, as you’ve seen. 

25 And there are several things that are standing in the
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1 way of good regulation here. The first one is that

2 the government doesn’t tend to understand games and

3 technology very well. Our elected officials are old. 

4 The average congressperson was born in 1961. So

5 that’s years before the Atari 2600, 37 years before

6 Google was invented. For a kid who grows up today,

7 Google is just part of your life. 

8 The president is six years older than Mr. 

9 Potato Head, Mr. Potato Head, being the original sort

10 of loot box, the original DLC for your potato. And

11 he’s 69 years older than the oldest iPhone that plays

12 Fortnite. 

13 So a lot of the folks that are thinking about

14 this, considering this, it’s not their generation

15 that’s experiencing it and living it. And I think

16 it’s really important that we start talking about that

17 as well. We have younger elected officials coming in,

18 which is wonderful. But there’s definitely a long way

19 to go here. 

20 So I think the biggest part in sort of

21 removing this frustration that the gaming community

22 has with government and regulation is really changing

23 the tone. Our leaders are often very critical, as

24 recently as the last few days, about video games,

25 blaming them for all sorts of social ills that studies
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1 show are just not the case. 

2 The other part of this that I think is really

3 concerning was just touched on by Renee, that if we

4 regulate this too severely, so much of the game

5 industry’s profit is coming from this area, that

6 regulations here could have a real impact on people’s

7 lives, on people’s jobs. It could cause some of these

8 companies a pretty serious amount of damage. So it

9 needs to be taken very carefully. It is not a game. 

10 These are people’s lives. 

11 Dialogue is needed because we need to change

12 the tone of this. When you have the President of the

13 United States saying that games create monsters at the

14 same time that our clients and people in the game

15 industry are raising millions of dollars to cure

16 cancer, it just strikes sort of a deaf ear and makes

17 people not feel very collaborative about this. And

18 because of that stuff, I think things like this loot

19 box workshop, panels, these kinds of discussions and

20 dialogue are really positive and really give us a

21 great opportunity to start looking at that game

22 industry properly. 

23 So thank you guys for your time. 

24 (Applause.) 

25 MS. FRASSETTO: Thank you, Omeed, and thank
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1 you to all the panelists this morning. 

2 At this point, we’re going to take a short

3 10-minute break before the moderated discussion. It

4 is about 11:50, so if you can be back here at noon. 

5 And if you have any questions that you

6 haven’t already filled out, please fill out a comment

7 card or tweet us @FTC #LootBoxFTC. Thanks. 

8 (Brief break.)

9 MR. WONE: Okay. Welcome back to the

10 moderated discussion for Panel 1. We’ve heard some

11 interesting presentations this morning on loot boxes

12 and the microtransaction landscape. And now, we’d

13 like to discuss some of the issues that were raised

14 this morning in more depth and also take some of the

15 questions that we’ve received from the audience. 

16 To start off, we thought we’d start with a

17 question pertaining to EA’s announcement. And given

18 their intent for its members to disclose odds for loot

19 boxes, we were wondering, first, whether game

20 developers or publishers used dynamic odds in their

21 loot boxes? And if so, how those odds would be

22 disclosed? 

23 MR. WARNECKE: Sure. So speaking to the

24 commitment, the commitment would apply to whatever the

25 particular loot box is. And regardless of the method
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1 used to reach the odds, those odds would be disclosed. 

2 What I can say on those dynamic drop rates is

3 that there are a lot of innocuous uses for those that

4 are perfectly legitimate, for instance, in a sports

5 game that’s mimicked on real world sports teams, you

6 would want to have the players have continually

7 updated stats. And, for instance, if you have a

8 baseball player that had a really good month of

9 gameplay, their overall ranking is going to go up over

10 time. And as that ranking goes up, they will move

11 into higher levels of rarity. And so that is

12 perfectly acceptable. 

13 In fact, if you had a sports game and you

14 didn’t continually update it to reflect that, the

15 consumers would be upset by that experience. So

16 that’s an appropriate use of dynamic drop rates. 

17 I’m sorry. Did you have -- 

18 MR. WONE: I guess, given how would those

19 odds be disclosed? Does the fact that they’re dynamic

20 influence how the odds are disclosed to consumers? 

21 MR. WARNECKE: Whatever odds are disclosed

22 will be the current odds for that situation. 

23 MS. FRASSETTO: All right. So this question

24 I’ll initially open up to Jeff, but others can weigh

25 in, just because, Jeff, you discussed this in terms of
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1 talking about the various types of loot boxes. So

2 with pay-to-progress or pay-to-win, do you think that

3 those are ever appropriate? And if so, what kind of

4 disclosures would you like to see to properly inform

5 consumers that they’ll likely pay those costs or what

6 is the total cost of the game going to be? 

7 MR. HAYNES: That gets to be a little bit

8 complicated. Pay-to-win style games, by and of

9 themselves, you’re basically walking into a situation

10 where you know the floor is already somewhat skewed. 

11 If somebody has more money or they are more willing to

12 get an edge over you, they will have that edge. So by

13 and of itself, you’re kind of walking in at a

14 disadvantage. And that almost proliferates an arms

15 war, where it’s essentially, I’m not going to have a

16 chance to compete unless I wind up getting certain

17 items or certain gear or I dedicate a ton of time. 

18 Pay-to-progress, on the other hand, gets to

19 be a little bit trickier. I think when you get to

20 things like -- especially if you have any parents and

21 you’ve been subjected to Harry Potter Wizards Unite. 

22 I know I’ve gone to many a park looking for inns

23 because my kid wants to cast spells and the spell

24 energy just constantly runs out, so you’re always

25 running to a park. 
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1 And it becomes this whole situation where you

2 can’t really go through all the content, but it’s this

3 back and forth yo-yoing of, I only have this amount of

4 time and either I’m going to pay money to go farther

5 or I’m going to have to wait a certain amount of time

6 just to get a little bit further ahead in the game. 

7 And in some cases, it’s useful at least in metering

8 out what is being done. 

9 So if the developers haven’t created certain

10 content, they can have additional time so players

11 aren’t blowing through everything that’s there. And

12 then all of a sudden, they go, I want to move to

13 something different. 

14 But in other cases it becomes a problem

15 because it’s like, oh, pay this amount of money to get

16 an extra advantage, pay this to replenish everything

17 and go ahead again. And that’s where you start

18 getting a little bit of the tax that nibbles away at

19 your bank account. 

20 MR. KANE: If I may add something to that. 

21 It’s interesting because there’s two perspectives on

22 this, and so some of the pay-to-play or play-to-win. 

23 You’ve got games that are more individualized and then

24 games that are more multiplayer. And so I know lots

25 of people that’ll play something like Candy Crush or
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1 one of the other games, where really they’re not

2 playing against anyone but the computer and they’re

3 still deciding to pay to help solve a level or they’re

4 deciding to pay to get another life or whatever they

5 might be buying in that particular game. So for them,

6 it’s kind of individualized. 

7 But then on the flip side when you have the

8 multiplayer games, some people in the community will

9 actually police some of these play-to-win or

10 play-to-power-up scenarios because just because you

11 have the ability to purchase that Level 99 sort of 

12 invulnerability doesn’t mean you know how to use it in

13 the game. 

14 And then in many cases, you have kind of the

15 community of that game itself self-selecting out those

16 particular players because they feel that, yes, they

17 might be overpowered in certain ways, but don’t

18 actually know how to play the game. And so those

19 overpowered things does not actually help them and

20 makes some of the gameplay less entertaining for

21 people. So I think it’s an interesting dichotomy. 

22 MR. HAYNES: Yeah, that’s true. Although

23 there are also -- on the other hand of that, there are

24 the situations where in some games you have players

25 that will, all of a sudden, acquire different
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1 characters. For instance, there was a situation

2 within Marvel Strike Force where, all of a sudden, a

3 gamerman should get a character that was basically

4 being eked out in a drop rate of about maybe one or

5 two shards per box. And all of a sudden, this

6 character had it within, say, about a month or two of

7 the game basically being released. And everybody

8 went, wait a second, how did you even do that? 

9 And it became a situation where you realized

10 that character was already overpowered than virtually

11 any other character in the game. And it was a

12 circumstance of, well, who wants to challenge this

13 player? Because we already know that the game’s been

14 basically broken wide open. This guy will beat you,

15 doesn’t really matter. But then is there even a point

16 in challenging that? Or is it something where they’re

17 going to have to restrict how they even enter into it? 

18 And it becomes a situation where you realize,

19 well, maybe they’ve got this advantage because they

20 decided just to spend the money for it. And that

21 becomes one where, true, the community will police it,

22 but it also becomes a situation of, do we enter this

23 arms race or do we just abandon it altogether? 

24 MR. WARNECKE: Something I’d like to add to

25 that, too, is that when situations like that arise,
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1 game publishers are very good about monitoring 

2 MR. KANE: Exactly.

3 MR. WARNECKE: -- the in-game world to make

4 sure that there’s balance and are constantly making

5 corrections to ensure that the other players have a

6 good experience. 

7 MR. BREYAULT: And just to add one more

8 point, just to underline something Omeed said during

9 his presentation about the impact that multiplayer and

10 being part of a clan, for example, can have in

11 someone’s willingness to spend money. I think it’s

12 important for the FTC, as it looks into this issue

13 further, to examine -- I know in games that I play,

14 there’s a lot of pings and nudges to join a clan or to

15 add my Facebook friends or to create basically a

16 social group within the game, to the extent to which

17 the creation of those social groups and the influences

18 to join clans may be affecting someone’s willingness

19 to spend additional money on the game or not. 

20 I think it’s one issue that, I think, Omeed

21 raised that it’s important for the FTC to look at as

22 well. 

23 MS. FRASSETTO: Okay. And just as a followup

24 on that, in terms of the disclosures at the outset --

25 and this is open to anyone -- I guess, how would you
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1 recommend in a game where it is sort of pay-to-win,

2 you disclose that up-front? Is it enough to just say,

3 in-game purchases as it is now or should there be more

4 of a specific, here’s what it costs for XYZ purchase? 

5 MR. BREYAULT: So I would say that the

6 current -- while I appreciate the efforts that ESRB

7 has done to try and make disclosures better, I don’t

8 think that simply saying on a box that you have any

9 in-app purchases available adequately informs your

10 typical parent or consumer just about the level of

11 investment that goes into trying to get people to

12 spend more on the game or in the app. So I don’t

13 think that necessarily just saying that up-front is

14 sufficient. 

15 Some ideas that I’ve seen floating around

16 there which I think are worth exploration are

17 disclosing what is the average spend on this game by

18 people after they acquire it. I think that might be

19 useful in helping consumers understand, okay, chances

20 are that I’m probably going to spend $10 on this game

21 over the life of the game, or to be really good and be

22 in the top 1 percent, we’re spending thousands of

23 dollars on this game. I think that would be useful

24 information in the hands of consumers to help them

25 make a more informed decision. 
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1 MR. WARNECKE: Something I’d like to add to

2 that, from a parent’s perspective, one way that may be

3 simpler, instead of going game by game as to what the

4 anticipated post-purchase expenditure might be, is to

5 just set the spending limit in the parental controls

6 that would apply across all games. It’s just more

7 efficient to do it that way. 

8 MR. BREYAULT: And there’s no reason you

9 couldn’t do both. 

10 MR. HAYNES: Yeah, I actually would think

11 that, in some cases -- just to build off of something

12 that John said, I think -- having the label that

13 simply says in-app purchases or in-game purchases

14 doesn’t fully explain what those purchases happen to

15 be. And so it might be actually worth it to have a

16 web page that actually lists whatever the content

17 might be that parents or consumers could go to to

18 actively see what the content would happen to be,

19 especially in some cases for, say, sports titles,

20 which are constantly updating with content or

21 situations based off of real game scenarios, so that

22 players can test their own skills against what

23 happened in a game. 

24 So it might be a situation where it’s like

25 score 50 points. Can you score it faster? Can you
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1 score it with these players? And at least you have

2 more of a sense of what the in-app purchase or the

3 in-game purchase happens to be, so you always have a

4 sense of how the costs will change. Because setting a

5 limit is fine, but if you realize all of a sudden you

6 need to spend extra to maybe get a certain scenario or

7 get a certain purchase, that spending limit will

8 quickly evaporate, especially if you wind up always

9 paying for a new pack, a new player, a new stadium,

10 something else. 

11 MR. KANE: Well, I think we’re kind of like

12 looking at a couple different issues here. Because

13 we’re talking about certain things about disclosure

14 and whether or not the -- as John said, kind of what’s

15 the average player spend. Well, so the real question

16 on that is then, what’s the average player? Is that a

17 player that spends or doesn’t spend? Because that

18 could really change your numbers right there. 

19 But secondarily, Jeff, you’re talking more

20 about children or parents and them understanding more. 

21 Some of the games that we’re talking about here are

22 not games for children. 

23 MR. HAYNES: Sure. 

24 MR. KANE: Some of these games, basically --

25 we obviously have COPPA that Renee mentioned earlier. 
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1 Most of the companies here, if they have knowledge

2 that a child is 12 years old or younger and has an

3 account, that game will shut down that account because

4 those particular players, that particular age, is not

5 necessarily welcome within that game. And there are

6 other games we’re talking about that are rated by the

7 ESRB as older, mature, that sort of thing. I know

8 kids that play those games. 

9 Now, part of this goes back to the parents. 

10 Parents need to have an active role in deciding what

11 their children are going to do, if we’re talking about

12 children. But it seems like we’re talking about all

13 of these different issues right now and everyone’s

14 trying to lump them together into one thing and, in

15 certain ways, vilifying these mechanics which are

16 geared towards different types of players in different

17 types of games in different types of scenarios. And I

18 think we need to be really, really clear what point

19 we’re addressing to what subgroup within that. 

20 MR. HAYNES: I absolutely agree with you. 

21 But I think in some cases, just to counter that, there

22 are absolutely certain games -- for instance, to use

23 the MLB: The Show reference, there are plenty of kids

24 that will play MLB: The Show. It’s not to say that

25 that game is for mature audiences. It’s a baseball
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1 game, and so there are going to be plenty of kids that

2 want to get their favorite players, they want to get

3 their favorite packs. Just like with FIFA, you have

4 plenty of players around the world that want to get

5 their favorite football players. 

6 And in many ways, even though there are the

7 COPPA regulations that basically say you can’t have it

8 if you’re this age with this account, it’s very, very

9 difficult to also then take somebody and say, but now

10 you need to understand all of the varying little

11 idiosyncrasies when it comes to every single pack,

12 which is why I was saying having an extra page that

13 maybe explains what some of the additional costs might

14 be or what some of the extra packs are also protects

15 some of the developers because at least they could say

16 we listed that there are in-app purchases, here’s

17 where you can find them. 

18 But then for parents -- because parents do

19 need to have a role in this so that it’s not simply a

20 situation where they establish an account, they pay

21 absolutely no attention, then all of a sudden they go,

22 how did I get $1,000 worth of charges? At least that

23 way they know if my kid is playing baseball, I know

24 that they’re playing baseball, it’s a safe game. But

25 then I also know exactly what the charge might be if
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1 they want to try and find their best players for their

2 particular team. 

3 MR. KANE: Yeah. And again, I think the

4 disclosure is wonderful, I think what the ESA is

5 announcing is wonderful. But I always go back to the

6 point where an online shop, like Amazon, or a brick7 and-mortar, like Macy’s -- I’ve known people that were

8 compulsive shoppers and they will go out and they will

9 spend their rent money on whatever item they feel like

10 they need to have. Personally, I just don’t feel like

11 it’s Amazon’s or Macy’s role to have to step in and be

12 the parental figure and tell these people, you can’t

13 buy this. And I think sometimes that’s the economy

14 we’re dealing with, is that pressure is being put on

15 an industry to take on a role that may not be

16 something they need to take on. 

17 Disclosure is wonderful and I think we all

18 need to understand what it is that we’re buying. But

19 it’s a matter of how you do that. It’s a matter of

20 how clear it is and whether or not we’re being clear

21 to the industry as a whole across the board or if

22 we’re trying to create clarity for one particular

23 outlying individual. And I think we can’t do the

24 latter. 

25 All we can do is basically put out disclosure
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1 that, in as clear sense as possible, makes people

2 understand what they’re getting, what they’re

3 purchasing. And if they decide to do it because they

4 love that game, then that’s their right to do it. I

5 don’t think that we, as an industry, needs to step

6 into that parental role, though, because some of these

7 people are not children. 

8 MR. HAYNES: Yes, absolutely.

9 MR. KANE: Some of these people are our age

10 and they’re spending $1,000 on a game that they love

11 and this is their way of relaxing after a hard day’s

12 work. 

13 MR. HAYNES: Absolutely, I completely agree. 

14 MR. WONE: Okay. We’d like to turn to ask

15 one of the questions we received from the audience,

16 and this was a question that they’re directing to ESA. 

17 Will the newly announced standards or policies

18 develop active strategies that parents can use to talk

19 with, educate, or monitor their children? Will it

20 include resource referrals to Gamblers Anonymous or

21 other similar public health organizations?” 

22 MR. WARNECKE: So separate and apart from the

23 announcement on the drop rates disclosure, as will be

24 discussed later this afternoon, ESRB will be

25 announcing some greater educational efforts to reach
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1 out to parents and inform them about parental control

2 features, including spending limits. 

3 In terms of your question about -- what was

4 it, Gamblers Anonymous? 

5 MR. WONE: Yes, that’s what the person -- 

6 MR. WARNECKE: So, no, it does not include

7 any sort of hotline for that. ESA’s position is that

8 loot boxes are not a form of gambling and that it

9 wouldn’t be an appropriate solution to that issue. 

10 MS. FRASSETTO: All right. The next question

11 is for Omeed, but, again, anyone can jump in. Someone

12 had talked earlier about online content creators and

13 are they properly disclosing their relationships to

14 the companies. So I’m curious, based on your

15 expertise, do video games pay these content creators

16 to open loot boxes? Do they pay for the loot boxes?

17 And if so, do they, at times, give them better odds

18 than the public at large and how much of that is

19 disclosed?” 

20 MR. DARIANI: Yeah, that’s a good question. 

21 So, yes, companies do pay for that sort of thing. 

22 It’s pretty uncommon for it to specifically be, hey,

23 just open a bunch of loot boxes. But we’ve definitely

24 seen that. It happens more in sort of the eSports

25 type games. 
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1 I’ve definitely been in a room where a

2 publisher said we could do better odds on the packs

3 that this person opens for promotional purposes. 

4 That’s only been one time. 

5 But, yeah, I think, in general, people --

6 content creators very often open the loot boxes

7 because audiences really enjoy that. It’s exciting,

8 right? You don’t know what’s going to come out. You

9 don’t know if they’re going to get the rare stuff. 

10 And, hey, I don’t have thousands of dollars to spend

11 on buying my own loot boxes, so I can watch someone

12 else do it and sort of live vicariously through them. 

13 MS. FRASSETTO: And to the disclosure point,

14 I guess, how do content creators go about disclosing

15 all of the various aspects that they’re paid at all,

16 that they’re paid for the loot boxes, they’re getting

17 better odds, things like that? 

18 MR. DARIANI: Well, so I’ve never heard

19 anyone disclose that they’re getting better odds. So,

20 in general, content creators are supposed to abide by

21 the FTC endorsement guidelines. For our clients, we

22 are very strict about that. We provide -- obviously,

23 it’s in the contracts, in the agreements, it’s also in

24 their notes for the activation itself. 

25 So you have a tweet, hey, a reminder to put
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1 hashtag ad or mention that it’s sponsored, things like

2 that. Very important to us because we want to make

3 sure that we’re staying on the right side of this. 

4 That said, content creators are sort of mixed

5 in compliance here. We see a lot of cases where

6 things are not disclosed properly or disclosed at all. 

7 So it’s certainly an area where there could be some

8 improvement. But from our perspective, it’s a matter

9 of education. 

