Video games have cemented themselves as one of the world’s preeminent personal pastimes, with interest spanning generations. A 2021 report estimated the video game industry value exceeded US$300 billion,[1] and that value has been projected to reach US$435 billion by 2028 (or earlier).[2]
The video game industry is an ever-evolving ecosystem, providing entertainment for more than just the player. Through various platforms, gamers “stream” themselves playing games to a sometimes massive audience for hours each day. Professional video game players can garner millions of viewers, and in some cases their effective compensation (through salaries, endorsements, and ad revenue) is comparable to that of professional athletes. Hence the recent addition of the neologism “e-sports athlete” to our lexicon. Each year, more and more people turn gaming into their full-time job.
As our lives move more online, we are increasingly likely to find ourselves in this thriving ecosystem. For example, popular video games have spawned movies, TV shows, books, toys, clothing, and even food.
Monetization models
Unlike most other forms of entertainment, video games are relatively unshackled from traditional revenue generation. Broadly speaking, most video games employ one or more of the following models:
- One-time payment: The “traditional” model where the player pays a one-time price for the game. Mobile games are typically priced between CA$5.00 and CA$20.00, and console and PC games are typically priced at CA$80.00. The game is completely self-contained, with no other purchases required (or even available). If the developer wants to continue the story, they do it through a sequel (typically sold as another one-time payment game years later).
- Downloadable Content (or “DLC”) or expansion packs: The game developer releases periodic (often yearly or quarterly) updates to the game’s story and/or adds new mechanics and features. These “expansions” often cost less than the one-time payment price—typically around the CA$20.00–$30.00 price point. Games that are supplemented with DLC or the season pass discussed below are often sold at the same initial price point as a one-time payment game.
- Season or Battle Pass: An alternative or supplement to DLC/expansion packs, a game developer may sell a pass that allows the player to access additional content or features for a limited time (the “season”, akin to a sports season, often lasting only a few months). Some season passes “gate” their rewards behind milestones for the player to reach (e.g., defeat X amount of enemies to unlock Y feature). Like DLC, season passes are typically priced around CA$20.00–$30.00. Some games offer a free battle pass to all players but also sell an enhanced battle pass with additional features beyond the free version.
- Ad supported: The game displays ads (typically banner ads like those found on websites, but some games periodically display “fullscreen” ads). Ad-supported revenue generation is often used in free-to-play games (described below), and are rarely used in games using the traditional pricing model, DLC, or season passes.
- Microtransactions (often called “MTX”): Apart from releasing large amounts of content through DLC or season passes, some video games sell comparatively smaller content at relatively lower prices. Whereas an expansion pack might provide new levels, playable characters, or storylines for the player to explore for the price of CA$30.00, a micro-transaction might provide a player with a limited time boost in power for CA$1.00, or a permanent change to the appearance of the player’s in-game character (often called a “cosmetic MTX”) for CA$5.00, or extend the time the player has to complete a level by 30 seconds for CA$1.00 (“time extension” microtransactions are popular in puzzle games).
- Free-to-play (often abbreviated “f2p” or “ftp”): Free-to-play games are sometimes called “freemium” (a portmanteau of the words “free” and “premium”) games. A free-to-play or freemium game is free to download and play but has additional “premium” content available through payment, generally using one of the other monetization models noted above, such as a season pass or MTX, and may be further supplemented with in-game ads. In some uses of the term, players who play a game but don’t spend any money on MTX, DLC, or the season pass are called “f2p players.”
- Pay for time: In some f2p games, in addition to in-game resources acquired through playing the game, a player’s progression through the game might be limited by another resource: time. For example, unlocking a chest containing desirable items may take a nominal amount of time (perhaps mere seconds or minutes at most) in the earlier parts of the game, but as the player progresses, and as the rewards contained in the chests increase in quality and/or quantity, the “unlock time” may take hours, or even days. Players may be given the option to “skip” the unlock time by paying premium in game currency (purchasable for cash), or sometimes paying with cash directly. The “skip” mechanics are commonly referred to as a form of MTX.
Microtransactions are relatively free of regulation
Over the last decade, the industry has seen an increase in the use of microtransactions—especially in free-to-play games. As a whole, most estimates have the video game industry generating billions of dollars each year off of microtransactions alone.
Though video game developers have increasingly employed microtransactions in their games, the Canadian federal and provincial governments—like almost all governments world-wide—have not yet implemented any form of regulatory regime. Indeed, video game monetization remains virtually unregulated outside existing consumer protection and advertising laws, insofar as those laws may even apply.
And that’s the problem that video game developers will face in the future: existing statutes and case law may prove woefully inadequate to deal with the video game industry. In many ways video games are sui generis. Right now game companies have no choice but to develop games in climates that could, in terms of the regulations within which they are forced to work and design, drastically change in the near future.
Beyond that, if a video game company find itself in litigation, they could see Canadian courts struggling to analogously apply precedents from other industries, or gymnastically interpret decades-old statutes written before video games even existed.
Internationally, most jurisdictions are equally unprepared. In fact, it appears that only a handful of states have begun regulating video game monetization such as microtransactions. Three states, the Netherlands, Belgium, and Japan, have implemented strict regulatory regimes that have effectively banned some video games.
The Japanese government took perhaps the strongest approach by banning an entire game genre called “kompu gacha”, often shortened to simply “gacha”. Gacha games allow players to collect rare items by first collecting complete (“kompu”) sets of lesser-quality items. For example, the player collects (by buying) 25 items A through Y, and is rewarded with the Z grand prize. The collection of the lesser-quality items is often highly randomized, so a player may need to buy hundreds of microtransactions in order to complete the set. The Japanese lawmakers found this type of game to be misleading and unjustifiable, and ultimately banned it in 2012.[3]
Takeaway
In Canada, the future for the video game business is bright while the regulation and legal constraints remain murky. Without monitoring closely when and how governments are seeking to control the industry, as well as how Canadian courts are adjudicating video game litigation, video game companies risk developing products and services that could be open to regulation and lawsuits at launch or soon thereafter.
To stay on top of the latest legal developments in the video game industry, as well as Canadian regulation of video games (including microtransactions and loot boxes), please reach out to the authors Josh Dial and Changhai Zhu.
Josh and Changhai wish to acknowledge their co-authors, Jesse Dias and Jack Yuan, summer students in the Calgary office.
[1] https://www.accenture.com/us-en/insights/software-platforms/gaming-the-next-super-platform?c=acn_glb_thenewgamingexpbusinesswire_12160747&n=mrl_0421
[2] https://www.bloomberg.com/press-releases/2022-02-14/gaming-market-size-worth-usd-435-billion-by-2028-cagr-12-1-zion-market-research
[3] For an unofficial translation of this law, please see https://www.cas.go.jp/jp/seisaku/hourei/data/aau.pdf
