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Thursday, September 6, 2018

EA’s Failed In-Game Moneymaking Strategy Proves that Consumers Remain the Most Effective Regulators of Markets

What can we learn from EA’s experience? Ultimately, there’s no such thing as an “unregulated” market.

The outcry over so-called “loot boxes”—basically a virtual currency in video games that allows users to acquire virtual items and upgrades—shows clearly that calls for regulating the video game industry aren’t going away any time soon.

In fact, loot boxes and other microtransactions are just the latest in a long line of controversies that have attracted policymakers’ attention: whether it’s a debate about violence in games, or tax breaks for developers, or the ethics of sponsored content, each drama brings with it further demands for regulation and censorship. Fortunately, many of these proposals never come to fruition. Unfortunately, their past failures haven’t stopped politicians and regulators from periodically whipping public opinion into a frenzy over the alleged dangers of gaming.

Despite these constant threats, however, the video game industry has proved repeatedly that consumers, not governments, make the best regulators.

Pay to Win?

Microtransactions are a case in point. They’ve have been around for several years, and have always had vocal critics. But the controversy surrounding them came to a head with the release of EA’s Star Wars: Battlefront II.

Gamers complained that microtransactions encouraged “pay to win” tactics rather than providing a level playing field.

Battlefront II placed major emphasis on loot boxes, rewards players could use to win digital content that provides in-game advantages. Initially, loot boxes could be purchased using either real-world money or by achieving specific objectives in the game. Technically, no one was forced to buy them; however, players faced a trade-off between spending money and spending time to unlock the loot they wanted. And because everyone wanted to benefit as soon as possible, there was a strong incentive to take shortcuts by spending money rather than grinding.

Numerous criticisms have been raised against the loot crate payment system. Gamers complained that microtransactions encouraged “pay to win” tactics rather than providing a level playing field. Others objected to paying more for loot after having already paid full price for the game itself. And most notably, legislators in several countries declared that loot boxes were a kind of gambling that encouraged wasteful and even addictive spending habits, especially among children.

While I don’t find this last claim plausible, there is certainly room for debating what makes for a fair gaming experience, as well as what developers should reveal in advance about the real price players are expected to pay, and how they will pay it, and exactly what they’ll be paying for. So while I think the reaction to loot boxes was exaggerated, I do understand why some players were upset.

Government Regulation of Loot Boxes Is Unnecessary

The problem was already being solved by the most relentless and effective group of regulators there is—consumers.

My main point, though, relates to the regulatory aspects of the story. Whatever their merits, loot boxes caused an uproar among gamers and policymakers and inspired numerous calls for legislation to limit or even ban them. These efforts were not only misguided economically, but also unnecessary: as politicians were scrambling for the spotlight in order to demand action in response to their (unproven) allegations of predatory marketing, the problem was already being solved by the most relentless and effective group of regulators there is—consumers.

What so many politicians and even gamers missed was the common-sense fact that even enormous companies like EA are not entirely immune to the demands of consumers. When Battlefront II was released, many players did exactly what unhappy customers should do: they refused to buy it, rejected the loot box scheme, and started an extremely vocal boycott of EA. What began as a short-sighted creative decision to pad the company’s bottom line quickly turned into a financial disaster.

In response to early criticism, EA attempted to tone down the loot box mechanics before the game was released, but it was already too late. In the following stock market chaos, EA lost as much as $3.1 billion in shareholder value (close to 10 percent of its market cap). And although it did try to calm investors by claiming its revenue would not be substantially affected by the change, inevitably, it was.

Battlefront II fell between one and three million copies short of its early sales targets, and came up several million copies short of the sales numbers of its predecessor in the franchise. Unsurprisingly, EA quickly began fully dismantling the loot box system, eventually reworking the game’s progression system and eliminating all monetary payments for rewards.

No Such Thing as an Unregulated Market

EA’s Chief Design Officer Patrick Söderlund has since explained that the company has learned its lesson, and will be taking steps to avoid this kind of fan backlash in the future:

I’d be lying to you if I said that what’s happened with Battlefront and what’s happened with everything surrounding loot boxes and these things haven’t had an effect on EA as a company and an effect on us as management… We can shy away from it and pretend like it didn’t happen, or we can act responsibly and realize that we made some mistakes, and try to rectify those mistakes and learn from them.

Exactly how the company will change its revenue models remains to be seen, but it’s likely that microtransactions and loot boxes will continue to be dialed back, at least for gameplay-related content. In fact, this is already happening with titles from other developers, including Monolith’s Middle Earth: Shadow of War, which has also removed microtransactions in response to fan criticism.

What can we learn from EA’s experience? Ultimately, there’s no such thing as an “unregulated” market: either businesses are regulated by consumers, or they’re regulated by government. The loot box saga has already shown how one of the largest developers in the world can be humbled by its customers without the “help” of politicians or new legislation. There’s a simple lesson here for gamers: not every bad decision by a developer needs to be “fixed” by government.

  • Matthew McCaffrey is assistant professor of enterprise at the University of Manchester and editor of Libertarian Papers.