10 What’s really interesting about it to me is

11 that content creators are actually, much more so than

12 traditional celebrities or actors or things like that,

13 they’re not ashamed to admit that they’re being paid

14 for these things. In fact, it’s actually a benefit to

15 them in a lot of cases because it’s like, look, EA is

16 recognizing that my content has value. They’re paying

17 me; they’re supporting my channel. Because of the

18 work that we’ve done, the community that we’ve grown

19 together with our audience, these big companies are

20 involved now. And that, for many people, can be a

21 source of validation, a source of growth, a badge of

22 honor, that sort of thing. 

23 MR. KANE: If I may on that. So we’ve

24 actually handled several FTC investigations into

25 influencers in this space. And I will say that -- so
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1 I’ve had a lot of experience with the endorsement

2 guidelines. One of the things I will say, a question

3 I get quite a lot, though, is, what really is the

4 required disclosure and how do you go about doing it

5 properly? 

6 And that’s sometimes a problem, I think, for

7 certain content creators. They don’t know whether

8 #Spawn or #Ad is sufficient or it needs to be more. 

9 And does that need to be stated on the screen when

10 they’re talking about a particular game and when?

11 Because some of these streams are an hour long or

12 multi-hours long. At the beginning of that stream,

13 someone might say, I’ve been compensated by EA for the

14 play that I’m doing today or I’ve gotten this game for

15 free to play this game today. 

16 MR. DARIANI: Yeah, and to build on that, not

17 only a course of several hours, but a course of days,

18 weeks, months, years. 

19 MR. KANE: Exactly. 

20 MR. DARIANI: So if EA gives me a copy of

21 Battlefield 9 and I disclose, like, hey, thanks, EA,

22 for giving me this copy, do I have to disclose it -- 

23 I mean, I have to disclose it every time I play the

24 game -- 

25 MR. KANE: But do you have to disclose it
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1 every five minutes in a three-hour stream? 

2 MR. DARIANI: Yeah.

3 MR. KANE: But what happens if I come in 10

4 minutes in and I didn’t see the beginning? 

5 MR. DARIANI: Yeah, we had this conversation

6 with a lawyer at the FTC. It was more of like an

7 educational, like fact-finding thing. But he asked

8 the question, which was very good, it’s like, how do I

9 ensure that everyone who watches this Twitch channel

10 fully understands? And the answer that I had to give

11 him was, it’s impossible. You would literally have to

12 have a platform level solution that is blocking every

13 person coming in, like an age gate, and telling them

14 that this is happening, in addition to having the

15 person talk about it constantly. 

16 Because unlike a recorded video, people come

17 in and out, right? So it’s not like if I watched the

18 first 30 seconds and then five minutes and then five

19 minutes, I’m going to see one of them. I could just

20 be there for a time where there’s no disclosure. 

21 MR. KANE: And right now, the influencer

22 can’t -- like, Ninja, if he wanted to, couldn’t be

23 like, I’m going to put this bar that pops up on Mixer

24 that now says, I’m getting compensated for this,

25 because I don’t have control over that platform or the
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1 distribution method. 

2 MR. DARIANI: Yeah. And even when Twitch

3 does sponsored streams, sometimes, not always, but

4 they’ll require that there’s an actual badge on the

5 screen, like sponsored by EA or whatever. But that’s

6 not always required and that’s certainly not a

7 platform level solution. That’s they send the image

8 to the broadcaster and the broadcaster puts it into

9 their broadcast. 

10 MR. WONE: Okay. We’re almost out of time. 

11 So just a final wrap-up question to all the panelists,

12 what direction do you see the industry moving towards

13 in the future relating to loot boxes and other in-game

14 purchases and will “freemium” games with

15 microtransactions continue to be a popular model? 

16 Whoever would like to go first. 

17 MR. BREYAULT: From my point of view, I don’t

18 see any reason why the industry would turn away from a

19 game model that is becoming increasingly profitable

20 for them. In terms of the disclosure, just to

21 underline what other folks have said, Michael’s

22 announcement on ESA and loot box drop rates is

23 important, and I think it does show that this is an

24 industry, unlike other industries, where you often see

25 people like me criticizing. It’s one that does seem
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1 to pay attention to its users and react fairly quickly

2 to them. And so for that, I think they should be

3 applauded. 

4 But at the same time, I think it’s important

5 for the FTC to maintain a close eye on this. This is

6 an industry where, as has been said many times,

7 hundreds of millions of people are playing them and

8 it’s generating billions of dollars in revenue. And

9 so to ensure that the industry doesn’t take advantage

10 of gamers in its efforts to continue that

11 profitability is an appropriate role for the FTC to

12 take. 

13 MS. GITTINS: I think that the “freemium”

14 model is a core part of the app economy, not just

15 within games. We see it in fitness apps and other

16 apps as well. And I think consumers are getting

17 really used to that. It’s risk-free for them because

18 they can try out any applications prior to purchase. 

19 And when consumers are introduced to games on this

20 “freemium” model, I believe that they begin to expect

21 that on consoles and the PC market as well. So I

22 think we’ll continue to see growth in that area. 

23 MR. DARIANI: Can you imagine if the

24 “freemium” game model existed sort of in that time

25 period where AOL was just mailing CDs to everyone like
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1 every day? I mean, World of Warcraft doesn’t make

2 most of its money from the $49.99 box; it makes most

3 of its money from $15 a month. You could very easily

4 see a situation where they’re just sending those disks

5 to everyone and it’s like, hey, just try this for a

6 month and see what you think. But I think download

7 speeds caught up, so that was never necessary. 

8 But can you imagine going back to the ‘80s

9 and telling little Omeed, this game that you’re

10 playing could just be free, like it’s just free. It’s

11 like, oh, my God, how did that even happen? So it’s

12 pretty amazing that this business model exists. 

13 MR. KANE: I think the industry is going to

14 continue to strive to provide better and bigger

15 experiences to the users and do it in a way that tries

16 to be at a price point that makes the most sense. And

17 I think there’s going to be ebbs and flows, there’s

18 going to be successes and failures because different

19 methods of monetization are going to work for the

20 industry, but maybe not work for the community. And

21 so there’s going to be a learning by both sides. And

22 as technology increases and changes, we’re going to be

23 seeing things differently. 

24 So personally, I think that all of these

25 issues makes it certain that my grandkids are going to
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1 be around still kind of questioning what’s new and

2 what’s going to happen. It’s going to be a great

3 ride, I think, for all of us to see where we’re going

4 to go. 

5 MR. HAYNES: Yeah, I think it’s going to be

6 really interesting, especially since we’re on the cusp

7 of a new generation of hardware coming out next year. 

8 And I think that there are certain models that work

9 really well. I think sports games really have a

10 pretty good grasp of the loot box mechanic when it

11 comes to certain content. But I think the game

12 industry, in some quarters, are moving away from it. 

13 At E3, there were a number of companies that said no

14 loot boxes, no microtransactions in this game ever,

15 and it was this huge flag that they were planting

16 down. 

17 And it was one of those circumstances where,

18 I think, some game types or some games genres, that

19 mechanic hasn’t worked very well. In others, it works

20 perfectly. And I think sports, especially with it

21 being such a dynamic situation and developers trying

22 to capture that dynamism in game as realistically as

23 possible, it winds up providing that perfect marriage

24 of the two. 

25 On the other hand, when it comes to mobile
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1 apps, I think there’s going to be a larger explosion

2 of that, with possibly the exception of whatever the

3 Google Pass or the Apple Arcade announcements will be

4 and how that will be handled. Because if it winds up

5 being a situation where you pay in for a subscription

6 to have a certain kind of experience without ads or

7 without in-app purchases, that could radically change

8 the landscape of how apps are even being handled and

9 measured with loot boxes or microtransactions going

10 forward. 

11 MR. WARNECKE: Few industries innovate as

12 quickly and as frequently as the video game industry. 

13 And we’re constantly experimenting with new ways of

14 reaching consumers, new ways of providing them a range

15 of experiences. And as Sean mentioned, and I agree,

16 sometimes we get that right, sometimes we need to make

17 adjustments. And I think that that’s always going to

18 be the case. And I think consumers want us to

19 continue to kind of push to see what new experiences

20 we can offer and what new ways they can enjoy

21 gameplay. 

22 And so I can’t say where the direction of the

23 industry is going to go in five or ten years, but what

24 I can say is this. It is a customer-focused industry. 

25 And when gamers are upset or have concerns about a
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1 particular implementation, there is an incredible

2 feedback loop to the publisher and to the industry

3 about what works, what doesn’t work, what can be

4 improved. And so I imagine, regardless of what the

5 technical platform will be for the future, that

6 feedback will continue and the industry will continue

7 to be responsive to the gamers who help support us. 

8 Thank you. 

9 MS. FRASSETTO: All right. Thanks, everyone. 

10 And thanks to the audience for a good morning panel. 

11 All right. So we are running a little bit

12 late. I see it’s about 12:30, so we still want to

13 give you guys about an hour for lunch. So if we can

14 reconvene for Panel 2 at 1:30, that would be great. 

15 Thank you. 

16 (Applause.)

17

18

19

20

21

22

23

24

25
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1 PANEL 2: HEAD IN THE GAME – WHAT DRIVES LOOT BOX

2 SPENDING?

3 MR. MCALVANAH: -- will present recent

4 academic research about loot boxes. 

5 This afternoon’s panelists include David

6 Zendle from York St. John University, Andrey Simonov

7 from Columbia University, Adam Elmachtoub, also from

8 Columbia University, and Sarah Domoff from Central

9 Michigan University. 

10 As with the prior panels, each of you will

11 have the floor for about 15 minutes, and then we will

12 move straight on to a moderated discussion. 

13 We’re running a little bit behind, so please

14 try and keep to your allowed time and don’t get

15 offended if during the moderated discussion session if

16 I have to cut you off. 

17 As a reminder, there are comment cards. If

18 you’d like to submit a question to any of the

19 panelists -- we have a paralegal -- you can raise your

20 hands, and the paralegal, Emily, will come over, and

21 she can take them, and we’ll submit them. 

22 Okay. Without further ado, David, let me

23 turn the podium over to you. 

24 DR. ZENDLE: Okay, thank you. 

25 Okay, hello there. My name is Dr. David
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1 Zendle, and I’m one of the world’s leading experts in

2 the potential for harm present in loot boxes,

3 something that hasn’t really been covered extensively

4 so far today. 

5 And if you’re wondering what it looks like to

6 be one of the world’s leading experts on this, this is

7 a subset of the journal articles that I’ve published

8 on the topic this year. They are in what you call Q1

9 journals, which only take the most scientifically

10 valid research. Please believe me when I say I’m an

11 expert about speaking from a position of authority. 

12 The stuff I’m saying today is real and it is very

13 worthy of your consideration. 

14 There’s one clear message that I want to get

15 across today, and it stands in stark contrast to

16 everything we’ve heard so far, or mostly everything

17 we’ve heard so far. The message is this, spending

18 money on loot boxes is linked to problem gambling. 

19 The more money people spend on loot boxes, the more

20 severe that problem gambling is. 

21 This isn’t just my research. This is an

22 effect that has been replicated numerous times across

23 the world by multiple independent labs. This is

24 something that the games industry does not engage

25 with. 
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1 Today, I want to talk about this link and I

2 want to talk about why you should care about it. The

3 reason you should care about it are the two words,

4 “problem gambling.” Problem gambling refers to an

5 excessive and disordered engagement with gambling

6 activities that is typically outside of the gambler’s

7 volitional control. It is incredibly harmful. It’s

8 linked to depression and anxiety. It causes financial

9 distress, the destruction of families and, most

10 importantly perhaps, it leads to people taking their

11 own lives. Problem gambling is the reason why some

12 parents come home at night to find their children are

13 not there. 

14 This is so important. It’s not something we

15 should trivialize, or laugh at, or compare to baseball

16 cards. This is life or death. That’s what I’m here

17 to talk about today. 

18 So the reason why problem gambling is such a

19 big topic when it comes to loot boxes and why people

20 care about gambling and loot boxes is because loot

21 boxes look so much like gambling. Both when you’re

22 playing on a roulette wheel or when you’re opening a

23 loot box, you’re wagering something that you have in

24 your hand of value now on the uncertain hope of

25 getting something of greater value later on. It’s
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1 that reason that loot boxes have tripped gambling

2 regulations in a couple of countries within Europe,

3 because of those formal similarities, and because of

4 those formal similarities, people have been worried

5 for a very long time that loot boxes might act as a

6 gateway to problem gambling, particularly amongst

7 younger and vulnerable populations. 

8 We set out to find out more information about

9 this. We started out going to large samples of

10 gamers, big, big samples of gamers, and we found out

11 how much they were spending on loot boxes. And then

12 we measured their problem gambling severity using a

13 standard instrument from the gambling literature,

14 called the Problem Gambling Severity Index. It’s very

15 commonly used, very well known for predicting real

16 world things. 

17 And what we found was this. So this is the

18 first time we found it. Again, this has been

19 replicated many times across the world. This isn’t a

20 new effect. We’ve known about this for a while. 

21 You’ve got people who have no gambling problems and

22 they tend to not spend much money on loot boxes. And

23 then as people’s gambling problems get more and more

24 severe, they spend more and more money on loot boxes. 

25 And the effect associated with this is something that
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1 we call clinically significant, meaning that it’s

2 large enough that people should maybe take notice of

3 it. And you see it again and again and again and

4 again. 

5 Now, some people might say, okay, you’ve got

6 a link between how much people are spending more money

7 on loot boxes and they’re more severe problem

8 gamblers, does that show that loot boxes are a gateway

9 to problem gambling? That is one interpretation to

10 this effect. I’m going to go through others. But

11 it’s the interpretation that fits with the theory of

12 how problem gambling develops. 

13 We know that one of the main pathways to

14 problem gambling is a process of conditioning, whereby

15 the gambler comes to need and expect the excitement

16 associated with the gambling win. So what we think --

17 one of the possible explanations for this effect is a

18 situation in which people are buying a loot box,

19 getting excitement, buying a loot box, getting

20 excitement, buying a loot box, getting that reward,

21 getting that hit, going out into the real world,

22 seeing something that has many of the formal

23 characteristics of a loot box, like a slot machine,

24 and that conditioning transfers over. So therefore,

25 spending money on loot boxes, literally causes people
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1 to engage in gambling, leading to problem gambling. 

2 However, one thing to note about this is that

3 it’s a correlation. And because of that, we can’t

4 determine the direction of causality from it. We

5 won’t know this direction of causality for many years,

6 by which point, one could argue, the damage has been

7 done. This might also indicate a relationship that

8 flows the opposite way, where people who already have

9 severe gambling problems spend more money on loot

10 boxes because of whatever is driving those gambling

11 problems. And that’s a theoretically valid

12 explanation as well, because after all, problem

13 gambling is a state of affairs in which an individual

14 is engaging in excessive and disordered spending on

15 gambling activities that are beyond their volitional

16 control. They can’t control this. 

17 So you could be out spending, spending,

18 spending, spending, spending on slot machines

19 uncontrolled. And then you go home, you switch on

20 your favorite game and you see something that looks a

21 lot like a slot machine, so you start spending on

22 that, too. We don’t know which of the cases is true. 

23 We don’t know which of these is right. But we think

24 that in either case, it’s a clear cause for concern

25 and it’s not something to be trivialized. 
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1 In one case, you have a mechanism in games

2 that many children do play, that is literally causing

3 a state of affairs which is enormously destructive. 

4 And if loot boxes do cause problem gambling, we’re

5 looking at an epidemic of problem gambling, the state

6 of which the world has never seen. 

7 But in the other case, if that’s not true,

8 and I’m totally open to that not being true, totally

9 open to the other state of affairs being the case, if

10 that’s true, then you’ve got a system in which games

11 companies are differentially profiting from the most

12 vulnerable of their consumers. Problem gamblers

13 already have enormous issues going on in their lives. 

14 They don’t need to have their money taken away from

15 them through this as well. 

16 So that is -- you’ll notice at the top, there

17 are URL links. Those will link you to each of these

18 studies. But more than that, they’ll link you to the

19 data for each of these studies. 

20 I adopted a process called Open Science. 

21 It’s a set of practices, one of which is that I always

22 openly share all of my data. If you want to have a

23 look at the data for these studies, if you want to see

24 what it’s like, it’s out there. It’s free for you. 

25 Go have it. 
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1 And other people have been having it and

2 they’ve been finding similarly worrisome things. This

3 is a study by Aaron Drummond and Jim Sauer out of New

4 Zealand, where they sort of looked at how much money

5 problem gamblers were spending by reanalyzing our

6 data, which is available freely to anyone who wants

7 it, and they found that problem gamblers were spending

8 enormous amounts of money on loot boxes and suggested

9 that maybe setting limits might be a good idea. 

10 But beyond those effects I’ve talked about,

11 there’s one very important topic, which is children

12 and adolescents. So contrary to what you may have

13 heard, a recent study conducted by the government in

14 my country, in the UK, the UK Gambling Commission,

15 found that as many as a third of children aged 11 to

16 15 had opened a loot box, which was alarming. It’s

17 alarming because we know that engagement in gambling

18 activities in childhood and adolescence is a key

19 driver of gambling problems in adulthood. 

20 We don’t know why children and adolescents

21 are particularly vulnerable or susceptible to the

22 development of gambling problems. Some people say

23 it’s because it’s a turbulent social time and they

24 find gambling as a means to cope with that. Other

25 people say, oh, there are neurodevelopmental
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1 explanations. It has to do with brain plasticity. 

2 But for whatever reason, they’re very vulnerable. 

3 So we set out to find out if the same link

4 between problem gambling and loot box spending existed

5 in adolescents as well. And guess what? It does. 

6 In fact, it’s much, much stronger than in adults. 

7 This isn’t new research. This has been out for a

8 while. So you have the same relationship replicated

9 in adolescents, but that’s no surprise because this

10 replicates everywhere. 

11 Another interesting thing we did was we asked

12 those adolescents why are you buying loot boxes? And

13 they gave us a number of answers, some of which you

14 might have predicted. Others of which, you might not

15 have predicted. When I read out these things, bear in

16 mind, these are older adolescents. They’re aged 16 to

17 18. These are teenagers. 

18 So some of them say things like gameplay

19 advantages, which you might have seen coming. I feel

20 pressured to get new gear, continue to compete with

21 the ever-changing boundaries of what’s classed as good

22 gear, new gear is constantly -- is added constantly,

23 and thus, gear quickly becomes outdated. Or I enjoy

24 the game. I compete with friends. I don’t want to

25 fall behind them. You cannot be competitive at NBA
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1 2K19 or FIFA 19 without them. This is the sort of

2 stuff we might have predicted. 

3 But we had other responses as well. And the

4 papers are out there. All these papers are freely

5 openly available. You can get access to them if you

6 want to. Lots of the adolescents said that they were

7 opening loot boxes for the fun, excitement, and

8 thrills of opening the box itself. 

9 Here’s a quote, bear in mind, this is a

10 minor. “Shit just feels good, man. Seeing other

11 people opening hundreds and you get a few of that

12 feels good and keeps me goin’.” 

13 Here’s another one. “Because it’s addicting

14 and thrilling reaching into the unknown.” Some of

15 them talked about the gambling feeling associated with

16 loot boxes. 

17 So this brings me to the subject of Kinder

18 Eggs, if you’re at the UK and EU, or baseball cards,

19 if you are in the US. I used to have a lot of

20 sympathy with the argument that loot boxes were just

21 like baseball cards. I don’t have any sympathy

22 anymore. And that’s because whilst you might be able

23 to point to similarities between loot boxes and

24 baseball cards, you can also point to differences. 

25 And I’m increasingly coming to see the baseball card
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1 line as a method by which the industry, like a stage

2 magician, draws our attention towards something,

3 whilst distracting it from something else. 

4 So sure there are similarities. But here’s a

5 difference for you. Loot box spending is linked to

6 problem gambling. Here are other differences for you. 

7 Can you imagine anybody saying that about Kinder Eggs? 

8 It’s a ludicrous argument. We’ve never determined

9 what’s safe before by looking at the similarities

10 between it and something else. 

