Players have long been able to buy virtual items with real money in video games, such as special weapons and features. But Nintendo raised the ire of parents and regulators in 2018 when it added so-called loot boxes—a virtual lottery for in-game items—to its kid-friendly Animal Crossing: Pocket Camp.

That same year, the US Federal Trade Commission said it would investigate loot boxes, which critics liken to a slot machine or a scratch ticket that’s more accessible to children. The video game industry pushed back hard, arguing that loot boxes are an integral part of the strategy and skills players use to compete.

“People are thinking about ways to design policies and products so you can actually engage with the product in more responsible ways without getting people too overinvolved in playing and spending.”

A new paper by Tomomichi Amano, assistant professor at Harvard Business School, and Andrey Simonov, associate professor at Columbia Business School, analyzes the loot box business using data from millions of players. Loot boxes generate $15 billion a year revenue for gaming companies. But 90 percent of that money comes from a small group of particularly in-game-spending-obsessed customers, known in industry parlance as “whales,” who make up just a small percentage of players.

Regulators’ and consumer protection groups’ concerns are justified for whales, for whom opening loot boxes is an in-game casino that has little to do with the game itself, the authors find. But those worries do not apply for the vast majority of the players, they add.

The results suggest that companies generate revenue by exploiting behavioral biases of whales, leading them to overspend on loot boxes. Given the concentration of overspending among whales, spending caps are the best way to rein in loot boxes and protect consumers, the authors suggest.

The work resonates beyond entertainment to offer insights for the many industries facing regulatory pressures and weighing business models that broadly work, but that trigger occasional misuse and ethical dilemmas. The duo’s work also provides a window into what data-driven regulation of digital platforms should look like in the future—deeply grounded both in the analysis of consumers behavior on the platform and complementing existing regulatory standards.

“What’s fascinating about this category is that people are thinking about ways to design policies and products so you can actually engage with the product in more responsible ways without getting people too overinvolved in playing and spending,” Amano says.

Analyzing actions of millions of gamers

Roughly two-thirds of Americans play video games, from Fortnite to Pokémon, while the number of players globally tops 3 billion, the paper says. “People don’t realize how pervasive games are,” Amano says. “They are larger than music and movies combined.”

Amano and Simonov analyzed the decisions made by 2.5 million players of a free-to-play Japanese mobile puzzle game on whether to open loot boxes and pay money. Players advance in the game, which has 173 game stages, by building up their virtual characters, using either in-game or real money to purchase the loot boxes. The loot boxes are big business, amounting to 96 percent of in-game revenue.

“When we got the data, we were fascinated by how complex the games are,” Amano says, pointing to the “multiple stages and multiple forms of currency” used in the puzzle game and in many video games now. “There is an elaborate story to get you into this world.”

The thrill of the loot box

Part of the thrill of opening loot boxes for whales is the randomness of what they will find inside, which can be similar to the draws of gambling, the paper notes. The authors find that whales were more likely to rapidly open one box after another, suggesting that they weren’t carefully evaluating whether they needed to open more loot boxes. A “rare” outcome can trigger a feeling akin to the one a gambler gets hitting a slot machine jackpot.

Crunching the numbers, Amano and Simonov found that while the whales were by far spending the most money on loot boxes, advancing and succeeding in the game was just a tiny part of the overall draw for them, or 3 percent.

By contrast, for pretty much all other players, 90 percent of their motivation for opening the loot boxes was tied to the actual play of the game, redoubling their efforts to advance after finding valuable items in the loot boxes. In other words, the majority of players did seem to make more informed, calculated purchase decisions.

A patchwork of regulation

Loot boxes—and whether they may simply constitute an addictive form of gambling for some players—are now being debated by regulators across the world.

Belgium has banned all loot boxes, while the Netherlands has banned some, arguing they are a game of chance, the paper finds. China has asked game producers to disclose to players the odds they face in finding different items before they open a loot box.

New Zealand and Poland have ruled that loot boxes are not gambling, while the United Kingdom and the United States are still exploring the issue.

Amano and Simonov ran simulations based on a complete ban on loot boxes. They found a more than 23 percent drop in the enjoyment and satisfaction on part of the average, non-loot-box-obsessed player. Revenue for the gaming companies would also plunge under this scenario.

However, simulations that used a series of spending caps produced better results. A $500 spending cap, for example, would preserve most of the satisfaction with the game on the part of whales, while also enabling the company to hang onto 85 percent of its revenue.

Lessons for regulators and gaming companies

“Video games provide an amazing sandbox to study consumer behavior on digital platforms, as well as the effects of product and platform design on this behavior,” says Simonov. “While the video game market is large in terms of consumer expenditures, and even larger in terms of the attention share it captures, understanding why consumers engage with digital products is important beyond this market—for instance, gambling-like motives also drive media and entertainment consumption.”

“It’s a balancing act between different types of consumers, and realizing that limited usage of one product feature has repercussions for how consumers engage with a product overall.”

As more digital products and services leverage the ability of technology to draw and engage, the authors anticipate that more firms will soon face the challenges of squaring how to monetize their products while making sure consumers use their product in safe and healthy ways.

“Our simulations of loot box bans suggest that simply banning certain product features can end up harming the enjoyment that the majority of people obtain from a product. It’s a balancing act between different types of consumers, and realizing that limited usage of one product feature has repercussions for how consumers engage with a product overall,” says Amano.

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Image: iStockphoto/Sabrina Bracher