With boxed copies and 'pay per download' games, users make a one-off payment to play the game on their device. The advantage is simplicity – the publisher submits the game to the physical and/or online stores which, in turn, make it available to users and pass the revenues generated back to the publisher (minus a revenue share).
The disadvantage is that once the publisher has received the revenue for the game, the monetisation ends. In addition, the fact that up front charges often discourage users means that developers frequently turn to other monetisation models.
This option works well for some publishers and, provided the game complies with certain content requirements (and labelling rules for boxed copies), the publisher has few legal issues to consider. This is because the physical and/or online stores (rather than the publisher) process the payments from users and interface with them.
Nonetheless, it is useful to have terms and conditions for the game (often referred to as an End User Licence Agreement or EULA) to limit the publisher’s liability and to inform users about what they can and cannot do with the game – particularly important if it features user-generated content. These terms and conditions should also contain certain provisions mandated by the platform providers under their agreements with the publishers.
These include, for example, setting out the period of retention for any personal data held, clearly setting out the lawful basis under which any processing is carried out, as well as being transparent about the transfer of any data to a third party. More care needs to be taken and, potentially, additional measures applied with wider uses of data, particularly where players are more likely to be children.
If games are distributed outside the physical and/or online stores, for example, on the publisher’s website, it is vital to consider the practicalities of the strict consumer distance selling laws. These require, among other things, a refund mechanism – a process that would normally be carried out by the relevant app store.
The use of in-game purchases is now almost universal where the freemium model has become the main route to monetisation. This model involves the sale of game play extras to users in order to add an extra revenue stream. For example, the hugely popular app game Pokémon Go, allows users to purchase additional item storage including "incubators" that hatch eggs and "incense" that increases Pokemon spawning, which each enable users to do something different in the game to help them compete more successfully against others.
The advantage of using in-game purchases as a monetisation model as opposed to the boxed copies and 'pay per download' models is that users are more inclined to play free games. If they like them they will tell their friends, post positive reviews and then make in-game purchases or perhaps even purchase a boxed or 'pay per download' version (the rationale behind so-called 'lite' app games).
The use of in-game purchases, particularly in respect of games which target children, could breach the Consumer Protection from Unfair Trading Regulations 2008. The Office of Fair Trading, now the Competition and Markets Authority (CMA), published guidelines in 2014 that list examples of behaviours that are "more likely to comply" or "less likely to comply" with consumer protection laws. In respect of adverts for games that offer in-game purchases, the Advertising Standards Authority (ASA) has held that publishers must be clear about what consumers can expect from the free element and what impact failure to make ingame purchases would have on gameplay.
The CAP Code has specific provisions on the use of the word "free" (rule 3.23-3.26). The CMA has referred several online games to the ASA, for example Mind Candy and Moshi Monsters, for unfairly targeting children through the use of games labelled as “free” but requiring considerable levels of in-app purchasing for the game to operate to its intended capacity. In addition, inappropriate use of the word "free" is also on the blacklist under the UK Consumer Protection and Unfair Trading Regulations 2008 and will be deemed unfair.
Publishers are, therefore, advised to make it clear to users before the point of purchase (as well as within the game itself) the extent to which in-app purchases are required to use the game or, alternatively, to explore other monetisation models. They should be mindful of describing games as "free" where they require extensive in-app purchasing.
Fortnite is a prime example of a game with in-game purchases that has encountered some controversy involving children and spending habits.
The subscription monetisation model can be lucrative. Publishers such as Blizzard (for example, with its game World of Warcraft) have released games where users need to pay subscription fees to play them.
The advantage is that the subscription monetisation model provides regular income for publishers although it does require investment to maintain high quality, fresh content and compelling gameplay to retain user loyalty.
If a publisher sells subscriptions direct to users, for example on its website, it is (again) important to consider the practicalities of the strict consumer distance selling laws.
In the context of app games, it is often the case that publishers use the subscription monetisation model to encourage users to subscribe on their website (rather than on or via the app itself). This enables the publisher to keep 100% of the subscription fees and circumvent the revenue share taken by app stores.
Nonetheless, the app stores have strict rules which form part of their agreements with publishers – for example, if a publisher of apps on the iOS platform allows users to subscribe outside the app, the same (or better) subscription price must be offered inside the apps.