11 Say I run a cinema and I serve Coca-Cola to

12 all my customers. Coca-Cola is a thick, black,

13 viscous liquid, full of energy, and I sort of got a

14 great deal on engine oil. And I said to you, oh, I

15 know what, I’m just going to swap out the Coca-Cola in

16 people’s cups with engine oil because it’s similar in

17 that it’s also a thick, black, viscous liquid. 

18 You’d have me arrested. That’s never been how things

19 are done. You can’t say something is safe because

20 it’s similar to something else. 

21 Let me move on and talk about the features of

22 loot boxes. There’s some people who would tell you

23 that loot boxes that are only cosmetic, contain only

24 cosmetic items, are in some way harmless. That’s a

25 common opinion you’ll hear from people. 
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1 We were asked by the Australian government --

2 I present this research to governments quite

3 regularly. I’ve presented to the Australians. I’ve

4 presented to the UK Select Committee, in our own

5 parliament. And the Australians said, are there any

6 particular types of loot boxes that are harmless? So

7 we went out and did something called a moderation. 

8 And by the way, this is the basic effect. 

9 This is the problem gambling severity people who

10 engage early in unpaid openings versus who pay to

11 open, and people who pay to open loot boxes have more

12 severe problem gambling. But that’s what you’d

13 expect, because that’s what everyone sees whenever

14 they try and run this analysis. 

15 We tried to do something else, where we tried

16 to see if certain features of loot boxes strengthened

17 relationships between spending on them and problem

18 gambling. And we essentially found that no matter

19 what kind of loot box you had, it was linked to

20 problem gambling, whether it was cosmetic or pay-to21 win. 

22 It’s an early exploratory analysis. There

23 were some small effects in there. But, generally,

24 what we seem to be seeing is that there’s something

25 specific about the loot boxes. 
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1 That brings me to my final slide, which is

2 about the prevalence of loot boxes. Loot boxes are an

3 extraordinarily popular way of making money in games. 

4 They’re in a lot of games. It’s quite hard to find

5 out what games have loot boxes, because they’re not

6 sort of labeled very clearly. So we went through, we

7 just tried to find out how many games they were in. 

8 We went through the highest-grossing Google Play games

9 in the UK. I imagine this is analogous to a situation

10 you have in the US. We found that 54 percent of those

11 top 100 -- 54 percent of that top 100 had loot boxes

12 in, the top grossing games. 

13 But sort of, perhaps worryingly, 94 percent

14 of those games with loot boxes in were PEGI rated,

15 which is our rating system -- it’s analogous to the

16 rating system you have over here -- were rated as

17 being suitable for 12 or above. So there are lots of

18 loot boxes in games that are played by children. And

19 there’s clear evidence that there’s the potential for

20 harm in them. 

21 Again, we don’t know if it’s that the loot

22 boxes are driving problem gambling or if it’s that

23 problem gamblers simply are drawn to spend more on the

24 loot boxes because something to do with them. But in

25 either case, it’s extremely worrying. 
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1 I’m here today, I’m aware that there’s a lot

2 of industry people. We could get this wrapped up. We

3 could find out which of these is the case if you would

4 work with us. There are people out here. We’re not

5 mobsters. We want to work with industry. But in

6 order to answer these questions, in order to find out

7 which way the relationship goes, people need to share

8 that data with us. 

9 You have terabytes of data on users’

10 interaction and user spending. That stuff is what we

11 need to find out which is happening, and it’s just not

12 being shared. So please share it before someone

13 decides that the enormous self-regulatory powers that

14 you’ve been given are something that you’re no longer

15 worthy of holding, which is a very real scenario. 

16 That’s me. Thank you for listening. 

17 (Applause.)

18 MR. MCALVANAH: Thank you, David. 

19 Next, we’ll hear from Andrey Simonov. 

20 DR. SIMONOV: All right, thanks, Patrick. 

21 And hello, everyone. It’s a pleasure to be here. 

22 So I’m Andrey. I’m on the faculty of Columbia

23 Business School and -- where is clicker? This one?

24 MR. MCALVANAH: Yeah, that’s it. 

25 DR. SIMONOV: Oh, wow. Hmm, okay, let’s try
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1 it. All right, here we go. 

2 All right, so I’m Andrey at Columbia School. 

3 And the work I’ll talk about today was with Tom Romano

4 from Harvard. So Tom is also in the audience here. 

5 In some ways, this paper relates a lot to 

6 kind of the topic of this panel and the question the

7 panel asks. And I’m really glad that David had a talk

8 about his paper or his work before us because it

9 really highlights how many different perspectives on

10 loot boxes there are out. 

11 So where this paper is starting is we’re

12 trying to summarize all the different views we heard

13 about loot boxes in two separate buckets. One is that

14 loot boxes are really useful for gaming, and they

15 enhance gaming. And this is that, it’s voluntary to

16 use these items and people can choose them because

17 they’ll go to the game and these items help you to

18 make progress in the game. So it’s part of the video

19 games developers work on. 

20 For companies, it’s a great way to monetize

21 the games. And companies have been struggling with

22 this a lot. We heard about fixed costs involved. And

23 this is one of the forms of bundling that these ways

24 you can do pricing. So Adam will talk more about this

25 after me. 
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1 For consumers, it’s a great chance to obtain

2 useful items in the game. So if I’m stuck on a

3 particular stage, I want to make progress, it’s

4 somewhat useful to open a lottery, and with a large

5 probability I’m staying in the same spot, but there’s

6 a small chance I’m just jumping to a very different

7 productivity curve. So there’s the same economic

8 arguments which were about lotteries in the ‘60s and

9 ‘70s in the US. So that’s one view on loot boxes. 

10 A different view is that while loot boxes

11 look a lot like gambling in a lot of different

12 features -- so you have to buy some currency. It’s

13 in-game currency, but it’s often purchased. It’s a

14 chance to obtain the item. So even though we’re sad

15 that consumers could get direct utility -- so in the

16 first story it was utility for playing the game, 

17 maybe consumers just play loot boxes because they get

18 some utility from a risk. Utility like indirect --

19 like utility from getting excited about the risk. 

20 And this is really problematic because this is 

21 the same as casinos, and it can lead to problem

22 gambling, to addiction, and to all stories like 

23 this. Particularly, it is concerning for minors

24 because kids play video games a lot. 

25 So what we are trying to do in this paper is
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1 to really separate out these two views on loot boxes. 

2 One is -- our question is, how much people play loot

3 boxes because of the in-game functional value, that

4 like the items you get will enhance this gaming

5 utility, and how much they play just for the sake of

6 playing the loot box and getting this maybe like risk

7 preferences, like some draw of behavioral utility from

8 opening a risk. 

9 So that’s where we start. And a second way,

10 so if we show there is some preference for loot box

11 which is direct, now we might ask, okay, how much

12 addiction there is, how much problem gambling we can

13 detect about this in the data? So is there some habit

14 formation? I play more today -- I play today and I

15 play more tomorrow because of this. How much of it is

16 moderated by the variance of loot boxes related to

17 variable schedule reinforcements? And then do people

18 open loot boxes in certain conditions, like cue-based

19 consumption? 

20 Okay, so this will be an empirical paper. We

21 actually have data from a large video game company in

22 Japan and it will be able to separate this out in some

23 way. But to get us started, to get us thinking on how

24 -- like what it means to separate this question, let

25 me show you a very simplified version of the theory
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1 model just to get intuition or to imagine. Given it’s

2 a video game conference, we’ll call it a toy model. 

3 So there was a consumer who wants to play a

4 game and also open loot boxes. One period, he makes

5 two binary decisions. Do I play the game and do I

6 open the loot box? If consumer plays the game, he

7 gets the utility from the game. One is alpha G, which

8 is I just enjoy playing the game whatever. Another is

9 beta, I also enjoy the game more if I win a particular

10 stage in the game. Okay, so there is probability to

11 win. Note that it also depends on YL, which is do

12 they open the loot box or not. So that’s my utility

13 of playing. 

14 If the consumer opens a loot box, he or she

15 also gets utility. So it was direct utility from a

16 loot box, alpha L, which is potential as a risk

17 preference. I need to pay a price, P, and I don’t

18 like to pay money, so there is marginal disutility of

19 money. That’s one part of why open loot boxes. But,

20 also, if I open a loot box, there is a chance I get an

21 item which helps me to advance in the game. So with

22 some probability, my -- this probability to win

23 becomes higher because I have this new item. 

24 So the goal of the paper is really to

25 separate out those two stories. And from the model,
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1 we want to show do people play loot boxes because it

2 enhances the probability of winning, so it was a beta

3 factor. And if that’s the story, we should see that

4 people will open loot boxes at the moment when the

5 marginal return of having this extra item is the

6 highest. In other words, if I really don’t play so

7 well at this stage and an item in the loot box will

8 help me, that’s the moment I want to open the loot box

9 and get the item. 

10 Okay, if the second story is saying this

11 alpha L is just my preference for gambling, then it

12 shouldn’t really be correlated with do I lose in the

13 game, do I win in the game. I should just be opening

14 loot boxes quite a lot in general and get this utility

15 from loot boxes. Okay, so the basic intuition what

16 we’ll be looking for in the data. 

17 So the data we get is from a Japanese mobile

18 video game. And to kind of simplify it, which

19 simplifies our story in some way, is that you think

20 about it as some version of Candy Crush. So there is

21 not much social interactions. People open loot boxes

22 mainly for functional value of the items, so it’s not

23 -- it’s not about skins. It’s really about these

24 characters will help them to progress in the game. We

25 can extend analysis to social interactions, but this
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1 helps us to simplify. And so we’ll be able -- having

2 the data, we’ll be able to measure what is the return

3 of having each character to make progress at each

4 stages of the game. 

5 Okay, so let me tell you a bit more about the

6 game description to get a sense of what is the

7 context. It’s a popular mobile game in Japan. It’s a

8 puzzle game where you have to -- there are a lot of

9 stages you make progress in this game. Every stage is

10 what’s called a battle. And when you do this battle,

11 you need to use your skill to play, but you also need

12 to use some kind of in-game characters. To acquire

13 in-game characters, you can play a lot and get them or

14 you can open loot boxes and have a chance to get a

15 good character. 

16 And then characters differ in the quality. 

17 Some characters are better than others, but also in

18 how they specialize. So which helps us as the game

19 progresses, stages becomes increasingly hard and it

20 requires often different quality of characters, but

21 also different specialization. So we can easily see a

22 moment where I play amazingly at stage 50, but at

23 stage 51, suddenly I get a very different set of

24 characters. And if it’s a functional value of loot

25 boxes, that’s the moment I would want to open them and
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1 to get this thing. So it covers -- will give us some

2 indication for how it matters and different things. 

3 Okay, so a bit more about the data. We got a

4 subset of individual level, very detailed data from

5 this mobile game company on how people play and how

6 people open loot boxes. We have a sample of around

7 800,000 different users. To highlight some of the

8 things we have in the data, we have different metrics

9 of player success. So one, I’ll show you in a bit is

10 like what a score of the player and how many stars

11 each score gets in a round. That’s a very important

12 metric for these players. 

13 We can see which characters they used once

14 they played the game. So from this, we can see, well,

15 if I use a particular set of characters, how

16 successful it was. So we can measure production

17 function of having an extra character, how much extra

18 scores I will I get. It also allows us to identify

19 the moments in the game where the set of characters I

20 have now is not really satisfactory. That’s the

21 moment I would want to open loot boxes for functional

22 value. 

23 We see loot box realizations and distribution

24 of outcomes of loot boxes. And in this game, the -- I

25 think the regulation in Japan requires you to post
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1 probabilities. So for all the loot boxes, there was a

2 probability for every character which is in the game. 

3 So we see what the probability is; we see which

4 characters who you get. We know what is the actual

5 realized distribution. 

6 From this, we can compute what is the

7 expected value for a player to open a loot box. So

8 because we know how I play the game, how good the

9 score is, I know what is all distribution of

10 characters in a loot box, I can measure if I open it

11 with which chance I will be better in the game or not. 

12 So that’s how we match the functionality of this

13 thing. 

14 And then we have data on actual spending in

15 the game, both in-game currency and how they will

16 purchase this currency with real money. 

17 Okay, so let me -- basically, I’ll share at

18 this stage, so we’re still -- the main results we’re

19 still working on. So I’m not sure we’re ready to

20 share the main kind of analysis of the full model and

21 everything else. But let me show you our results on

22 the moderated question which we started with. 

23 So do people tend to play more -- open loot

24 boxes more at the moment when they start losing the

25 game? So as we would treat it, we have different
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1 metrics of success. So maybe the success is you

2 advanced to the next stage. Maybe the success is you

3 have to pay something to keep playing the stage and

4 finally win it. Maybe success is what is the score

5 and how many stars you get at this level. 

6 For different metrics we use, almost always

7 -- and this is something we’re still testing, I have

8 to be a bit careful -- we find that there is strong

9 correlation between how well you’ve done at a stage. 

10 So the worse you do at particular stage part of the

11 game, the more you’ll be able to loot boxes. And even

12 though -- so there is -- we have controlled a bunch of

13 fixed facts, we try to be careful that this is the

14 right variation to use in the data, we still -- I want

15 to highlight this is still correlation evidence. 

16 We’re still -- there is some instruments in the data

17 we can use, but we are not ready to present results

18 with our correlation. 

19 However, to highlight how it is looking at

20 this on one metric, here is a plot which shows how

21 much people open loot boxes as they play the game and

22 how well they did in this game. So here on the

23 Y-axis, on the vertical one, you have transformed

24 probability of people actually opening, engaging in a

25 loot box. And on the X, you have different scores. 
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1 Those three vertical lines are thresholds to get one

2 star, two stars, and three stars in this game. 

3 So the people who play really not so well,

4 they also don’t open loot boxes. Those are the guys

5 on the left bottom corner. As you make slightly more

6 progress and you’re close to the one star threshold,

7 that’s where you open loot boxes a lot. And that’s --

8 I think one [indiscernible] is, you want to make

9 progress and get a better score in this game. And

10 then as people play better and better, you can see

11 downward trend in how much you open loot boxes. 

12 So what this shows to you is -- and this is

13 consistent with all descriptive evidence we saw --

14 there is definitely some functional value in how

15 people open loot boxes. So people do open loot boxes

16 a lot in this game for the sake of getting a character

17 which will help you to progress. 

18 The slide I wanted to finish with and kind of

19 wanted to -- maybe also actually save some time for

20 discussion later -- the slide I wanted to kind of

21 highlight here is even though we show some suggestive

22 evidence for this functional value and, in this, we

23 believe that functional value is quite important, it

24 doesn’t mean that people open these loot boxes only

25 for functional value. 
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1 So what we’re really trying to get out of

2 this paper -- and results, hopefully, we will share

3 soon -- is which share of amount of loot boxes which

4 are opened to people are really opened because of

5 functional value or are opened because of persistent

6 preference, this preference for loot boxes directly. 

7 Because if it’s like 95 percent of loot boxes because

8 of functional value, well, that’s actually part of the

9 video game. But if 95 percent is really this extra

10 component where it doesn’t have to do with how people

11 play the game, maybe we should think about it more as

12 casinos and as gambling. 

13 So that’s our takeaway from the work so far. 

14 All right, thank you. 

15 (Applause.) 

16 MR. MCALVANAH: Thank you, Andrey. 

17 Now, we will hear from Adam Elmachtoub. 

18 DR. ELMACHTOUB: Hi. Good morning. 

19 So my name’s Adam Elmachtoub. I’m from

20 Columbia Engineering. Thank you to Patrick for

21 organizing this session and for all the great speakers

22 today for their well-informed talks. 

23 So today, I’m going to be talking about a

24 slightly different topic, very different angle. We’re

25 actually going to take a perspective on how would I
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1 actually design a loot box if I’m the publisher,

2 developer, or the gaming company. And before I really

3 get into it, I want to emphasize that we have no

4 connection to the industry at all. So this is like a

5 neutral perspective. And we also have a neutral

6 perspective on the entire issue as well. So although

7 we’re just we’re telling you how one would design it,

8 we’re not advocating or vise versa, okay? 

9 The reason why we think it’s important is

10 that how can one design regulations without

11 understanding the actual economic mindset of a gaming

12 company, what they’re trying to accomplish, which is,

13 make money, right? They’re all for-profit companies

14 for the most part. So this paper is telling us how

15 would one optimally design and price loot boxes and

16 what are the actual outcomes for sellers and

17 consumers. 

18 So this is work with Ningyuan Chen at the

19 University of Toronto, Michael Hamilton at the

20 University of Pittsburgh, and Xiao Lei, who is the

21 audience. He’s was my PhD student who convinced me to

22 turn his PhD into studying video games. So this is a

23 large credit to him. All right. And the paper is

24 online if you want to see it. 

25 So here the research questions, why do video
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1 game companies even use loot boxes? Can we quantify

2 the optimality of such a strategy? One doesn’t need

3 to use loot boxes to have a video game, so why does

4 this even exist? 

5 What is the actual optimal way to design a

6 loot box? We consider many design aspects of loot

7 boxes. Someone earlier today was telling us that

8 there’s millions of ways to come up with a loot box. 

9 Some of those tactical decisions includes: Do you

10 allow the gamers to have duplicates of items or not? 

11 What are the actual allocation probabilities you use? 

12 And do you allow items to be resold to other gamers or

13 back to the platform? These are all actually very

14 important things to consider in loot boxes and affect

15 both the seller and consumer happiness. 

16 And, finally, how do all these things affect

17 the consumers? So given that the seller is going to

18 do something to make them the most money, how does it

19 affect consumers, their overall happiness? So we’ll

20 quantify how much they end up purchasing and what’s

21 the surplus they actually get. 

22 So the framework we’re going to use is a

23 mathematical model to answer these questions. I’m

24 going to try to avoid math for today and just sort of

25 tell you what the results are. You can see all those
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1 details in the paper online. But the core idea is

2 that what we try to model is, at the really most

3 granular level, each consumer has some specific

4 willingness to pay for each item. And there might be

5 thousands of items. And these willingness to pays are

6 going to vary by consumers and also by the items. 

7 So some things you value $1. Maybe some things you

8 value $5. Some things you value nothing. They’re

9 random, but the seller somehow has a good

10 understanding of how much these items are worth. 

11 So let me give you an actual example. So

12 here are two different people. The person in blue has

13 different valuations for these six items than the

14 person in black, and you can see those six numbers

15 above their heads correspond to the six items on the

16 right hand side. And each customer is sort of having

17 different valuations for all the items. And this is

18 the core principle behind our model that we’re trying

19 to capture, this heterogeneity across consumers and

20 across the items. 

21 All right. So what is the seller doing in

22 our model? They’re trying to maximize revenue. 

23 That’s always their goal. And there’s two ways to

24 think about loot boxes that we look at. One is called

25 a unique loot box where consumers are always allocated
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1 a new item. And the other one is a traditional loot

2 box where customers can actually potentially receive

3 duplicates. We call it traditional because it kind of

4 dates back to the idea of baseball cards where you can

5 end up with duplicates. And unique, again, is called

6 unique, because you always get a unique item. 

7 And the way we model consumers is that they

8 essentially just keep purchasing loot boxes until they

9 no longer perceive any value from them. And that’s

10 the central core principle behind our model. 

11 So I think it’s best to now just show you

12 some examples. So here’s just two games, one where

13 there’s a unique box, one where there’s a traditional

14 box. 

15 And here’s an actual picture of how the model

16 works. So back to this person over here, he has these

17 -- there’s these six items that they’re willing to pay

18 for and you can see how much you’re going to pay for

19 these six items above his head. And let’s say we’re

20 selling loot boxes for $2.99 each. So the way this

21 model works is the customer thinks that they’re going

22 to get one of these items at random. So with the

23 probability one out of six, they’ll get each of the

24 items. So on average, they value this loot box at

25 $4.50 by taking the average of those six items. And
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1 that’s more than $2.99. So in their head, they think,

2 yes, I’m going to buy this because I value the loot

3 box more than $2.99. 

4 So they buy the loot box. They receive an

5 item. And now, because they have the item, now that

6 item is worth zero. They don’t want to get it again. 

7 So now the value of the next loot box decreases and

8 becomes $3, which is still bigger than $2.99, so they

9 purchase another one. But guess what? They got the

10 same thing. So they still value that same loot box

11 again at $3, so they end up buying again because they

12 just received something that was worthless. 

