The post is authored by Vadita Agarwal, a 3rd year B.A.LL.B.(Hons.) student at the West Bengal National University of Juridical Sciences, Kolkata.
In the first part of this blog, available here, the author introduced the recent IT Rules, 2021 and delved into a discussion on the meaning of microtransactions and self-regulation for the online gaming industry.
4. THE ROAD AHEAD
A. LESSONS FROM JAPAN
Japan’s case is contextually relevant since it matches India in the significant criterion that neither country recognise microtransactions in their gambling laws. This is different from countries like Belgium or the Netherlands where loot boxes are specifically classified as gambling and thus outlawed.
Named after vending machines which dispense random toys, the ‘Gachapon’ has been replicated by Japan in virtual games, making it one of the most lucrative systems of microtransactions in the world. The ‘gacha’ game ‘Puzzles and Dragons’ became the first mobile game ever to earn USD 1 billion in revenue. Following allegations of development of a ‘shadow market’, there was a strict crackdown by the Japanese government, leading to an outright ban of multi-layered microtransactions in 2012. Self-regulation of the video game industry which followed post-ban was now limited in the sense that it was already under Japan’s National Consumer Affairs Agency (‘CAA’). When the CAA stepped in, share prices of some of the most popular games plunged, leading to a loss of nearly USD3.8 Billion.
Japan is a clear example that failure to self-regulate in time can lead to interventions by the government which drastically alter the market dynamics, potentially to the detriment of the players in an industry.
Additionally, microtransactions do not fit the definition of gambling under Japanese law. The regulation of these microtransactions takes place through a consumer welfare approach and does not fall under the prohibition of gambling.
The IT Rules suggest inclusion of criteria such as protection of children and curbing risks of financial loss in the self-regulatory framework. These are sufficient to establish regulations which protect the interests of consumers, rather than necessarily looking towards amendment of the Gambling Act.
B. PARAMETERS FOR REGULATION – BALANCING INTERESTS
There are primarily two parameters that any future regulation must keep in mind to prevent either the players or game developers from being unfairly disadvantaged. First, differentiating between downloadable content (‘DLC’) and microtransactions and second, incorporating isolated purchases into the regulatory framework.
I. Differentiating Between DLC and Microtransactions
Following demands from US Senator Maggi Hassan regarding regulation of loot boxes, in 2018, the Entertainment Software Rating Board, (‘ESRB’) started attaching the label ‘In-Game Purchases’ to all games where items can be purchased using real-life money. The problem with this classification was that now, games with all forms of purchases such as DLC would now carry this label. Often comprising additional levels or quests, a DLC is fundamentally different from a microtransaction like a loot box. The conflation of the two under a single label is a way for the ESRB to evade responsibility, a move which has been widely criticized in the gaming community.
With a DLC, players can only experience the additional levels if they have the base game without any add-ons. Unlike in a DLC where the players know what they are purchasing, microtransactions take the payment first before revealing the outcome. Effectively, games like Overwatch are designed to frustrate players by giving them the same reward multiple times and stuffing loot boxes with hundreds of low-value items. The difference between DLCs and microtransactions is further compounded by the fact that while DLCs are limited in number, the lure of loot boxes can impose unlimited costs on the player.
Self-regulatory bodies like the ESRB, as demonstrated earlier, have failed to make consumers cognizant of these differences. Any regulations adopted in India, in order to be effective, necessarily need to differentiate between the two.
II. Incorporating Isolated Microtransactions in the Regulatory Framework
Another relevant consideration in regulating microtransactions must be whether the contents of a loot box hold value in the real economy or not. To elaborate, some games give players the option to trade items between players and convert them into ‘platform’ money which have real-world value. When this form of value conversion is allowed, microtransactions get ‘embedded’ into the economy. Conversely, when the value of microtransactions is limited to the game, they are ‘isolated’ from the economy.
When considering this within the definition of gambling in most countries, which requires gamblers to win something with monetary value, the only lootboxes which are covered under this definition are those which are bought with real money and are embedded in the real economy. Thus, even if microtransactions take place with real-money, they can be excluded from legislative control merely because they are unsellable and have no value in real economy. This explains why some games with the largest player-base such as FIFA and Overwatch, prefer to adopt this model. India’s gambling laws which don’t cover virtual games are a far cry from covering the nuances of this model and outlawing them.
Notably however, inclusion of the category of ‘online real money game’ in the recently notified IT Rules sheds some clarity on this subject. Comprising games in which the user makes a deposit in cash or kind with the expectation of making monetary winnings, this definition can be understood to include embedded microtransactions. Among additional rules regarding verification of these games, the IT Rules stipulates that only those online real money games which don’t involve “wagering on any outcome” are permissible to be registered.
With no definition of a wager, this gives a free hand to self-regulators to exclude games of skill from verification due to having elements of a wager. More importantly, unless the understanding of “any prize, in cash or kind” is read expansively to include prizes in the game which have no value in the real economy, isolated microtransactions still remain outside the legislative or self-regulatory framework. Thus, consideration of these criteria in developing regulations is crucial to filling the gap in legislation and preventing developers from exploiting potential loopholes in the regulatory system.
The rapidly evolving nature of online gaming has disrupted decades-old perceptions of how the industry functions. In the light of these changes, self-regulation needs to be welcomed by game producers as a feasible mechanism to maintain independence and avoid excessive interference by the government. The end result of effectively regulating microtransactions, ideally, can result in a scenario where players, particularly children, are wary of overspending on video games and the avenue of microtransactions is not completely blocked for game developers either. In order to harness these benefits, self-regulation needs to be adopted at the earliest. Attempts by regulators such as the ESRB to evade responsibility using deceptive labels like ‘In-game purchases’ is unsurprising, considering the quantum of profits that microtransactions generate. However, the average consumer is unlikely to sympathise with these motivations when it comes at the cost of replacing skill with money in a video game. With these conflicting interests in mind, the paper has attempted to create a framework which considers the needs of both the players and the game developers.
The IT Rules have been welcomed by the gaming industry in India, indicating a willingness to comply with the rules laid down. With the discourse around microtransactions piquing interest internationally, this is a crucial opportunity for India to regulate online gaming, while maintaining autonomy in the industry.