The use of links in the apps which allow users to purchase content or subscriptions outside the app is also forbidden, making the customer journey somewhat counterintuitive and, perhaps, impacting conversion rates. App stores will almost certainly remove any apps which contravene the rules.
Publishers should also be careful to comply with consumer protection rules when auto-renewing subscriptions. Users need to be given adequate notice and the chance to opt-out prior to renewal.
Another option is to embed small banner ads and other forms of advertising into games. In the context of app games, for example, there are many different ad networks to choose from including AdMob, Adfonic and BuzzCity. It is important for publishers to choose an ad network (or number of ad networks) that suit their requirements, target market, geography and budget.
The industry standard is for the publisher to be paid on a 'cost per click' basis – this is where the advertiser pays for each active response from a user to their adverts such as clicking through a banner to the advertiser’s site.
The advantage is that the revenue generated from integrated advertisements means that games can be distributed for free which, in turn, can generate more downloads and, consequently, more advertising revenue for the publisher. This is the monetisation model in the 'lite' version of several app games such as Rovio’s Angry Birds.
The legal issues are similar to those in respect of ad networks used on websites. It is advisable for app game developers to check their agreements with the ad networks to make sure that advertisements appropriate for the app and the target audience are served within it. The ad network should be under an obligation to vet the advertisements and not display them within the app from websites that, for example, sell counterfeit goods or illegal services.
The app developer will often seek indemnities in case of third party claims (although no legal contract will be able to compensate adequately for serious reputational harm to the publisher, nor for any criminal liability it might face in extreme cases).
Sponsorship, where a game is developed to generate awareness of the sponsor’s brand, is a common monetisation method for browser-based and app games. The game publisher will often receive a contribution towards the development costs at the start of the project which ensures a profit before the app has even been launched. In return, the developer features branding opportunities within the game, often to the sponsor’s specification.
For example, H&M’s sponsorship of the MyTown app game, enabled users who checked in to H&M stores to earn points that could be used to purchase branded H&M virtual products in the game.
It is important to have an agreement in place between the publisher and the sponsor. This agreement should make it clear who owns the intellectual property in the game and to what extent each party can market/ advertise it (and develop sequels).
The publisher and sponsor also need to set out their respective payment obligations clearly – the sponsor might pay a one-off fixed fee or otherwise pay the publisher a revenue share generated from sales through the game.
Loot boxes provide players with the opportunity to pay to open a ‘box’ and acquire an unknown quantity and quality of in-game items for use within the game. The UK Gambling Commission has identified loot boxes as a potential risk to children and young people.
In the case of loot boxes specifically, a key factor in deciding whether a gaming practice crosses the line of what is and is not gambling and presents a risk to people is whether in-game items acquired “via a game of chance” can be considered money or money’s worth.
In practical terms this means that where in-game items obtained via loot boxes are confined for use within the game and cannot be cashed out, they are unlikely to be caught as a licensable gambling activity. There is a lot of complexity and a lack of clarity in this area.
Many parents are not interested in whether an activity meets a legal definition of gambling. Their main concern is whether there is a product out there that could present a risk to their children. The Gambling Commission is, therefore, concerned with the blur between video gaming and gambling.
Where a product does not meet the test to be classed as gambling but could potentially cause harm to children, parents will undoubtedly expect proper protections to be put in place by those that create, sell and regulate those products. It is a difficult balance for the Gambling Commission to manage moving forward and we may see enforcement strategies continue to develop in this area.
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The video games industry continues to enjoy significant growth, with revenues growing at double-digit rates since 2012.
1 of 6 Insights
Many of the issues we have covered in this month's edition of Download also apply to eGaming, but there are additional factors to be considered, as well.
2 of 6 Insights
Following a series of high profile events across the globe, UK games workers are seeking greater recognition of their employment rights.
3 of 6 Insights
The use of in-game purchases has become increasingly popular. This monetisation model involves the sale of game play extras to users in order to add an additional revenue stream. For example, the hugely popular battle royale game, Fortnite, was one of the highest grossing video games of 2018 despite being free to play.
4 of 6 Insights
It is becoming increasingly common for games platforms to have User Generated Content (UGC) systems integrated into the game itself, and to allow users to post UGC in chat forums or pin adverts to the platform.
6 of 6 Insights