13 So they buy again. Now they have two items

14 and their value goes down. And now, their value for a

15 loot box is $2, which is less than $2.99. So now they

16 stop buying. And this is just one example of our

17 model. So in this case, the customer bought three

18 loot boxes and stopped. 

19 All right. So our goal is to basically

20 theoretically describe which strategies are best and

21 how does it affect seller and consumer behavior? So

22 actually, I’m going to take a quick poll. If you’re a

23 gaming company, and maybe people here representing the

24 gaming industry, do you think it’s better to sell

25 unique boxes or traditional boxes? So anyone can
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1 actually take a vote here. So if you think a unique

2 box makes more money, raise your hand. If you think a

3 traditional box makes more money, raise your hand. 

4 So around 80 percent of people said the traditional

5 box. 

6 Now, let’s think about it from the consumer

7 side. Do you think if you’re a consumer, do you

8 prefer a unique box or traditional box? So if you’re

9 a consumer, raise your hand if you prefer the unique

10 box. Okay. Raise your hand if you prefer a

11 traditional box if you’re a consumer. So it actually

12 went the other way. So around 80 percent of people

13 think consumers would prefer the unique box. 

14 Actually, our research is going to show the

15 opposite of both those things. So what we end up with

16 is something very counterintuitive. 

17 So first of all, we show that unique boxes

18 are actually optimal for the seller and traditional

19 boxes only make around a third as much revenue as

20 unique boxes. And what’s happening is that,

21 basically, you can charge more for a unique box

22 because it’s more valuable. You’re guaranteed a new

23 item. And this, in turn, leads to more revenue. 

24 And in both cases, the customers end up

25 purchasing roughly the same amount of number of loot
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1 boxes, except that a unique box is going to earn more

2 revenue than a traditional box because it has a higher

3 price. But in both cases, customers end up buying the

4 same number of boxes. 

5 Now, what that means is for the customer, if

6 you’re buying traditional boxes, you’re going to end

7 up with less items overall because you have all these

8 duplicates. Now, the flip side is, though, that given

9 that traditional boxes actually had a lower price,

10 consumers are actually happier in the long run because

11 it turns out, the prices are a lot lower when you sell

12 traditional boxes. So we find that consumer surplus,

13 which is the sort of classical economic notion of

14 consumer happiness, is a lot higher when you sell

15 traditional boxes than unique boxes. Actually, you

16 can show when you sell unique boxes, consumers are

17 left with almost no surplus. 

18 And, again, the driving force here is that

19 the prices are so high when you sell unique boxes,

20 that essentially leaves nothing for the consumers. 

21 But for traditional boxes, you price low enough where

22 some value goes to the company and some value goes to

23 the seller. So we end up with this sort of very

24 counterintuitive situation where, actually, it’s

25 better for customers to receive duplicates because the
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1 prices come down a lot. 

2 Now, what happens if I allow a resale market,

3 which is the gaming company can completely control

4 this. They can allow you to resell or not. It

5 depends. And, naturally, you might think that if I’m

6 a gamer, I want to be able to resell stuff. That

7 gives me more flexibility. But, once again, actually

8 we find that it doesn’t really help. We actually see

9 that, at most, it can increase surplus by 1 percent,

10 and most of the time, it decreases surplus, which is

11 again surprising and, again, the driving force is that

12 companies will actually end up charging higher prices,

13 which hurts you overall. So although resale sounds

14 like a good idea, it also allows prices to go up,

15 which is not good for the gamer. Good for the seller. 

16 So let’s talk about allocation probabilities. 

17 So this is a very important topic. And I think a lot

18 of people talked about it this morning, about being

19 transparent. So here’s just an example of one company

20 being explicit about the probabilities, and we saw

21 several examples this morning as well. 

22 So if you’re the seller, what is actually the

23 optimal strategy for you? It turns out, actually, the

24 optimal thing to do is to do the simplest thing, which

25 is just allocate uniformly at random, which also, in
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1 this case, may be good for consumers because they can

2 understand this strategy. Simply, if there is 1,000

3 items, allocate each item with probability one one4 thousandth, regardless of how much these items vary in

5 quality. So for example, let’s say 1 percent of your

6 items are the best kind, legendary, which is the

7 example I was looking at before. Then you should

8 allocate legendary items with 1 percent probability. 

9 So if 10 out of the 1,000 items are legendary, then

10 you should allocate a legendary item with a chance of

11 10 in 1000. 

12 So this is the simplest possible policy and

13 it turns out to be the optimal one. So this is, in

14 some sense, good news for both the seller and the

15 gamer. The simplest strategy is not only best for

16 revenue, but it’s also the easiest for the customers

17 to understand. 

18 Now, here’s the caveat, and this is where

19 regulation becomes really important. What happens if

20 the seller lies about the probabilities? This is

21 something that’s impossible for any one user to keep

22 track of, especially if you have a 1 percent chance of

23 winning something. It’s reasonable to not get it 15

24 times and think that’s just bad luck. There’s no way

25 for an individual to monitor if their allocation
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1 probabilities are really being true or not. 

2 So it turns out if the seller publishes some

3 list of probabilities and lies about them, the seller

4 can actually make a significant more -- significantly

5 more amount of money, more revenue. So there is

6 benefit to lying. Since there is benefit to lying,

7 there must be regulation around this. Otherwise,

8 people will make money. They’re for-profit companies. 

9 And this is why Apple and Google have already

10 made such rules in their platforms to make sure that

11 these allocation probabilities are announced. And we

12 already had the news this morning, that these

13 allocation probabilities should be announced. 

14 But what I’m saying is that in addition to

15 them being public, they all should also be monitored

16 to actually make sure you’re following these

17 probabilities. So we need to keep track of this. And

18 not only on the aggregate level, but also on the

19 consumer individual level. So it’s even possible to

20 make more money where in the aggregate you’re

21 following the probabilities. If you see what

22 everyone’s getting, the probabilities all look

23 correct. But for individuals, the probabilities may

24 not be correct. So it’s possible to gain more revenue

25 by extorting specific individuals. So even monitoring
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1 at the individual level is necessary over time. 

2 So to wrap up, I don’t think one can design

3 regulations and policies without really understanding

4 the economic or business mindset of a company. So

5 we’re proposing, basically, the first model to do

6 this, and there’s many sort of caveats, of course, but

7 I think there’s an important direction to study. So

8 we show that unique boxes are best for companies, but,

9 actually, traditional boxes are possibly better for

10 consumers. 

11 Allowing a resale market may seem like a good

12 idea for consumers, but actually we show it has

13 minimal value; in most cases, negative value. So

14 that’s important to understand. 

15 We show that allocation probabilities don’t

16 have to be overthought. Actually, the simplest thing

17 to do is just allocate randomly. And that’s actually

18 best for everyone. 

19 And, finally, be sure that there is benefit

20 from lying about these probabilities. So this is a

21 specific case where regulation is needed. If loot

22 boxes are allowed to stay as a legal sort of way of

23 selling items, then at least we need to regulate these

24 kind of allocation probabilities.

25 Thank you very much. 
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1 (Applause.) 

2 MR. MCALVANAH: Thank you, Adam. 

3 Now, we will hear from Sarah Domoff. 

4 DR. DOMOFF: All right, thank you for having

5 me. And I’m glad to be presenting alongside such

6 esteemed researchers on this panel. I’ll be speaking

7 about children and gaming and some current issues that

8 I have encountered clinically and then also in the

9 research. 

10 So I will be presenting some gaming trends

11 among children, parent child interactions around

12 gaming, unique concerns related to current games, and

13 problematic gaming, defining it for you, and helping

14 you understand when does gaming interfere with a

15 child’s functioning. 

16 So in terms of gaming trends, we know that

17 screen time is really high for children and

18 adolescents. And, actually, the amount of time

19 children use mobile devices has tripled in the past

20 few years. At the forefront of many parents’ and

21 children’s minds this past year has been Fortnite. 

22 And it remains a popular game, with 45 percent of

23 children and 61 percent of teens ever playing it. 

24 When we consider how games impact children,

25 it’s important to consider the content and the context
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1 of gaming or other types of screen media use. So when

2 I speak of context, I’m talking about when children

3 can play different games. And with mobile games,

4 children can play games at any time and any place. 

5 And, indeed, a quarter of teens indoors playing

6 Fortnite in class. 

7 But besides nationwide studies on screen

8 media use among children, there really has been

9 limited research conducted on preteens and younger

10 children and their gaming experiences. And so there’s

11 definitely a gap in the research that my team and I

12 hope to address. 

13 What I can tell you a little bit more about

14 are parent-child interactions around gaming. Now,

15 unfortunately, approximately three-quarters of parents

16 and children have never played Fortnite with each

17 other. Although they may play on their own, there

18 isn’t interaction around different mobile games, for

19 example, one being Fortnite. 

20 In my research, we conducted a naturalistic

21 study looking at how do parents and children interact

22 around different types of screen media. So children

23 wore audio recording devices and we transcribed and

24 described parent-child communication interactions

25 around different types of screen media. In this
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1 study, we found that there’s very limited interaction

2 between parents and children around media and mobile

3 devices. 

4 So we have heard earlier today that parents

5 have a lot of interaction and power to kind of control

6 some of these concerns related to games, but, right

7 now, things are getting in the way. There are

8 barriers to parents and children interacting around

9 gaming. And this is really problematic because recent

10 research supports setting limits around gaming and

11 that parent-child communication about gaming could be

12 really important for older children and adolescents. 

13 So we definitely want more of this, but for

14 some reason, I think one of the big things being the

15 rise of mobile games, makes it very challenging for

16 that to happen. And, indeed, parents’ beliefs about

17 games associate with parenting around gaming. So that

18 definitely is an area that we want to pursue more and

19 really research into, what can we do to help parents

20 engage with their children more around gaming. 

21 So in terms of unique concerns, at my clinic

22 at Central Michigan University, we really focus on

23 helping clinicians, teachers, other individuals

24 important in children’s lives, communicate and make

25 decisions around media use screen time. And one thing
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1 that we hear time and again, is that gaming is

2 embedded in social interactions among children. So

3 sometimes this can be really good. You connect with

4 your friends and peers on games. And other times it

5 can be conflictual. And we’re seeing it kind of

6 trickle into the school -- the school zone. Children

7 are developmentally vulnerable to gaming risks, and we

8 heard about this today. 

9 And then, finally, one thing that I’ve

10 encountered is parent-child conflict around gaming and

11 problematic gaming. I want to define for you what

12 problematic gaming is and tell you what the current

13 status is on it being a diagnosable condition. Here

14 in the States, we have DSM-5. In Section 3, which is

15 “Conditions for Future Study,” internet gaming

16 disorder is listed. These symptoms include

17 preoccupation, withdrawal, unsuccessful attempts to

18 cut back, loss of interest in other activities,

19 continued excessive use despite psychosocial problems,

20 among others. 

21 In order to get -- let me put it back for

22 people so they can write it down. In order to be

23 considered to have a problem with gaming or disordered

24 gaming, there has to be dysfunction in someone’s life. 

25 So it’s not just enjoying playing video games or being
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1 really enthusiastic or wanting to be a professional

2 gamer. It interferes with the child or adolescents

3 functioning. 

4 Recently, the World Health Organization has

5 made gaming disorder an actual diagnosis with the

6 ICD-11 code up there. Symptoms include impaired

7 control over gaming, increased priority given to

8 gaming to the extent that gaming takes precedence over

9 other life interests and daily activities, and then

10 continuation or escalation of gaming despite the

11 occurrence of negative consequences. 

12 So it’s very important to point out here that

13 it’s not about the number of hours that you game. 

14 It’s not about frequency or passion. It’s about

15 actual dysfunction. This must be severe enough to

16 lead to significant impairment in important areas of

17 functioning. So, for example, not sleeping, not going

18 to work, not going to school, losing relationships. 

19 So it’s really important to clarify what’s a clinical

20 issue with gaming versus enjoyment. 

21 Now, back several years ago when I was doing

22 my clinical post-doc, I’m a clinical psychologist and

23 work with children and families, there weren’t

24 measures out there to capture concerns related to

25 media use. And so that led to the development of the
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1 Problematic Media Use Measure, using DSM-5 criteria to

2 identify children at risk for problematic media use

3 including gaming. 

4 And what’s really important to point out

5 here, is that this measure predicts psychosocial

6 functioning over and above the amount of screen media

7 use. And so, again, I’m trying to shift this

8 conversation away from just tell me how many hours is

9 allowed to what are some symptoms or engagement with

10 different types of screen media that would indicate

11 that there’s a problem that should be addressed. And

12 so that’s a very different approach to understanding

13 when does it become problematic. We don’t necessarily

14 care as much about the number of hours, although that

15 will correspond or correlate with problematic gaming. 

16 So this measure worked equally well for boys

17 and girls, and it’s been tested in children ages 4 to

18 13 years of age. It’s a parent report. We just

19 create a self-report version of this. And really this

20 came out of the need from clinicians to have a

21 screener so they could address concerns related to

22 media use or gaming in well-child visits or in other

23 clinical arenas. 

24 I want to spend the rest of my time talking

25 about some of the work that I pursue at the Center For
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1 Children, Families, and Communities at CMU. And this

2 really stems from a need from providers, school

3 personnel, and parents in communities around the

4 country regarding how do I manage -- around screen

5 media use; how do we handle or make systemic change

6 when screens are in schools and so forth.

7 So at this center, we seek to address screen

8 media-related concerns, including problematic gaming,

9 cyber victimization, media parenting skills. But,

10 importantly, a large part of what we do is we provide

11 training to providers to help them screen for

12 problematic media use and give them tools for managing

13 conflict in the home. 

14 Again, with mobile gaming and mobile devices,

15 they can go anywhere. And so when it comes to school

16 policy, there is not one consistent school policy

17 across all schools in a state, for example. And so a

18 lot of times the schools are seeking guidance around

19 should we set limits on access to mobile devices

20 during the school day. With mobile games, it may be

21 embedded into interactions during the school day, and

22 so if there are conflicts related to performance on a

23 mobile game, that may trickle over into the real life

24 and real world. 

25 And then, additionally, what we also focus
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1 on, is developing interventions that treat screen

2 media-related concerns, so helping parents manage

3 screen time using harm reduction approaches. 

4 So if you’d like more information, I have my

5 contact information up here. I wanted to leave enough

6 time for discussion, but then, also, there’s a lot of

7 research that I wasn’t able to talk about today

8 related to other types of screen media and concerns,

9 and I’d be happy to share that with you if you’re

10 interested. 

11 (Applause.) 

12 MR. MCALVANAH: Thank you, Sarah. 

13 Okay, now we have time for a Q&A. We’ll have

14 about 15 minutes for this. So I’ll start off with the

15 first question. This will be posed to as many people

16 as feel comfortable answering it. How can you

17 determine if a person is not just a risk taker,

18 meaning they are more likely to buy loot boxes,

19 excessively gamble, and/or use drugs? Is this getting

20 at some correlation with risk aversion? Is it a

21 definition issue of can you separate out risk aversion

22 from loot boxes? 

23 DR. SIMONOV: I mean, I guess that in the

24 framework which I talked about, it’s really all part

25 of this alpha L as the persistent preference for loot
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1 box. And I guess one way to separate it out is just

2 ideally what you want to find is some shifters which

3 will affect your -- will not affect the risk

4 preference characteristic of risk of the loot box, but

5 will affect how much people are exposed to the loot

6 boxes, like in which environments they use them. It

7 requires a lot of data and the right variation in the

8 data, I guess. 

9 And then it’s often -- I think in-game, if

10 you have -- if you can separate it out, was it in a

11 model, economic model list of things, that’s great. 

12 It’s harder to have extra data on how consumers --

13 what happens to them later in their lives, because

14 it’s really hard to attribute what happens to people

15 later on to a particular thing which happened to them

16 in this game. 

17 MR. MCALVANAH: This is a question from

18 Twitter for Drs. Zendle and Elmachtoub. Did you

19 consider aesthetic design in your research? 

20 DR. ZENDLE: So to some extent, yes. So what

21 are the interest -- there are lots of -- we’ve got a

22 paper that’s just sort of coming out in a journal

23 called Computer and Human Behavior, where we looked at

24 different features of loot boxes and whether any of

25 those loot boxes were particularly strongly linked to
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1 problem gambling. 

2 When it comes to aesthetics, the one thing we

3 did look at was near-miss effects. So near misses are

4 a common thing you get in gambling devices and loot

5 boxes mirror gambling devices in lots of important

6 ways. So there is the fact where, say, you’re playing

7 Fruit Machine or something and you almost get a win. 

8 You’re just one fruit out. You may be more likely to

9 play again because you’ve got that near miss, or

10 perhaps in the gamblers mind, a near win. Many loot

11 boxes have a similar mechanism. 

12 It’s not clear if they’re imitating slot

13 machines directly or whether it’s some sort of

14 convergent evolution, where you’ve got a sort of

15 rotating disc of options going round and then you sort

16 of -- you might just miss out on something really good

17 that you like, then you get something less good. So

18 we looked to see if those types of loot boxes were

19 both strongly linked to problem gambling. 

20 We found like tiny effects, like little tiny

21 things, nothing that we’d consider important or

22 trustworthy. Generally, it seems that regardless of

23 these features, that link to problem gambling exists. 

24 DR. ELMACHTOUB: Well, I guess it’s good that

25 I let you answer for us, because we ignored that
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1 effect and now you justified it for us. 

2 (Laughter.)

3 DR. ZENDLE: Yes. 

4 MR. MCALVANAH: Another question from the

5 audience. Does the literature support the idea that

6 loot boxes are different from baseball cards or Kinder

7 Eggs or has that simply not been studied? 

8 DR. ZENDLE: Oh, that’s actually a good

9 question. So I was wondering if I would get this,

10 because -- so we’ve got this link between problem

11 gambling and loot box spending. But you might engage

12 in an argument where you say, ah-ha, but perhaps

13 buying Kinder eggs is also linked to problem gambling. 

14 Now, logically, that doesn’t sort of fly as

15 well as loot boxes does, because loot boxes look so

16 much more like gambling, and there’s this sort of

17 distribution of value in them which you just don’t

18 find in a Kinder Egg. There are many formal

19 distinctions. We thought, oh, just to ironclad

20 things, we’ll go and run that study. 

21 So we went and we asked about 900 people

22 about collectible card game spending to see if that

23 was linked to problem gambling. And it just wasn’t. 

24 Like, you know, there’s something special about loot

25 boxes. We haven’t published that study yet, but if
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1 anybody would like to have access to the data from it,

2 I’m very willing to share any of the data from this. 

3 And since it’s a question that people are asking, I’ll

4 make it a priority to get it published. 

5 I do think we’re pre-printing, where as soon

6 as I finish the manuscript, I make it publicly

7 available so people don’t have to wait for it to go

8 through the general process. So if this is something

9 people care about, they can have that data within a

10 week if they like and the paper. 

11 DR. ELMACHTOUB: Yeah, one thing though it’s

12 important to recognize, there’s no friction costs for

13 buying loot boxes. There’s a huge friction cost for

14 buying a physical item. And that’s why we don’t have

15 that cost in our model. So when you buy something --

16 even if you buy it from Amazon, you still have to wait

17 to receive it. And by that point, your thrill may

18 have disappeared a little bit. 

19 DR. ZENDLE: Yeah, that’s a really neat

20 point. I remember when we were talking to the

21 Australian Senate about this, they sort of said, what

22 are the differences between loot boxes and trading

23 card games in the real world. We said, well, there

24 are loads and we don’t really know which are the

25 important ones. But, certainly, one of the things
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1 that seems important is the velocity and the volume

2 with which you can make loot box purchases. 

3 I mean, you can’t go to a shop and just buy

4 Kinder Egg, Kinder Egg, Kinder Egg, Kinder Egg, Kinder

5 Egg, Kinder Egg, Kinder Egg, Kinder Egg, but that’s

6 what we see people do with loot boxes. 

7 MR. MCALVANAH: This question’s from the

8 audience, so potentially to everybody. Are there

9 common graphical or audio elements presented during

10 the opening of a loot box, such as a flashing screen,

11 or lights, or louder music, that increases the

12 potential for spending on loot boxes? 

13 Stumped them. 

14 DR. ZENDLE: I’m not aware of any research

15 which shows that that’s the case or not. 

16 MR. MCALVANAH: This question’s for Andrey

17 Simonov. What control variables were in your study? 

18 Is there something to control for the popularity of

19 the game or the rarity of the items or any unique

20 traditional style boxes? 

21 DR. SIMONOV: Yes. So all the analysis was

22 done within the game, so there is no need for control

23 for the game. There is -- so for the descriptive

24 items I showed, there was controls for stages, for

25 player fixed effects, what kind of items people had. 
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1 So at this stage, what we -- this is all against

2 [indiscernible] relational. We have the right

3 variance. We just didn’t clean enough results to be

4 ready to share the results of causal estimates. But,

5 well, basically, those correlations hold whatever the

6 fixed effects will include, basically. 

7 MR. MCALVANAH: Do you see any difference

8 between purely cosmetic loot boxes or some of the more

9 pay-to-win loot boxes for any of the research you

10 presented for implications for addiction or for the

11 pricing or for usage? That’s open to everyone. 

12 DR. SIMONOV: I mean, for what we presented,

13 one -- there’s two things to keep in mind here. One

14 is we kind of -- in this particular game, there is no

15 value for having cosmetic value of items. There is

16 little social interaction, so we can’t focus on this

17 functionality as probability of winning. 

18 About pay-to-win, so this is also a

19 pay-to-win game in a sense of you need to get those

20 items to progress. But important fact is you compete

21 with a machine. You don’t really compete with other

22 players. And I think that the role of play-to-win

23 items is extremely different if I am paying to get an

24 item that the other guy can get as well and now it’s

25 like a prisoner’s dilemma because I want to play the
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1 game well, but also this guy has the same. 

2

3 And I think in any games with interaction

4 between players, even items which have a functional

5 value, it can get very problematic because gaming

6 companies have a design to do it. In our case, we

7 don’t have this problem because you really compete

8 with the machine. But I would keep this distinction

9 in mind for different games. 

10 DR. ZENDLE: I think you can see, also,

11 different motivations for purchasing -- it might seem

12 obvious -- items from loot boxes that give you some

13 sort of advantage in meeting the ludic challenges of

14 the games and ones that give you some cosmetic value. 

15 When we look to our data, when we asked people why,

16 these adolescents, why are you buying these loot

17 boxes, lots of people said, I just want to fit in with

18 my friends. 

19 And so I think one thing that we’ve all got

20 to be aware of is that games aren’t coin-operated

21 arcade machines anymore. They’re vibrant social

22 worlds. And just because your motivation for

23 purchasing something isn’t to do with literally

24 winning the game doesn’t mean that it’s valueless. 

25 There’s a lot of value in looking a certain way in
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1 many of these games. And lots of times, people play

2 these games not to win them, but to hang out with

3 people. 

4 MR. MCALVANAH: So there had been some

5 mention early today of video game developers

6 potentially using dynamic odds for loot boxes. Does

7 that have any implication for addiction and variable

8 reinforcements or for the optimal pricing of that or

9 usage? 

10 DR. ELMACHTOUB: So I think that with regard

11 to dynamic odds, I think that would be a nightmare to

12 regulate. Because as the odds are changing, you can

13 never, with like just a couple samples, see if you’re

14 truly adhering to such odds. So that’s something that

15 I think would really be something to worry about in

16 terms of -- just in terms of making sure that people

17 are sticking to these odds, even if they are dynamic. 

18 And the unique thing -- another unique thing

19 about loot boxes versus baseball cards is that

20 companies can see your inventory. That’s a

21 fundamental difference. So being able to take

22 advantage of that would obviously be beneficial for

23 the seller and allow them to exploit more. But also

24 be bad for consumers because they -- it would be very,

25 very difficult for them to understand their optimal
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1 purchasing strategies in the long run of the game. It

2 would be very hard to anticipate how much money they

3 will need to succeed in the game if everything is

4 updating dynamically. 

5 DR. ZENDLE: I’d like to agree with Adam’s

6 comments there. They’re well-taken. 

7 I’d also like to point out that this isn’t a

8 theoretical future. These are things that being

9 patented by companies as we speak. There’s a new

10 paper that’s out in this journal, Computers And Human

11 Behavior, which is one of the best journals for this

12 stuff, by a researcher called Dan King. You can find

13 it online if you like. And he approaches this issue 

14 in an interesting way in that he just does a Google

15 patent search. And the things that people are

16 patenting are unusual and might surprise you, or they

17 might worry you. 

18 MR. MCALVANAH: And you, Sarah? 

19 DR. DOMOFF: What was that? 

20 MR. MCALVANAH: Did you have any comments? 

21 DR. DOMOFF: I just think it’s -- I’m going

22 to bring a point that may not be entirely related to

23 this, but it’s really challenging for parents to

24 navigate all of the details of the variety of games

25 that kids are playing and it takes a lot of effort and
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1 time. And I find myself, and other clinicians and

2 other individuals who work with children, have to

3 spend a lot of time to kind of figure out what are

4 these protections that we should tell parents about

5 because it’s just not clearly labeled. 

6 And regardless of whether regulations are

7 coming forth, I think we definitely need better

8 documentation about what parents should consider,

9 whether from within the industry or from consumer

10 groups, such as Common Sense Media, because it’s just

11 really complicated and there are just so many games

12 for parents to keep up with it. It’s a real

13 challenge. 

14 DR. ZENDLE: I’d like to follow up on what

15 was just said by saying that, in fact, many of the

16 games -- many of the companies for which we see these,

17 there are sort of patterns for these new types of loot

18 boxes being registered are companies that make mobile

19 games for children. So I know Kabam was mentioned

20 again and again and again during this paper. That’s

21 the company that makes Marvel’s Contest of Champions. 

22 That’s a game where you can play with your favorite

23 Marvel superheroes against each other. 

24 I think the industry needs to take a really

25 long look at itself and see what is it doing. I hear
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1 these internal discussions by the industry say, of

2 course, we behaving totally ethically. But from the

3 outside, it really doesn’t look like that, and it

4 really doesn’t look like that to researchers, and it

5 doesn’t look like that to policy makers, and it

6 doesn’t look like that’s regulators. And in my home

7 country, the UK, we’re talking very seriously about

8 should you be able to self-regulate? Have you

9 demonstrated that responsibility? And lots of people

10 think that you haven’t. 

11 MR. MCALVANAH: Okay, that concludes the

12 second panel. Thank you all very much. 

13 I think we’ll take a 10-minute break. 

14 Yeah, we’ll shoot for a 10 minute break. And it’s

15 2:35 now, so let’s aim to be back here at 2:45,

16 please. Thank you all. 

17 (Applause.) 

18

19

20

21

22

23

24

25
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1 PANEL 3: A LEVEL PLAYING FIELD - WHAT’S FAIR GAME?

2 MS. JOHNSON: Good afternoon. I am still

3 Mary Johnson, and this is William Ducklow. And,

4 together, we’re going to be moderating today’s final

5 panel on self-regulatory initiatives and consumer

6 education. 

7 MR. DUCKLOW: So joining Mary and I on the

8 final panel today are the following, Pat Vance,

9 President of the Entertainment Software Rating Board;

10 Keith Whyte, the Executive Director of the National

11 Council On Problem Gambling; Anna Laitin, Director of

12 Financial Policy with Consumer Reports; and, finally,

13 Ariel Fox Johnson, Senior Counsel for Policy and

14 Privacy with Common Sense Media. 

15 Please feel free to refer to the speaker bios

16 that are available outside for more background

17 information. 

18 MS. JOHNSON: So I thank all of you for being

19 here. We’re in the homestretch here of the day. And

20 as with the prior panels, you’ll each have 15 minutes

21 at the podium. And thank you to everyone for staying

22 on time. This has been moving very smoothly, and we

23 really appreciate that. 

24 So after the formal presentations, then we’ll

25 move to a moderated discussion. 
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1 Please feel free to take the podium, Pat. 

2 Thank you so much. 

3 MS. VANCE: Great. Well, thank you very

4 much, Mary and Will. It’s great to be here. 

5 We’re going to -- I’m going to start my

6 presentation just talking a little bit about who the

7 ESRB is. We are celebrating our 25th anniversary this

8 year. We were established by the industry as a

9 self-regulatory body. You’re probably most familiar

10 with our rating system. We assign ratings to video

11 games and mobile apps to ensure that consumers, but

12 especially parents, have the information they need to

13 make an informed purchase decision. 

14 We also enforce a very robust set of

15 marketing guidelines that the industry has adopted

16 that relate to how ratings are displayed across boxes,

17 in ads, as well as how product can be marketed,

18 particularly mature-rated product. 

19 And then, last but definitely not least, we

20 have our ESRB Privacy Certified Program, which is a

21 privacy seal certification that is one of the first

22 COPPA safe harbors sanctioned by the FTC. So those

23 are our key activities. 

24 When it comes to our ratings, we have a

25 three-part rating system. We have age rating
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1 categories that suggest age appropriateness. We have

2 content descriptors. We use approximately 30

3 different content descriptors that indicate why a

4 particular age rating was assigned to that particular

5 game or app. And then our newest and third component

6 of the rating, is what we call interactive elements. 

7 I’ll talk a little bit more about them as we get into

8 the presentation. 

9 ESRB ratings are available for games and apps

10 across a variety of different devices and platforms. 

11 They are available for all boxed games sold in the

12 United States. They’re available on many digitally13 delivered games, mobile apps, virtual reality,

14 augmented reality, and mixed reality games and apps as

15 well. So we’ve had universal adoption among major

16 retailers, as well as the major game platforms from

17 virtually the beginning of the ESRB rating system. 

18 In part, thanks to being around for 25 years,

19 87 percent of parents of kids who play video games say

20 that they’re aware of the ESRB rating system. And of

21 that 87 percent, 77 percent say that they regularly

22 use the ratings. In other words, that they’re

23 checking the most, if not all the time. 

24 Now, despite the fact that interactive

25 elements is the newest part of our system, 70 percent
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1 of parents say that they’re aware of the interactive

2 elements. And of those parents, 79 percent say they

3 regularly check them. 

4 Now, all of the interactive elements are

5 important, but this is a ranking, and in the context

6 of the conversation today, I thought it was important

7 that although in-game purchases is an important

8 component to parents, 75 percent of parents say that

9 the in-game purchase notice is either extremely or

10 very important in helping them decide which games are

11 appropriate for the kids to play. 

12 If you look at this chart, our shares

13 location interactive element, 82 percent of parents

14 indicated that that was extremely or very important to

15 them, followed by users interact, and followed by

16 unrestricted internet access. So all are important,

17 but this is a general ranking. So it’s important in

18 the context of the conversation today to appreciate

19 that there are many different aspects of disclosures

20 that are important to parents. 

21 Now, parents consult many different sources

22 when they’re trying to make a decision about what’s

23 appropriate for their children and families, Not just

24 the ESRB rating information, but they’re playing the

25 game themselves. And I think we’re finding that
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1 increasingly to be the case as new generations of

2 parents have kids, and they grew up with playing

3 games. 

4 Parents are also checking out the genre as a

5 good indicator of whether or not a particular game is

6 appropriate for their children. They’re conducting

7 internet searches. They’re looking at the

8 descriptions on the game boxes and on the detail page

9 when they download a game. And they’re also

10 consulting user reviews. 

11 Now, the Family Online Safety Institute

12 released a study last year that suggests that parents

13 are actively engaged in having conversations with

14 their kids about online safety and the use of

15 technology in the home. Ninety-one percent of parents

16 set household rules. That’s a really important

17 statistic for us to understand because it’s not just

18 about one solution or one tool. It’s about parents

19 being actively engaged. 

20 The ESRB provides a family discussion guide

21 on our website to actually start that conversation. 

22 Sixty-four percent of parents indicate that they

23 frequently discuss online safety with their children. 

24 And our own research suggests that 7 out of 10 parents

25 have actually prevented their child from playing a
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1 game because of one of the interactive elements that

2 were assigned to the game. 

3 Now, ESRB ratings are integrated with the

4 parental controls that are available across different

5 game devices. So here you’ll see the Xbox,

6 Playstation, and Nintendo parental controls, which

7 allow you to block games by their ESRB rating. And

8 you can do the same thing in the Google Play Store. 

9 Now, we put together this little video to

10 give you a brief glimpse of how parental controls

11 enable parents to manage the gameplay in their homes. 

12 (Video played.)

13 SPEAKER: Playing video games as a family is

14 a great way to spend time together. And it’s never

15 been easier for parents to manage what, how, when, and

16 with whom their children play, even when they’re not

17 around. 

18 Parental controls are available for all

19 current game consoles, handhelds, PCs, smartphones,

20 and tablets. Each device has settings that can limit

21 and manage the experiences that your children have,

22 and they take just a few minutes to set up. On some

23 devices, you can remotely set controls from your

24 mobile phone or your computer. So whenever you want

25 to add a restriction or change a setting, you can be
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1 assured that your children enjoy playing games within

2 the parameters that you approve. 

3 There are four important ways to control how

4 your kids play video games. You can control in-game

5 purchases or block them altogether, and the account

6 holder will always be notified whenever a purchase has

7 been made. Parents can also limit play and screen

8 time. Some devices allow you to set specific time

9 limits for every day of the week. You can also block

10 games based on their age rating and you can restrict

11 online communication. Some devices allow you to

12 approve with whom your child plays online or block

13 other players, even by specific game. 

14 Above all, remember to keep on having fun

15 playing video games with your kids and talk to your

16 kids about the games they like to play. There is no

17 better way to make sure your child has the best

18 experience possible playing video games then staying

19 involved. 

20 Visit parentaltools.org to access parental

21 control guides and a family discussion guide to help

22 start the conversation with your kids. 

23 (Video concluded.)

24 MS. VANCE: So there are obviously a lot of

25 functionality in parental controls, but are parents
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1 using them? And based on our latest research, 72

2 percent of parents have indicated that they have

3 activated or enabled parental controls on their

4 computer at home, their mobile device, or their game

5 console. And not surprisingly, the propensity for

6 them to do that is higher for parents with kids of

7 younger ages than older ages. 

8 So again, all of the functions and parental

9 controls are important to parents. But if you look at

10 what they’re actually doing with parental controls,

11 our research says that the number one function they’re

12 actually enabling is the manage in-game spending

13 function. So two-thirds of parents indicated -- two14 thirds of parents who were using parental controls

15 indicated that they had activated the manage the

16 in-game spending limits. 

17 Sixty-four percent indicated that they were

18 restricting access to social media using parental

19 controls. Sixty-one percent had indicated that they

20 were -- they had blocked games based on ESRB ratings. 

21 And fifty-two percent indicated that they had set time

22 restrictions, followed by 50 percent indicating that

23 they had managed online communications. 

24 So parents are familiar with parental

25 controls. They’re using them and they’re using them
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1 in a variety of different ways. 

2 Last year, we began looking at loot boxes

3 specifically. We conducted research among parents,

4 and we discovered that a large majority of parents

5 don’t know what a loot box is. In fact, only 32

6 percent of parents indicated that they knew what a

7 loot box was, but when we presented several different

8 options for them in terms of a definition for loot

9 boxes, they were able to select the correct definition

10 only -- less than a one-third of the time. 

11 Once we told them what a loot box was, by far

12 the biggest concern that they expressed they would

13 have would be the ability for their children to spend

14 money, much more so than the randomized nature of loot

15 boxes or the impact that they may have on the amount

16 of time that their child plays games. We repeated

17 this research earlier this year and found very similar

18 results. Although there is slightly higher awareness

19 in use -- awareness and understanding of what loot

20 boxes are among parents, the actual concern they

21 expressed about spending was even higher than the

22 first time we surveyed parents. 

23 So this is important to understand in terms

24 of how we’re presenting disclosures. Our rating

25 system’s primary target audience are parents. Parents
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1 need to understand what it is that we’re providing and

2 we need to provide it in a way that they understand,

3 that’s concise and that they can digest at a fairly

4 quick glance. 

5 So we started assigning in-game purchases to

6 physical video games back in April 2018. We had begun

7 -- we had already begun doing something similar in

8 mobile and digital games, but it wasn’t until early

9 last year where we began actually assigning the

10 in-game purchase descriptor to physical video games. 

11 And, today, 18 percent of all rating assignments for

12 physical video games include that notice. 

13 Now, that notice spans not just loot boxes. 

14 It spans all types of in-game spending. As our

15 research indicated, parents are concerned about

16 in-game spending of all kinds, not just loot boxes. 

17 And so when you see an in-game purchase notice on a

18 game, it indicates that there are -- there’s the

19 ability to make a purchase using cash, whether you’re

20 buying virtual currency, or whether you’re buying a

21 subscription, or a season pass, or a loot box, or some

22 other in-game transaction. 

23 But disclosures aren’t enough. We want to

24 make sure that parents know that when they see that

25 in-game purchase notice, if they want it limit -- if
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1 they want to limit their child’s ability to spend

2 money, they know how to do it. So we launched

3 parentaltools.org last year, which gives very easy

4 access to parents to instructions on how to set up

5 parental controls depending on which device they have

6 in the home. And we created an animated video that’s

7 a very simple way to sort of describe what parental

8 controls can do. 

9 And, to date, almost a half a million views

10 have been generated for the video, almost 100,000 page

11 views, and we’ve been writing articles and blogs and

12 making an effort to make sure that parents understand

13 what in-game purchases enable, as well as the parental

14 controls that are available on different devices. 

15 Now, we’ve just recently refreshed

16 parentaltools.org and added an additional

17 functionality to the website, which allows parents to

18 first check, well, what do I want to do with parental

19 controls, and then get specifically to that place in

20 the instructions for that device that they have in

21 their home so that they know how to control spending,

22 control time, control by age rating, or restrict

23 communication. 

24 We also have just partnered with GameStop and

25 are talking to other retailers, so that this holiday
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1 season whenever a parent purchases -- or any consumer

2 for that matter, purchases a new console, that it

3 comes with an insert that reminds them to set parental

4 controls and directs their attention to

5 parentaltools.org so that they know how to do that. 

6 And we’re going to be complementing that program with

7 an online ad banner campaign targeting parents. 

8 We also just released a new blog on our

9 website, esrb.org, that is entitled “What Parents Need

10 To Know About Loot Boxes and Other In-game Purchases,”

11 which really tries to break down what’s a very

12 complicated concept. And as you heard earlier today,

13 loot boxes come in all different forms, in all

14 different contexts. And so we tried to really

15 simplify it for parents and also make sure that they

16 understand what other types of in-game purchases are

17 available. And we’ll continue to create new articles

18 and new blogs that help parents navigate games. 

19 So in summary, I just want to tell you that

20 you can be confident that any game that gets

21 published, regardless of the device, will have some

22 descriptor that will indicate that there are in-game

23 purchases; that parents have very low awareness of

24 what a loot box is, but that their main concern is

25 spending, and we are addressing that by not just
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1 having disclosures available for games, but also

2 making sure that they have the tools and parental

3 controls to manage the money and time that their child

4 spends playing video games. 

5 We’ll continue to support parents like we

6 have for the last 25 years with disclosures, with

7 enhancing the system whenever it’s warranted, having

8 educational materials available to parents, and

9 addressing their concerns as we go. 

10 So thank you very much. 

11 (Applause.)

12 MR. DUCKLOW: Thank you, Pat. 

13 Next, we have Anna Laitin. 

14 MS. LAITIN: Hi. Good afternoon, everybody. 

15 My name’s Anna Laitin. I’m the Director of Financial

16 Policy at Consumer Reports. 

17 First, a little bit about Consumer Reports

18 and why I’m here. We’re an 80-year-old independent,

19 nonprofit member organization. We work side by side

20 with consumers for truth, transparency, and fairness

21 in the marketplace. Most of you know us for rating

22 cars and mattresses, but we also do work on a wide

23 range of issues. 

24 We approached this workshop -- we don’t have

25 -- we haven’t historically done a lot of work on video
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1 games, so we approached this workshop from a

2 perspective of looking at larger marketplace trends

3 first. And a couple of things we’ve been spending a

4 lot of time on lately, drip pricing, hidden fees, the

5 obfuscation of the true cost of a product or service. 

6 This is something the Federal Trade Commission has

7 spent a lot of time on from a 2012 workshop on drip

8 pricing to the workshop earlier this summer on online

9 event ticketing. 

10 It’s very hard for consumers to know what

11 they’re getting, what it’s going to cost. Shopping

12 has become more complicated and more confusing. And

13 then the manipulation of consumer psychology,

14 monetizing user experiences and dark patterns on

15 websites that get people to do things that maybe

16 wasn’t exactly what they intended to do when they

17 started. 

18 So how does that apply to the gaming

19 marketplace? Well, obviously, the increased

20 monetization of play. That’s what we’re talking about

21 here. You’ve got the downloadable content, those one22 time purchases, and then the microtransactions, the

23 loot boxes we’re all talking about today, repeat

24 purchases, consumables, often very quick purchases

25 made often in quick succession, and manipulative user
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1 experiences. So subtle tactics that influence

2 consumer behavior and nudge them to purchase these

3 loot boxes. 

4 What are loot boxes? I put together these

5 slides not knowing exactly what was to be talked about

6 in the morning, so there’s a little bit of repetition

7 here. I’ll move pretty quickly. 

8 In the FTC’s announcement, the description is

9 here. We see as the key things for us, the rewards

10 are seemingly random, paid for with real money or

11 in-game currency, sometimes impact gameplay, and the

12 contents are generally not transferable. 

13 So in terms of transparency, this is a

14 screenshot from Counterstrike Global Offensive. 

15 Consumers are unaware of what they’re actually

16 purchasing. The odds of winning a specific item are

17 not disclosed. This particular loot box, there’s a

18 lot of options, including one full, surprise, rare,

19 special item. 

20 In-game currency and pricing can really hide

21 the true cost. This one from Fire Emblem Heroes, it’s

22 very hard to see on these slides, but it costs five

23 orbs to summon a character, four each to summon the

24 next three, and three orbs to summon the last. So 20

25 orbs spent on loot boxes. But how much is an orb? 
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1 That price isn’t linear. So to figure out how much it

2 costs to summon 20 characters is not a simple matter

3 to figure out. This is very much finding ways to hide

4 the fact you’re spending real money on these

5 characters. 

6 And the ratings, we applaud ESRB for the work

7 they’ve done, but as the previous presentation showed,

8 there’s a label for in-game purchases and that can

9 mean a huge range of things. That’s everything from

10 you can buy a new character when it’s released to we

11 have surprise loot boxes, a whole wide range. And I

12 know when I look at a game, there’s a lot more detail

13 that consumers need to really understand how they

14 might be presented with the option to spend money. 

15 And, similarly, labeling for mobile games

16 provides limited information. This one says in-app

17 purchases. And then in information, you actually can

18 get some good information about how much things cost. 

19 But, again, you’ve got that same obfuscation. 

20 This one for Clash Royale, you can get a -- I

21 can’t even read it on my own piece of paper -- a pouch

22 of gems for $4.99 or a wagon of gems for $49.99. Is a

23 pouch 10 times smaller than a wagon? What are you

24 actually buying? And it’s, again, taking the money

25 away from the actual what you’re buying. 
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1 So loot boxes, just in conclusion, are not

2 transparent. Consumers aren’t sure of what they’re

3 getting; odds of winning items -- although the

4 announcement this morning may move to change that --

5 the cost is hidden; and those loot box mechanics are

6 insufficiently labeled. 

7 And another thing I’ll mention that came up a

8 lot today is how quickly the decision to buy a loot

9 box can be made. This is a speedy process, very

10 different from going back to the store and buying

11 another set of baseball cards if you didn’t get what

12 you wanted. 

13 Then on this issue of dark patterns, this is

14 something that Consumer Reports has looked at quite a

15 bit. And it’s interesting. It’s tactics to nudge

16 consumer starts taking actions. Grinding, making the

17 alternative to buying a loot box, doing a lot of

18 relatively pointless work for a very, very, very long

19 time, making it extremely costly on a personal level

20 to not spend that money. 

21 Appointment dynamics, dynamics that build the

22 habit of playing, using loss aversion, getting people

23 to keep going, keep going, keep going; and get bonuses

24 for playing every day. 

25 And pay-to-win, as was discussed quite a lot
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1 this morning. Playable without microtransactions, but

2 if you’re not willing to spend money, you’re not going

3 to do as well as your opponents or your friends, or

4 you’re not going to help out your group. 

5 This problem is both deep and broad. There

6 have been a lot of press reports about gamers spending

7 far more than they intend on loot boxes, people

8 spending thousands of dollars. We’ve all heard about

9 the parents whose kids racked up huge charges before

10 they figured out what was going on. 

11 These are actually two separate stories of

12 people who discovered they’d spent more than $10,000

13 on microtransactions. I raised this story with my son

14 who plays FIFA 19 the hard way without any allowance

15 to spend any money, and I showed him the cost of the

16 loot boxes and his eyes bugged out. People can spend

17 obviously a lot, a lot of money. 

18 And then a growing population of game players

19 exposed to loot boxes and manipulative content. So I

20 think this was discussed earlier today, we’re not just

21 talking about young gamers who play all the time. We

22 are now a society of gamers, whether you’re playing on

23 your mobile phone while commuting, whether you’re

24 sitting in your house playing games for hours, it’s a

25 lot of people. Sixty-five percent of American adults
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1 now play video games and seventy-five percent of

2 households have at least one gamer. So this is not an

3 isolated problem set to those young, sort of

4 stereotypical gamers. 

5 And then this is intentional in these games. 

6 There’s a column written by the CEO of Tribeflame

7 called “Let’s Go Whaling: A Guide To Monetization

8 Through In-app Purchases.” The whole idea of this

9 column is about getting people to spend as much money

10 as they can and make it so that you’re accustomed to

11 it, you’re -- this last line to me, you’re just a tap

12 away from spending. This is how the games are

13 constructed. This is where the money is made, and

14 consumers aren’t necessarily aware of that. 

15 And I’m relatively short because so much of

16 what I talked about came up earlier. 

17 Thank you. 

18 (Applause.) 

19 MS. JOHNSON: Thank you, Anna. 

20 And now, we’ll hear from Keith Whyte. 

21 MR. WHYTE: Hi, everyone. And thanks to FTC

22 and my fellow panelists and everyone today for this

23 really informative discussion. 

24 I’m Keith Whyte, the Executive Director of

25 the National Council On Problem Gambling. I’ve been
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1 working on gambling addiction issues for 25 years now. 

2 And as a brief note, I’d like to wish my son, Ian, a

3 happy 14th birthday today. When he’s not playing

4 drums, guitar, bass, or piano, he’s often gaming. And

5 he wanted me to tell you that loot boxes in Fortnite

6 are occasionally annoying, mainly because he doesn’t

7 get the gun he wants. Nothing to do with gambling. 

8 So just a little bit about us and why we’re

9 here, because we do have a unique perspective on this,

10 I think. We’re the national advocates for programs

11 and services for problem gamblers and their families. 

12 We were founded in 1972 and are neutral on legalized

13 gambling. And that is very important because it

14 allows us to work in partnership with government,

15 gaming industry, counselors, regulators, researchers,

16 and recovering gamblers. And we’re happy to work with

17 groups like ESA and their member companies as well if

18 they’re interested. 

19 Many of the world’s largest casino and slot

20 machine companies are members of the National Council,

21 and, again, we’re not anti-gambling, nor are we

22 anti-loot boxes. However, we’re here to share our

23 experience because many features of loot boxes are

24 similar to those of slot machines, and we’ve got about

25 five decades of experience working on consumer
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1 protection issues in the gambling space. 

2 Both our experience and the evidence show

3 that some features of loot boxes are absolutely

4 associated with gambling problems among players. My

5 presentation was just going to be everything that

6 David said, but I think I have to do a little bit more

7 than that. But, yes, many of the panelists have

8 discussed some of the issues we’ve been looking at as

9 well. And, indeed, a number of countries do regulate

10 loot boxes as gambling, or certain types of loot boxes

11 as gambling. 

12 But it’s clear that whether or not loot boxes

13 meet criteria for a gambling device in a particular

14 jurisdiction and whether or not parents recognize or

15 understand the risks, additional consumer protection

16 issues -- protection features must be put in place to

17 protect vulnerable players from developing gambling

18 problems. Loot boxes and slots can powerfully

19 influence player behavior in ways that lead to

20 entertainment for most, great excitement for some, and

21 excessive play and even addiction for a few. Players

22 with gambling problems likely provide a

23 disproportionate percentage of the, quite frankly,

24 massive profits from slot machines and from loot

25 boxes. 
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1 To my knowledge -- oops, I think I’m going

2 the wrong way. To my knowledge, every study published

3 to date on the connection between loot boxes and

4 gambling has found an association. You’ve heard from

5 Dr. Zendle and others on that today. And, in fact,

6 given everything we know about the similarities

7 between boxes and slot machines, it would actually be

8 astounding and surprising were there not such a

9 connection. They are, in many ways, so closely

10 related. 

11 We know that one of the reasons that, of

12 course, as Dr. Zendle said, problem gambling is an

13 issue is because it can lead to massive and

14 significant negative impacts. And I’d like to focus a

15 little bit, as we’ve talked today, about the types of

16 groups that we’re most concerned with. Obviously,

17 anyone who plays a slot machine or anyone who pays to

18 play a loot box may be at some risk, but we know that

19 there are groups with higher risk. And those

20 certainly include males, youth, and some groups that

21 have not been talked about a lot today, veterans. We

22 know veterans have much higher rates of gambling

23 problems. 

24 And we believe, again, there is likely a

25 bidirectional effect. People who are vulnerable for
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1 gambling addiction or who have gambling problems may

2 be more likely to pay-and-play and develop problems

3 with loot boxes. And those who play loot boxes may

4 well be on their way to developing gambling problems

5 due to their loot box play. These are very, very

6 complex associations. Obviously, a lot more research

7 needs to be done. And, again, the industry can play

8 an enormously helpful role in providing data to help

9 all of us make more informed decisions about some of

10 these risks. 

11 So based on our experience working with

12 government and the gambling industry to protect

13 players, we’ve got sort of four buckets of solutions

14 if you will, a number of which have already been

15 discussed, so I won’t spend a lot of time on them. 

16 And we have much more detailed information in our

17 written submission, which is, of course, available on

18 our website, and we have we have some copies here as

19 well. 

20 So first, in the gambling industry, we look a

21 lot about creating informed consumers. And we’ve

22 talked a lot about -- today, about making and building

23 transparency. And I think one of the challenges to

24 this industry and one of the ways that you can

25 actually do much better than the gambling side, is if
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1 you’re spending $250 million to develop a game and

2 you’ve got some of the world’s best, most creative

3 talent, let’s find a way to make this information in

4 disclosures entertaining and interactive and exciting. 

5

6 You know, build it into gameplay. Reward players for

7 doing some pro-social behavior, like finding out what

8 really the odds are in this game. 

9 I would hate to see it look like what a pay

10 table looks like for a slot machine, which is you know

11 2.5, zillions of numbers in there, and without a

12 degree in higher math, you’re utterly unable to

13 understand this. But there are ways to make this

14 transparency quite effective, especially when you’re

15 trying to communicate with younger customers or

16 parents who are not technically well-equipped. 

17 You know, obviously, we talk a lot about, in

18 the gambling space, about consumer education

19 protection. I think, last but not least, we would

20 suggest a rating of most games with loot boxes is M

21 for mature, because, ironically, if many of the

22 parental controls are based on existing ESRB ratings,

23 then most games with loot boxes, including some of the

24 ones we’re most concerned about, are rated as T for

25 teen. 
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1 And so if you’re a parent who’s basing your

2 parental controls on what the ESRB rating is, if the

3 ESRB rating is as we would think artificially low,

4 then that might not trigger the appropriate level of

5 parental controls. 

6 We, also, in the addiction prevention world,

7 or in the gambling world, we know that some addiction

8 in some people you can never prevent from developing a

9 problem, right? We must make all the efforts we can

10 to prevent, but just as we have learned from decades

11 of experience with drug and alcohol abuse and other

12 things, so while parental controls are important, we

13 need to go beyond that. 

14 And one of the things that we do a lot in the

15 gambling industry is we recognize the role of parents,

16 we recognize the role of industry self-verification,

17 but we absolutely believe that there has to be third18 party objective regulation. Sometimes that could take

19 the role of the -- sometimes that could be the role of

20 the FTC. Other times it can be the role of third21 party groups, like ourselves or others, perhaps some

22 of these panelists. 

23 And one other thing on this that’s, I think,

24 important when we talk about certification and

25 verification, nobody in the gambling industry would
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1 ever trust a slot machine manufacturer to self-certify

2 that their machines -- the odds and randomness of

3 their machines is as -- that their machines perform as

4 they say. So we use independent testing labs. That’s

5 what the state of Nevada and New Jersey -- that’s what

6 everybody uses to verify that the odds are as they are

7 stated. And they often find machines that don’t

8 perform adequately. It’s an important consumer

9 protection feature. 

10 And so if the industry is going to provide us

11 information on odds and randomness, take a lesson from

12 the gambling side, you got to get it done

13 independently. It’s not going to be effective if

14 you’re just telling us, oh, trust me, this game, these

15 items drop at this rate, especially without any means

16 to independently verify it. 

17 So we try and prevent as many problems as we

18 can. Those who slip through the net are going to need

19 help. And so one of the things that we will be

20 launching very soon is responsibleplay.org to help

21 people who have questions, and perhaps problems, find

22 a place to go. 

23 As Dr. Domoff talked about, there’s a number

24 of flavors, if you will, of addiction that are

25 implicated in this discussion. There’s straight-up
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1 gambling addiction. There’s, of course, gaming

2 addiction, which she went through with the clinical

3 criteria. And there’s internet addiction. These are

4 all separate, they’re distinct, but quite closely5 related issues. And what we’d like to do with

6 responsibleplay.org is help people come take these

7 various self-tests and then find where they perhaps

8 need to be. 

9 Some people who have problems with loot boxes

10 are probably people who have gambling addiction. Some

11 people that have problems with loot boxes may well be

12 gaming addicts. Some people may be internet addicts;

13 some people may have other problems. And so we want

14 to be sort of a gateway, an information referral

15 resource, where folks can come and then get steered to

16 the appropriate help for their condition or issue. 

17 And, again, another tip from the gambling

18 side is self-exclusion. So one of the most effective

19 ways to help someone, who may have a problem with

20 their gambling or with their gaming use, is to allow

21 them to self-exclude themselves. And in an

22 environment where transactions are monitored, you can

23 use self-exclusion through payment mechanisms, because

24 while people may have many different accounts and play

25 many different games across many different providers
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1 and platforms, they’re probably using that one credit

2 card or at least a common bank account. And so

3 payment level blocking can be very effective,

4 buttressing and adding to existing platform level

5 controls and others. 

6 Self-exclusion also places a priority -- or

7 that places the emphasis on the gambler or the gamer

8 and not necessarily the operator. But operators must

9 have an affirmative duty to honor self-exclusion. So

10 self-exclusion is not effective at all when you can

11 walk right through it. So there’s got to be, again,

12 that partnership between people who exclude and

13 companies that are going to participate in that

14 program, because the worst thing you can do is set up

15 an exclusion program and then not honor it. And that

16 will bring the worst of both worlds. 

17 So last but not least, we talk a lot about

18 evidence, and we believe it’s incumbent upon the

19 industry to help by providing identified data to

20 independent objective researchers to help all

21 stakeholders validate concerns and develop solutions. 

22 If the video game industry disputes our concerns, they

23 should make publicly available the massive amounts of

24 data they have on player participation and spend on

25 loot boxes that they collect. 
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1 As Dr. Zendle said, we’d be happy to be

2 wrong. We don’t think we are. Again, we’ve looked at

3 -- looking through the gambling lens and with 50 years

4 of experience on this issue, we think there’s clearly

5 both cause for alarm and a link between people who

6 pay-to-play loot boxes and people who develop gambling

7 problems. 

8 But the only way we’re going to really find

9 out who exactly is at risk, and thus how we can create

10 solutions, is to really dig into this information. So

11 we don’t want to identify people by name, so

12 deidentification of data is critical. But we think

13 there are ways to help provide that information to

14 qualified third-party researchers, which will help all

15 of us figure out their true -- some of the true

16 concerns. 

17 So in conclusion, with great profits come

18 great responsibility, right? We call on the video

19 game industry to dedicate a portion of loot box

20 revenues to a public health trust fund that supports

21 independent prevention, education, treatment,

22 recovery, and research initiatives. ESA and its

23 member companies can play a constructive and

24 productive role, just as some casinos and lotteries

25 embrace responsive gambling as the most ethical and
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1 economical way to address the harm their products

2 cause. 

3 It’s clear that paying for loot boxes is

4 linked with gambling problems, and that some gamers

5 are at higher risk for addiction due to their age,

6 gender, or even military service. We know from

7 decades of experience with slot machines and gambling

8 companies that educational awareness campaigns,

9 coupled with strong responsible gambling or consumer

10 protection policies and programs, can help reduce, but

11 never eliminate, the risk of problems. 

12 But for these measures to be effective, it

13 will take true commitment of leadership from ESA,

14 ESRB, and every developer and publisher worldwide,

15 because if you have even one company that chooses not

16 to participate, that opts out, that doesn’t comply

17 with standards, the whole system, the foundation of

18 the entire system is undermined. 

19 In the five decades in gambling, we’ve

20 learned that self-regulation alone is never enough. 

21 It must have an enforceable consumer protection

22 framework and be accompanied by external oversight,

23 research, monitoring, and verification by independent

24 groups. So there’s a three-legged stool, there’s room

25 for industry, for regulators, and for advocates. 
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1 We look forward to working with anyone who

2 has a sincere interest in preventing addiction and

3 protecting players. 

4 Thank you very much. 

5 (Applause.) 

6 MR. DUCKLOW: Thank you, Keith. 

7 Ariel, you have the podium. 

8 MS. FOX JOHNSON: So good afternoon. I think

9 I’m the last presentation, so thanks all for still

10 being here and awake. And, also, thank you to the FTC

11 for hosting this workshop today. 

12 I’m Ariel Fox Johnson, Senior Counsel for

13 Policy and Privacy at Common Sense Media. 

14 So as you’ve hopefully already heard this

15 morning when my colleague Jeff Haynes was on the

16 stage, Common Sense Media is committed to helping kids

17 and families navigate an ever-changing world of media

18 and technology. And over the years, that’s grown from

19 helping parents pick out what TV shows might be

20 appropriate for their children to now helping them

21 understand how to protect their privacy and their

22 pocketbooks as kids are discovering new opportunities

23 and facing new risks online and in games. 

24 A lot has been said so far today about how

25 children and youth are particularly vulnerable. And
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1 I’m pleased about that, that I won’t be the only one. 

2 I want to just talk a little bit more about what kids

3 and families know with respect to loot boxes and

4 in-app purchases. And spoiler alert, they don’t know

5 a lot. So let’s also talk about how we can improve

6 the situation. 

7 So as you’ve heard today, this isn’t just a

8 kid’s issue, but kids are particularly vulnerable. 

9 There are a number of different reasons why. First,

10 kids can have trouble distinguishing play money versus

11 real money, and games do not make it easy for them by,

12 as discussed, not always listing things in real dollar

13 terms. It’s hard for kids and adults to figure out

14 that things can cost real money. 

15 Second, even if information is listed

16 providing real dollar amounts, digital transactions

17 can make it difficult for people to understand that

18 they’re spending money. There is very little

19 friction. It’s hard to comprehend if you’re making a

20 purchase, if you’re just clicking online or talking to

21 a smart device, a lot harder than if you were handing

22 over cash. Additionally, the use of microtransactions

23 can compound this problem. To a kid 99 cents, $2.99

24 doesn’t sound like a lot, and they don’t think about

25 the fact that they’re going to make that purchase 70
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1 times. 

2 When talking about teens, there are

3 neuroscience and other issues to consider. 

4 Neuroscientists have looked at how teens brains are

5 different. They’re still developing, and this has

6 been talked about a little bit earlier today. Their

7 prefrontal cortex is not in the same shape as an

8 adult’s, and they’re more likely to do the immediate

9 and risky thing to get a reward and less likely to

10 consider long-term consequences. In this space, that

11 means that they’re more likely to spend money, and as

12 we’ve heard, some of them think it feels good. 

13 This is just an example of even how when

14 dollars are presented to a purchaser, it can be very

15 hard to read how much they cost and hard for a child

16 to make a smart decision. 

17 In addition to cognitive and comprehension

18 issues, there are also social and emotional issues at

19 play. And companies can take advantage of this. 

20 Older kids want to compete with their friends. And

21 we’ve seen that some gaming companies are filing

22 patents that would take advantage of this desire to

23 compete, contemplating pitting a junior player with a

24 more senior player in an effort to get the junior

25 player to spend more money. 
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1 Younger kids, they want to make people happy. 

2 They don’t want to disappoint their friends, their

3 family, and this also includes their favorite

4 characters. And what I now hope is an infamous

5 example that you’ve all heard of, and if not you’ll

6 hear of it now, is Strawberry Shortcake insisting that

7 children who are trying to play her game and make

8 treats, purchase certain costly kitchen tool items. 

9 And if they don’t, she’ll berate the player. 

10 There are other children’s games in which a

11 character will cry if the child doesn’t make the

12 purchases recommended. I think it bears noting here

13 that host selling like this is prohibited on TV. And

14 here you have not only the host selling, but the host

15 getting angry or upset with a child if they’re not

16 making a purchase immediately. 

17 Kids can also fall prey to the same type of

18 selling techniques that adults can. So here, if they

19 can read, they may go for the best value them. If

20 they’re pre-literate, they may just like the pink

21 color. 

22 I think it’s important to consider kids

23 purchasing techniques in the broader context of their

24 gaming experience. From our Common Sense research, we

25 know that some kids are spending a good chunk of time
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1 playing video games each day. While a minority of

2 teens and tweens, according to our research, are

3 playing video console games on a given day, I think

4 the numbers are much higher for mobile probably, only

5 27 percent of teens play console games. Those who do

6 average over two hours. Among gamer teens and tweens,

7 they’re spending over two hours a day on video games. 

8 And those who consider themselves mobile gamers, spend

9 almost as much time. 

10 As you’ve heard today, there are real and

11 growing concerns about addiction on games and via

12 other techniques, not just in-app purchases, but

13 buzzing and dinging and randomized notifications, snap

14 streaks, autoplay, and other features that tech

15 companies are using to keep us hooked, and Common

16 Sense is focused on these broader issues as well. 

17 If you add that to the thrill and excitement

18 of not knowing what you’re going to get when you open

19 up a loot box, then it’s really no surprise that, as

20 you heard, the American Psychological Association, the

21 World Health Organization, have identified internet

22 gaming disorder and hazardous gaming as public health

23 issues that merit further attention. 

24 So we do hear a lot of concerns from parents

25 at Common Sense about their kids spending too much
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1 time online and on games and we also hear questions

2 about in-app purchasing. We hear less, as you heard

3 from the ESRB, about loot boxes. I think a large

4 reason for this is that parents are in the dark. They

5 barely understand in-app purchases in general, let

6 alone specific mechanisms like loot boxes. 

7 Why are they so in the dark? Well, one

8 reason, again, disclosures can be ineffective, in

9 small and tiny print, and you have to click further to

10 see the costs of actual purchases and items. 

11 Additionally, parents might not realize that a kid has

12 access to their credit card. They don’t know that

13 it’s already linked to their online account because

14 they used it for unrelated purchase. They don’t know

15 that their kid can access it in their purse and they

16 might not know to worry about that if they don’t

17 realize that the game has in-app purchases to begin

18 with. 

19 While they may get statements, in some

20 instances, such as in Facebook gaming, a number of

21 parents weren’t getting any statements at all. And

22 when they do get statements, they’ll have sort of

23 vague descriptors, like Facebook or Amazon, in amounts

24 of cents. It could be hard for a parent to tell that

25 that’s an in-app purchase or if it’s maybe your
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1 monthly iCloud storage. 

2 When we talk to parents, they have very basic

3 questions. How do we turn off in-app purchases? How

4 do you find out if a game has them? How do you find

5 out if a game requires them to play? They feel lost. 

6 And for parents of kids who’ve already racked up huge

7 in-app purchases, they feel angry. I think at this

8 point it’s sort of -- you’ve heard multiple times

9 about people spending thousands of dollars in these

10 games whether they liked it or not. And I have a

11 family member who was telling me this weekend about

12 spending thousands of dollars on in-app purchases. 

13 One example here, is four kids, all under 10,

14 spent 550 pounds trying to get their favorite football

15 or soccer player. The parents only realized when

16 their bank card was declined. They were playing a

17 game that was recommended as appropriate for ages 3

18 and up. 

19 When parents find out that their kids have

20 made these purchases, they respond in sort of a

21 variety of predictable ways. One, they try to get

22 their money back, and a lot of these games have

23 chargeback rates that would be considered fraudulent

24 in other industries. Also, some of these parents turn

25 to the courts. And, indeed, in a lot of the examples
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1 I mentioned in the last slide, they are about parents

2 who’ve sued. 

3 Almost all of the major platforms have faced

4 FTC actions in settlement due to deceptive in-app

5 purchases and disclosures. So Google and Apple

6 settled with the FTC, and then Amazon, who first went

7 to court. They’re now required to disclose in-app

8 purchases in games. Though, as noted, these purchase

9 -- these disclosures can be woefully inadequate for

10 parents. 

11 Common Sense and other advocates have also

12 asked the FTC to hold Facebook to the same standard

13 more recently. That issue has not been resolved, and

14 we’re concerned that the claim has been extinguished

15 by the recent settlement. So current practices don’t

16 seem to be serving kids and families, and we’ve heard

17 that there are some steps to improve those today, but

18 we think there need to be more. 

19 Thus far in the US, most efforts have focused

20 on transparency. App stores, self-regulatory groups

21 are indicating in-app purchases. Now, there’s also

22 Google and Apple and, today, others who will be

23 disclosing odds, drop rates on loot boxes. Common

24 Sense, in our reviews, tries to give information to

25 parents about in-app purchases, as well as the prices
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1 of those purchases when we can. 

2 We also note when in-app purchases are so

3 pervasive or manipulative that they might disrupt

4 gameplay or a child’s experience, and that’s what we

5 call commercialism in a game. 

6 We think companies can and should do more,

7 however. One useful guide here is a UNICEF paper on

8 child rights and online gaming that just came out this

9 spring. It sets out key principles that all game

10 companies could follow to serve children. Companies

11 should help children understand the commercial aspects

12 of games and speak to them in a voice that they and

13 their parents can understand. And I love the idea of

14 companies and their developers being creative and

15 making this something that players and parents want to

16 read and spend time on. 

17 Companies should clearly label advertising

18 and other commercial content. And they should make

19 sure that children fully understand all purchases

20 before they pay for them and not later when their mom

21 asks how they racked up huge charges. Companies

22 should also be inclusive in their game design. They

23 should make them so that all children can play them

24 and understand and have the expectation that children

25 maze the games in a way that they did not intend, and
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1 they may play games, even if the product was not

2 designed for them. 

3 Common Sense would like to see companies

4 eliminate features that manipulate kids into spending

5 more money or time than they or their parents were

6 intending. We also think that platforms should take

7 more responsibility. They are the gateways and they

8 can do more to flag particularly problematic titles,

9 as well as help ensure that parental controls are the

10 default setting. 

11 As you’ve heard today, loot boxes are a

12 global concern. They are a concern for many

13 regulators, though there’s not always consensus on

14 what to do about this. Belgium and the Netherlands

15 have said that some types of loot boxes constitute

16 gambling, and game studios have responded by pulling

17 out or modifying their games. 

18 The UK has found that some similar practices

19 were not gambling. In China and South Korea, there

20 are rules that require game companies to disclose the

21 odds. This seems like a positive step forward, but

22 some of the odd disclosures that we have seen include

23 ranges of winning certain items that are so broad,

24 like say 5 to 60 percent, that it seems to barely

25 constitute a disclosure at all. 
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1 So as we move forward and talk about

2 disclosing drop rates and odds of winning, I think

3 it’s important that we maybe look closely at what’s

4 being disclosed. 

5 In addition, European regulators, Washington

6 State Gambling Commission have also signed joint

7 statement expressing concern. 

8 In the US, obviously, legislators and

9 regulators are also taking notice. Senator Hassan

10 asked for the FTC to investigate loot boxes and make

11 efforts like today’s workshop, to educate parents and

12 the public about potential addiction and other

13 negative impacts. And Senator Hawley, along with

14 Senators Blumenthal and Markey, has introduced

15 legislation to ban loot boxes and pay-to-win

16 monetization practices for those under 18. 

17 There are also broader bipartisan efforts,

18 like the Camera Research Bill, that would study the

19 effects of technology and media, including video

20 games, on kids. And at the state level, we’ve seen a

21 number of efforts, including one Hawaii legislator

22 who’s made repeated efforts to ban loot boxes for

23 those under 18 and require odd disclosures and

24 recently gotten passed a commission to study this

25 aspect of the gaming industry in his state. 
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1 This is still an emerging issue for 

2 many parents and it’s one which many are still

3 unfortunately not aware of. But as it faces increased

4 attention, we’re hopeful that efforts from all sides

5 will lead to a better experience for kids and families

6 in the future. 

7 Thank you. 

8 (Applause.) 

9 MR. DUCKLOW: Thank you, Ariel. 

10 So we’re going to jump into some Q&A now. 

11 And none of the following questions are directed at

12 any particular panelists, so please feel free to jump

13 in. 

14 The first question that I think we’re curious

15 to hear the panelists response to is, this issue of

16 disclosure of odds, this has come up throughout the

17 entire day. In fact, we actually had an announcement

18 by ESA earlier this morning that additional platforms

19 are bringing this online, joining Google and Apple to

20 kind of make this certainly a trend. What are

21 panelist’s reaction to this idea of disclosure of odds

22 as kind of being the way forward here? 

23 MR. WHYTE: I’ll start out and say we’ve got

24 a lot of experience with this in the gambling world,

25 and it is not harmful, but unlikely to be effective. 
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1 Most people don’t understand odds and randomness in

2 the most simple dimensions, especially when you’re

3 talking about dynamic odds. It’s almost impossible

4 for people to figure that out. 

5 And you have to look at the people you’re

6 disclosing to. If it’s a young person or someone

7 who’s vulnerable to gambling addiction, they’re going

8 to understand that information completely differently

9 than a rational or well-informed or non-addicted

10 consumer. 

11 So again, from the gambling addiction space,

12 there’s been few studies that have found much impact

13 on odds and randomness disclosure around slot

14 machines. It doesn’t hurt. It doesn’t lead to

15 negative perception, except in some ways if you --

16 there are ways to talk about odds and randomness

17 within gambling that can actually encourage or lead

18 people into false beliefs. But, by and large, I think

19 that information is okay. It’s valuable; it’s true;

20 it’s factual and should be disclosed. 

21 But I think the next step is to make -- is to

22 find ways to make it sticky and entertaining for

23 consumers and to make such disclosures impactful. And

24 so I think there’s a whole lot we can do to try and

25 find ways to communicate those odds to people in ways
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1 that they’re going to understand and be able to make

2 more informed decisions. That’s the ultimate point. 

3 The point of disclosure is to help improve

4 and change consumer behavior. The disclosure itself

5 is not the point. It needs to lead to something. And

6 that, of course, can be measured and evaluated, and

7 there could be a feedback loop to find better and

8 better ways to do it. 

9 MS. FOX JOHNSON: Yeah, I would second that.

10 Say, I don’t think a kid is going to make a

11 significantly better decision with certain odd

12 disclosures. And while it’s a good step, it can’t be

13 a step that replaces sort of more meaningful change. 

14 MR. WHYTE: Well, and the other thing I’ll

15 say just real quick, is that look at Powerball. Your

16 odds are 246 million to 1. Does that stop anybody

17 from buying Powerball tickets? No. Some people love

18 to chase long odds. That’s part of the thrill. 

19 That’s, frankly, part of the addiction for some

20 people. 

21 So again, not a magic bullet. A good first

22 step, but it’s a first step towards a lot of change in

23 behavior, and that’s a much bigger challenge. 

24 MS. LAITIN: Yeah, I’ll jump in and agree

25 with all of that and say from first inclination, it’s
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1 a good step, but there’s a lot of questions about when

2 that disclosure happens and how. If the disclosure

3 only happens at the time you buy the game, and then

4 it’s weeks, months later when you’re actually playing

5 and encountering the loot box, and how do you have any

6 recollection of that at that time, is that a

7 meaningful disclosure? 

8 And it’s something -- Keith was talking about

9 different ways of doing disclosures. I think finding

10 a way that people can really understand what’s going

11 on and that creativity is great, but we have to

12 remember that these games are looking to have people

13 play these loot boxes. And so finding that line, you

14 can be creative in the disclosure, but the reality is

15 they want people to buy these. And so is there a need

16 to disclose in a way that creates some friction, slows

17 people down, makes them think, and that may, of

18 course, stop them from playing the little boxes, which

19 takes away revenue? 

20 MS. VANCE: I think you have to trust that

21 the industry is serious about making the commitment

22 that they announced this morning. They have their own

23 customers to serve. And they’ve made a commitment to

24 make disclosures easy to access and to be

25 understandable. 
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1 And as we learned earlier this morning, loot

2 boxes vary game to game, loot box to loot box, and if

3 there is no one silver bullet for disclosures, there’s

4 no one standard, I think we have to leave it to

5 individual game developers to develop the right type

6 of disclosures for their game and for their customers. 

7 I also think it’s different disclosures for

8 different audiences. I mean, what you would disclose

9 for a parent -- like we just created a blog that helps

10 parents understand what drop rates mean, but it’s

11 complicated. And instead of -- I think to make a

12 parent comfortable, we’re better off focusing on a

13 generalized disclosure up-front that this game enables

14 in-game spending, and then point to parental controls

15 that allow them to limit the amount of spending that

16 their child can enable. 

17 MS. JOHNSON: Just picking up on that point

18 about the disclosure of in-game purchases, we’ve heard

19 today that some feel that that disclosure isn’t

20 prominent or detailed enough. Are there thoughts for

21 ways to -- I guess, how would you respond to that? 

22 And then, also, are there thoughts of other ways to

23 improve upon that to make that more impactful for

24 consumers? 

25 MS. VANCE: You’re talking about the in-game
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1 purchases notice?

2 MS. JOHNSON: Yes.

3 MS. VANCE: I mean, I walked everybody

4 through the rationale for making that decision, and

5 that was the right decision based on our research. So

6 it was informed based on what we were hearing from

7 parents. 

8 Our rating system, at least the up-front

9 information that we provide prior to purchase, needs

10 to be really easy to digest. Otherwise, it’s going to

11 get ignored. And so we really try to make our

12 information concise, easy to digest. We cannot throw

13 a lot of information at parents. They just -- their

14 eyes glaze over. 

15 But if they want to go deeper -- for an

16 example, we offer rating summaries on our website and

17 through our mobile app, so that if a parent wants to

18 know what do we mean by suggestive themes, or, you

19 know, okay, it’s teen-rated, but I have a 10-year-old,

20 and I really want to make a decision, I want to

21 understand more about the context of the content that

22 we’ve called out, they can go to our rating summary

23 and read a paragraph or two giving them far more

24 information, far more examples. 

25 But we can’t expect -- A, we can’t expect
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1 that to be on the box. We can’t expect that

2 information to be up on a mobile screen when you have

3 this amount of real estate. We have to give different

4 layers of information depending on how parents want to

5 digest it and what parents are looking for. 

6 But, look, the drop rates is really to serve

7 the gamers. The drop rates are really to provide

8 clarity about the relative rarity and probability of

9 getting certain items in a loot box. And I think

10 whether -- I think most gamers would understand what

11 that means. If they’ve been playing a game for years,

12 they know what those stars mean, they know what the

13 different terms are that are being used, whether it’s

14 legendary or rare or epic. And the drop rates, I

15 think, they understand based on the context of the

16 game that they’re very familiar with. So I don’t

17 think we should underestimate gamers’ ability to

18 figure it out. 

19 MR. WHYTE: I think that -- just to add to

20 that a little bit, I think sort of implicit in the

21 question is focusing on point of sale. And that’s

22 akin to when someone sits down to a slot machine or a

23 blackjack table saying, oh, hey, here’s a plaque. You

24 may lose your money and this is a random game. Or

25 like if you go to a bar, you expect your bottle of
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1 beer. 

2 It’s not going to -- so it can’t tell you --

3 point of sale is a very, very limited time for all

4 sorts of reasons to provide this kind of information. 

5 And it really -- the true way to approach this, as

6 with any other public health issue, is through large7 based awareness campaigns. ESA is starting in that

8 direction. I think there needs to be others. 

9 It’s almost impossible. We can’t push all

10 consumer protection at point of sale or point of

11 purchase. That is, there is a time. I mean, there’s

12 things we can do there, but it’s got to be throughout

13 the lifespan. I mean, if we’re not talking to kids in

14 schools about this, those measures are not going to be

15 -- again, they’re not going to hurt, but they’re

16 likely -- they’re not likely to be very effective. 

17 It’s got to be multilayered, multifaceted, multi-year

18 approaches all across the lifespan. 

19 MS. LAITIN: And I’ll add to that analogy. I

20 think it’s not sitting down at the slot machine. I

21 think it’s entering the hotel in Vegas and it says,

22 you may end up spending money here, possibly at a

23 restaurant, maybe at a show, or maybe you’ll be at the

24 slot machines. 

25 MR. WHYTE: That’s right.
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1 MS. LAITIN: And that’s what’s so hard about

2 that “contains in-app purchases.” As a parent, I look

3 at that. I don’t know if that’s loot boxes or you can

4 buy another world sometime later. It could be

5 anything in between. And so to get that level of

6 specificity when consumers are at the point or when

7 players are at a point where they’re accessing that

8 stuff, that’s a different moment. 

9 The point of purchase is really, really

10 important, and I’m thrilled that that’s there, but

11 it’s not doing enough of the job. 

12 MR. DUCKLOW: So Keith had mentioned the idea

13 of dynamic odds. And one of the specific types of

14 dynamic odds that we saw come up in comments is the

15 idea that you could actually guarantee a specific item

16 or a specific rare item to pop up after a certain

17 number of loot boxes. I’m curious what the panel’s

18 reaction is to that idea. Does that increase clarity

19 for gamers or could it actually counterintuitively

20 increase the number of loot boxes that they purchase? 

21 MR. WHYTE: I think it absolutely depends on

22 the gamer, right? If you’re a kid, if you’re, again,

23 vulnerable to addiction, there’s lots of people that

24 can perceive those as absolutely exhortations to play. 

25 The gambling world, you only have to admit you’ve lost
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1 when you stop playing. So anything you can beg,

2 borrow, or steal to stay in action, you’re always one

3 bet away from winning everything back. 

4 If you believe or you know or you think you

5 know that additional play or additional spend is going

6 to guarantee you an item, and why would you stop

7 anyway, but especially if you’re addicted, especially

8 if you’re risk for addiction, especially X, X, X, X. 

9 Other players, recreational players, nonproblematic

10 players, adults, you know, may be able to see -- may

11 be able understand the dynamic odds better. And,

12 again, that’s one of things that makes this hard. 

13 You’re talking 165 million people, but you know some

14 of them are people who either have problems or are

15 likely to develop problems, and you know for them,

16 their judgment is, by definition, impaired. 

17 They are worse at understanding odds and

18 randomness than others. They have cognitive

19 distortions. They have illusions of control. 

20 And providing information, dynamic odds, in such a way

21 to make them think that persistence is going to allow

22 them to win that epically rare item can be disastrous. 

23 That can absolutely be a pathway to gambling problems

24 if the problem is not already there. 

25 So again, it’s hard to answer, I mean, a lot
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1 of it depends on the player, in our opinion, because

2 we’ve seen this happen in the gambling addiction space

3 with devastating consequences for some. And we

4 predict that would be the same within this loot box

5 space. 

6 MS. FOX JOHNSON: I think this also just sort

7 of speaks to the recurring theme we’ve heard today

8 about the need for more research, and different

9 individuals respond differently, and how can we

10 support that. 

11 MS. JOHNSON: So -- 

12 MS. VANCE: Can I just -- can I just add one

13 thing? 

14 MS. JOHNSON: Oh, please.

15 MS. VANCE: There’s is a theme that, you

16 know, incentives are bad. Rewards are bad. Games are

17 all about rewards and incentives, and that’s what

18 makes them fun and that’s what makes them compelling

19 forms of entertainment. 

20 So I want us to be careful about how we frame

21 the conversation. Providing an incentive isn’t, on

22 its own, a bad thing. It provides challenge, it

23 provides progression, you know, encouragement to

24 progress through a game. So I think it’s important to

25 not tar all types of incentives as somehow bad. 
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1 MS. JOHNSON: Oh, that’s a good -- oh, go

2 ahead. Did you want to -- 

3 MS. LAITIN: No.

4 MS. JOHNSON: I was saying that’s a good

5 segue into sort of another question, which is what

6 about just offering randomized loot boxes for free,

7 essentially, you know, and only available through

8 gameplay, and then instead having specific virtual

9 items or bundles or passes available for purchase,

10 sort of á la carte? Would that solve the problem? 

11 MR. WHYTE: Not all of it. From a

12 psychological model of addiction, no. Whether or not

13 a reward is monetary or not, whether or not how you

14 pay for it, those things or not -- are slightly

15 salient in addiction, but not entirely. So it

16 wouldn’t -- making loot boxes free would not remove

17 the risk that some people will become habituated and

18 conditioned to them and will play them obsessively. 

19 We see this in the social casino space all

20 the time. Free-to-play social casinos have quite high

21 rates of people who will play ‘til extinction, and get

22 a billion chips, and then they’ll spend days and hours

23 playing all those chips to extinction again, so they

24 can go buy more free chips to continue to play, even

25 though they know they will never win anything of
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1 value. 

2 So, no, it won’t solve -- it might solve some

3 people, but it won’t solve the truly vulnerable people

4 for gambling problems. It would be great if it was

5 that easy. I’d be out of a job, but gambling

6 addiction is a little bit more sticky than simply

7 price. 

8 MS. VANCE: I mean, I do think that would

9 obviously change a lot of the economics. You may find

10 the up-front cost of games to be higher. You may find

11 it has a huge impact on the free-to-play market,

12 particularly in the mobile market. These independent

13 developers, in particular, need revenue streams to

14 monetize, to cover the cost of development. So I

15 think it obviously would have huge impact on the

16 economics of the business, which I think you need to

17 be careful about. 

18 Plus, many loot boxes are free and they’re

19 optional. So you don’t have to buy a loot box to play

20 through a game. 

21 MS. LAITIN: I think it’s interesting that

22 you say how much it would change the economics if

23 people could buy the things they’re currently winning

24 in loot boxes. I don’t -- I have no studies, no

25 knowledge, but it would be interesting to see how that
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1 played out and how much the reliance on loot boxes is

2 necessary for the economic viability of these. 

3 Because, again, if we’re talking about

4 warnings and disclosure and making sure people are

5 aware, and if paid loot boxes are necessary for these

6 games to continue to exist, that alone is something

7 that parents and others should be very aware of, that

8 these games can’t exist without these and that the

9 games are relying on people taking the chance here in

10 order for them to continue to exist. 

11 MS. JOHNSON: A followup, do you think there

12 should be any kind of cap on the amount of in-app

13 purchases for children and adolescents? So for

14 example, you know, you may see bundles that are $99.99

15 or range anywhere from like $2.99 to almost $100. 

16 Would it make any sense to limit the price cap for

17 loot box -- I mean, sorry, for in-app purchases for

18 games that are marketed to children and adolescents? 

19 MS. FOX JOHNSON: So I think it would make

20 sense to limit or eliminate potentials for spending in

21 games that are marketed to children and adolescents. 

22 I do worry that if we say, you know, if you have a

23 loot box, or you have an in-app purchases, you have to

24 rate your game for adults that that might be seen as a

25 get-out-of-jail-free card for people who have games
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1 that are, in fact, really appealing to 10-year-olds. 

2 And so I think you have to sort of consider it

3 carefully. 

4 But I think that parents would feel a lot

5 more comfort if they knew that there were limits for

6 their kids spending for certain age range games. 

7 MS. VANCE: Based on our research, almost

8 seven out of ten parents have rules that their kids

9 can’t make any in-game spends. So we believe that

10 parents need to be parents and set their parental

11 controls and be informed with the disclosures that

12 we’re making, including the in-game purchase

13 disclosures, but other information that we’re putting

14 on the box and on the product detail page. 

15 I think parents need to be informed, which is

16 why we’re doing a lot to try to educate parents and

17 make sure that they’re aware, not just of the

18 disclosures, but also the parental controls, and leave

19 it up to them to set the parental controls at whatever

20 levels that they think is appropriate. But based on

21 our research, the majority of parents are not allowing

22 their children to make any expenditures. 

23 MS. JOHNSON: And then we’ve gotten a couple

24 of questions from the audience. This one is for ESRB. 

25 And the question is, has ESRB found that there’s any
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1 effect of household income or socioeconomic status on

2 use of parental controls by parents? 

3 MS. VANCE: We’ve not studied that issue, but

4 I don’t know if anybody else here has. 

5 MS. WHYTE: No. 

6 MS. FOX JOHNSON: No. 

7 MS. JOHNSON: And let’s see, another one. 

8 This one is, why not define the type of purchase? 

9 Consumers do care about whether they will be hit with

10 constant money grabs versus rare or occasional full

11 game add-ons or subscriptions to pay online. 

12 So I think this goes to the issue of adding

13 more detail to the type of purchase up-front. I don’t

14 know if you have anything more to add than what we

15 spoke about earlier with regard to that. 

16 MS. VANCE: I mean, obviously, I’d refer you

17 back to the comments I made earlier. But I would also

18 just say that I think that you have to look at what

19 problem are you solving. I don’t think the choice to

20 purchase a game, it would be dependent on that

21 information. I think that information is really

22 relevant. Once you’re in there playing the game, the

23 most relevant information, at least that we know, for

24 parents -- from our research with parents, is that

25 they want to know that there’s some ability to spend
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1 money inside. And then once they bring that game

2 home, hopefully, they’ll likely set their parental

3 controls. 

4 But that level of detail, I think might be

5 helpful. But it’s helpful only after somebody has

6 made a decision to purchase a particular game. The

7 reason why they’re purchasing that game is because

8 there’s great word of mouth, it’s great game design,

9 based on a brand that I know my kid loves. There are

10 a whole host of reasons. Price point. I mean, there

11 are a whole host of reasons why a parent might make a

12 decision to purchase a video game. So I’m not sure

13 that particular information is relevant for that up14 front purchase decision, but might be helpful further

15 down the line. 

16 MS. FOX JOHNSON: I guess I would just add

17 that, in many instances, especially when we’re talking

18 about mobile, the parents aren’t really purchasing a

19 game. They’re clicking “download” and handing over

20 their phone to their kids. And I think one of the

21 things that we’ve heard from parents at Common Sense,

22 is that they do want to know if in-app purchases are 

23 -- you know, is it a rare, or occasional, or even

24 cosmetic. We heard today that maybe that doesn’t have

25 as big an effect as we thought. 
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1 Or is it something where it’s like every time

2 your child wants to advance to the next level, like in

3 the Thomas the Tank game, they are going to have to

4 spend money. Because a parent might make a very

5 different choice, even though both could be listed as

6 having in-app purchases. 

7 MR. WHYTE: And just to echo that, as Renee

8 and others have said, I mean, loot boxes, this covers

9 just a massive amount of territory. And at some

10 point, yes, providing information on better -- to help

11 everybody better understand the risks -- I mean, I

12 think there’s much more risks in some types of loot

13 boxes and much less risk in others. It’s still risk,

14 but helping weight that is important. But, yeah,

15 really hard. 

16 And I don’t know that we really know. And I

17 think, again, it’s a call -- as Ariel said and as

18 David said and others, it’s a call for more research

19 to help us understand features that are more harmful

20 versus less harmful, help us understand relative risk,

21 and then communicating that relative risk, because

22 risk is not seen equally amongst users. And there’s

23 -- and it’s a great question. When and where, where’s

24 the most effective way to provide that information and

25 to whom? In some cases, it’s the users. In some
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1 cases, it’s the broad public. In other cases -- and

2 sometimes it may need to be tailored very specifically

3 to specific groups. 

4 And I think we’re only just at the beginning

5 stages of understanding this as not a technology

6 problem or a game problem, but as a public health

7 issue. And if you look at it through a public health

8 lens, I think that points to, again, broader

9 prevention, educational initiatives, more of a public

10 conversation around this, and then layered with lots

11 of different tools for lots of different audiences,

12 delivered at lots of different times. Point of sale

13 being one, but not the only, and probably not even the

14 primary. 

15 Just as you wouldn’t expect your first lesson

16 about alcohol or driving drunk to be delivered when

17 you walk into the bar, when you walk in the hotel in

18 Vegas. That starts really early and continues

19 throughout your life, because the risk changes as

20 people change and mature. 

21 And we haven’t even talked about seniors, but

22 we’ve talked a little bit about cognitive development

23 and neurocognitive development. But there’s a lot of

24 evidence to suggest that seniors may be at higher risk

25 for negative consequences in some of these things as
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1 well, and it’s not just kids. 

2 MR. DUCKLOW: So I think the final two

3 questions we have today are more broad. First off,

4 simply put, can the concerns that we’ve discussed

5 today regarding loot boxes and other types of in-game

6 transactions, can those be addressed effectively

7 through industry self-regulation, or is some type of

8 legislative action required? And then beyond that,

9 what might cause the calculus of that answer to change

10 in the future? 

11 MR. WHYTE: So from our perspective from 50

12 years of working in the gambling industry,

13 self-regulation alone, no. It cannot be effective,

14 especially when there’s so much profit involved and

15 there’s so little understanding of both risk and

16 rewards across this global ecosystem. 

17 So, yeah, we were comfortable with the three18 legged stool on the gambling side. Industry

19 self-regulation plays a really, really important role,

20 and we partner with a number of gambling companies

21 directly. But we also partner with regulators in this

22 space, like the FTC. And as an objective,

23 independent, nonprofit advocacy organization, we’re

24 the third leg of that stool. We play a big role in

25 helping keep the industry honest. It’s, you know,
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1 trust, but verify. 

2 And my counterparts to the left and right

3 probably will also play a role. And so, that’s the

4 approach that we would suggest based on, again, our

5 experience with the gambling industry. 

6 MS. LAITIN: I’ll echo that. I think there’s

7 a lot that industry self-regulation can do. And I

8 think ESRB has taken some really important steps. But

9 the chance of this being solved entirely by

10 self-regulation, given the broad nature of the

11 industry, given the size of the problem, and given the

12 concerns that have been expressed today, I think there

13 will be a need for more than just that. 

14 MS. VANCE: Obviously, I think

15 self-regulation has worked very well, and the Federal

16 Trade Commission has looked at our industry over the

17 years and has written in their reports to Congress

18 that we have the strongest self-regulatory code and

19 high compliance with that code. I think we’ve proven

20 ourselves over the last 25 years that we can do an

21 effective job self-regulating and addressing

22 particularly parents’ concerns. 

23 But I would just add one more thing. This is

24 an incredibly fast-paced industry. We move really

25 fast and our self-regulatory system moves very fast
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1 along with it. When we need to make changes to the

2 rating system, we do. When we need to make changes to

3 the marketing guidelines, we do. We are continually

4 adapting and evolving as the industry evolves. 

5 I don’t think regulators can keep up with the

6 industry, and I really fear that should regulations

7 come to pass, by the time they’re passed, they’ll be

8 obsolete or they’ll be completely impractical. This

9 is a really complicated and very fast-moving industry. 

10 MS. FOX JOHNSON: And I guess I would just

11 say that, I don’t think that self-regulation can keep

12 up with the entire industry either. So I think

13 everyone has to play a role. 

14 MS. JOHNSON: So last question. Let’s say

15 we’re all going to get together again in five years. 

16 What do you think the key consumer issues would be at

17 that point related to microtransactions? Are we still

18 going to be talking about loot boxes at all? So what

19 are your predictions? 

20 MR. WHYTE: No. 

21 MS. VANCE: No. 

22 (Laughter.) 

23 MR. WHYTE: Yeah, well, if David and I are

24 right, then we’re going to see a spike in gambling

25 addiction. And so, yeah, I think we’ll still be
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1 talking about them, unless we really all team up to

2 take aggressive action. And that -- I don’t know. I

3 wouldn’t give it odds, but I think there’s some good

4 -- there’s some good bones there. So there’s some

5 framework that we could build on if everybody really

6 wanted to come together. 

7 MS. LAITIN: I think we’ll still be talking

8 about transparency, consumer confusion, parental

9 misunderstanding of how things work, kids being ahead

10 of their parents. I don’t know if we’ll be talking

11 about loot boxes, in particular. But as I started my

12 presentation, this is part of -- this is not something

13 that’s specific to video games. The marketplace is

14 getting more complicated. Pricing is getting less

15 transparent. Purchasing is becoming more

16 frictionless, leading to various different problems

17 and some fabulous solutions. 

18 So we’ll be talking about similar concepts,

19 but I have no idea what it will look like. 

20 MS. FOX JOHNSON: Yeah, I agree. I think the

21 technology might shift a little bit, but a lot of the

22 concerns will probably remain the same. 

23 MR. WHYTE: That’s true. 

24 MS. JOHNSON: Well, I want to thank all of

25 you for participating on this panel and everyone who
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1 has been here today. I’m going to turn the podium

2 over to Mary Engle to give some closing remarks. 

3 Thanks so much. 

4 (Applause.)

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1 CLOSING REMARKS 

2 MS. ENGLE: Okay, good afternoon, everybody. 

3 I am Mary Engle. I’m the Associate Director for

4 Advertising Practices here at the FTC. Thank you all

5 for hanging out to the bitter end, and I promise I’ll

6 be brief. 

7 First of all, I would like to thank all of

8 the panelists who appeared today, for the time they

9 took preparing for their presentations and for

10 presenting their research and the insights they

11 provided today. I’ve found it really interesting and

12 very helpful. 

13 I’m just going to try to kind of quickly

14 provide an overview of what we heard today. I think,

15 first of all, we heard that loot boxes are just one

16 type of in-game transaction and that there are many

17 different flavors and varieties of loot boxes. 

18 Loot boxes do have a number of benefits. 

19 They enhance gameplay. They make it possible to play

20 games for free. They help to keep game prices low,

21 pretty much the same price over time despite

22 inflation. But despite these benefits, we’ve also

23 heard concerns about them, about their potential for

24 addictive behavior and the evidence of correlation

25 with problem gambling behavior. 
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1 We heard concerns expressed about whether

2 game companies are engaging in predatory behavior by

3 using knowledge of an individual’s particular game

4 play to maximize the likelihood that consumers will

5 buy a loot box and whether this increases the

6 likelihood of addiction. 

7 We heard concerns about dark patterns being

8 used with games, things like grinding, appointment

9 dynamics and pay-to-win, and other techniques that

10 might increase the likelihood that consumers will

11 actually buy loot boxes instead of just playing

12 without buying them. 

13 We heard concerns that it is difficult for

14 people, both adults and children, to know actually 

15 how much money they’re spending because of the way 

16 the pricing is presented in the games. And we heard

17 that problem gamblers spend a lot of money on loot

18 boxes, and that holds true, even more so, for

19 adolescents. 

20 There were some analogies to baseball cards

21 and whether this is a relevant analogy was debated. 

22 It was pointed out that perhaps not because loot box

23 purchases are more frictionless and are not correlated

24 with problem gambling -- that baseball cards are not. 

25 We heard about research showing that people
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1 buy loot boxes for their functional value, but that

2 that is not inconsistent with their also being linked

3 to problem gambling. 

4 We’ve heard that the gaming community is very

5 diverse, and actually that 65 percent or so of

6 Americans do play video games. But the gaming

7 community has mixed feelings about loot boxes. They

8 mostly feel like that they are like gambling and are

9 concerned about how easy it is for kids to spend money

10 and how hard it is for parents to control this. 

11 Gamers also have mixed feelings about

12 government regulation because they don’t trust the

13 government to get it right and are concerned about the

14 impact any such regulation would have on jobs in the

15 industry. So they suggest instead perhaps guidance

16 and best practices being provided. 

17 We heard a lot of concerns about loot boxes

18 for children, in particular, and a discussion of

19 research showing that parents have very limited

20 interaction with their kids regarding their mobile

21 devices, concerns about internet gaming disorder,

22 where gaming interferes with a person’s daily

23 functioning in terms of work, school or interaction,

24 with relationships, not just in terms of time spent

25 playing games. 
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1 And we heard about the various parental

2 controls that the industry does provide for consumer

3 -- for parents to control how much time or how much

4 money their children spend on games, and as well as

5 the educational information that the ESRB provides. 

6 And, yet, we also heard that it is very

7 challenging for parents to navigate all of these

8 controls and all the different ways and platforms that

9 children may play games, and that there’s -- more

10 parental education is needed. More guidance could be

11 provided on these issues. 

12 There was also a suggestion that there needs

13 to be more research and public health evidence to

14 understand the extent of any problem in this area with

15 respect to gambling or addictive behavior and to help

16 develop solutions. 

17 We heard ESA announce a new initiative to

18 disclose the relative rarity and odds of winning

19 virtual items. That would be put into effect for new

20 games and game updates. This news was generally

21 welcomed, but considered as a good first step and not

22 a panacea to the problem. 

23 There were concerns for people with gambling

24 problems, that odds aren’t going to really matter to

25 them and certainly whether children would understand
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1 that or care about them. There was some discussion

2 about also that the odds of winning would need to be

3 independently verified because the companies have

4 incentive to lie about what the odds of winning are. 

5 They’ll make more money if they do that. 

6 There was also some discussion about how

7 meaningful that disclosure is really and whether --

8 you know, at what point the disclosure would be most

9 helpful to consumers. That point of sale is good, but

10 how about down the road when people are long into

11 gameplay? And also a discussion of really disclosures

12 to parents or other adult players versus disclosures

13 to children, and those being two different kinds of

14 things. 

15 Finally, there was some discussion about

16 whether self-regulation would be enough here or

17 whether legislation would be needed. And we heard a

18 variety of speakers here, yes and yes on both of

19 those. 

20 So the FTC is going to be taking this all in. 

21 We heard a lot of really valuable viewpoints today. 

22 People are also submitting comments online and we’ll

23 be reviewing those as well. So I know we have a lot

24 to look forward to. 

25 And I want to thank everyone, again, for
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1 coming today and, again, to our panelists for

2 participating. 

3 (Applause.) 

4 (The workshop was concluded.)

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1 CERTIFICATE OF TRANSCRIPTIONIST

2

3 I, Elizabeth M. Farrell, do hereby certify

4 that the foregoing proceedings and/or conversations

5 were transcribed by me via CD, videotape or audiotape,

6 and reduced to typewriting under my supervision; that

7 I had no role in the recording of this material; and

8 that it has been transcribed to the best of my ability

9 given the quality and clarity of the recording media.

10 I further certify that I am neither counsel

11 for, related to, nor employed by any of the parties to

12 the action in which these proceedings were

13 transcribed; and further, that I am not a relative or

14 employee of any attorney or counsel employed by the

15 parties hereto, nor financially or otherwise

16 interested in the outcome of the action.

17

18

19 DATE: 7/17/2020 

20 ELIZABETH M. FARRELL, CERT

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