Lentis/Microtransactions in Videogames
The widespread popularity of video games can be traced back to a select few inventors, one of whom is Ralph H. Baer also known as the father of home video games.  Baer invented the Odyssey, which went on sale in 1972 and sold over 100,000 units. Almost 50 years later, Baer's Odyssey has grown into a multi-billion dollar industry with companies such as Sony, Microsoft, and Nintendo all competing to increase market share. As video game revenues continue to soar, so does the cost of producing them. Triple-A is a title reserved for games produced by major publishers. Typically having larger development budgets, triple-A titles are the highest grossing labels. As consoles become more complex, developers are required to produce more code to fully exploit their capabilities. This increase in complexity is the root of rising development costs, however publishers recognize that at the current $59.99 price of a triple-A title gamers would be highly responsive to any increase in game price. Many publishers are turning to microtransactions to bridge this gap.
A microtransaction is any financial transaction conducted online, or in the case of this casebook investigation, conducted within a game. This investigation will explain the incidence of microtransactions in video games and document their reception from the perspective of the gaming community, game developers, and publishers.
In the late 1990's, with the rise of popularity in the internet, people began downloading video game content online. Video game developers and hobbyists would sell or share expansions to PC games as downloadable content (DLC). In 2002, Microsoft released Xbox Live, an online platform for the Xbox, which allowed players to purchase DLC on it. The first microtransaction sold by a major publisher was in 2006 when Bethesda sold horse armor in The Elder Scrolls IV: Oblivion for $2.50. It was made as an experiment to test the market’s reaction to DLC. Most players reacted negatively, saying that $2.50 for an in-game cosmetic item was too much. Despite the negativity, the horse armor became the ninth best selling DLC in Oblivion, and was still being purchased more than two years after its release. Bethesda, as well as other game studios, began using microtransactions more as an extra stream of revenue. In 2008, the iOS store launched on Apple Iphones, and games there used microtransactions as their main source of funding. In the first three years after its launch, iOS apps made over $3.6 billion in revenue, with over 15 billion downloads, and 80% of the revenue coming from mobile games. In an attempt to capture the success microtransactions have had in mobile games, developers added more microtransactions in PC and console games.
Implementation Strategies by Developers
Developers experiment with different microtransaction models in order to appease their shareholders and consumers. These are the three most prevalent ways developers integrate microtransactions in their games.
Loot Boxes are sets of randomized items that players can purchase. Items that are in loot boxes are generally small additions to the game, and are intended to be purchased more than once. Items that drop from them can vary in rarity. Some video games sell loot boxes that contain power upgrades while other games’ loot boxes only have cosmetic items. Loot boxes provide gamers with a sense of accomplishment when “winning” an item, can give a chance to unlock items at a low cost, but can also become addicting for those who continue to purchase boxes until they get a specific item. Because of their potential addiction habits, some countries have set regulations on how loot boxes can be sold. In 2016, China announced legislation that required companies to publish the draw probability of all virtual items. Despite these actions, Loot boxes are very prevelant in video games, appearing in 6 of the top 10 best selling games of 2016.
Resellable Skins are low-cost cosmetic changes to game assets that can be purchased and resold to others while gaming. This type of microtransaction keeps gameplay balanced by not allowing players to buy an advantage, but also promotes transactions. Since skins are tradeable, gambling sites have been created for users to bet and win skins. Counter-Strike: Global Offensive has been at the center of this controversy since the game's gun skins are used as tokens on gambling websites. Since the items are not real currency, gambling with them is legal and unregulated. This has given opportunities for people (including minors) to gamble in areas where gambling is illegal. In 2015, more than 3 million people wagered over $2.3 billion on the outcome of sport matches. Countries like the United Kingdom declared gambling with in-game items illegal. The Washington State Gambling Commission directed Valve Corporation -- the developer and publisher of Counter-Strike: Global Offensive -- to stop facilitating the use of skins for gambling activities. Valve has sent cease and desist notices to sites that use items from their games to wager bets, but believe that since they are not the ones creating the gambling sites, that they are not to blame. Though gambling sites abuse Valve’s microtransaction model, Valve has no intention of making cosmetic items non-tradeable because they believe it creates more user engagement and adds value to the items. Also, Valve has made over $355 million from selling cosmetic skins.
Freemium is a service model for games that are free-to-play but offer additional features for a price. The idea is to have a low barrier of entry and incentivize people to make payments via microtransactions. Freemium games depend on “whales”, a small percentage of players that spend an exorbitant amount of money on microtransactions. Up to 50% of revenue for freemium games comes from .15% of the playerbase. Most freemium games will offer shortcuts to items that will make a user more powerful to incentivise purchasing an item over earning it in game. However, over 50% of revenues were accounted by the top 10 gaming companies: Tencent, Sony, Activision Blizzard, Microsoft, Apple, EA, NetEase, Google, Bandai Namco, and Nintendo. By 2020, the global games market revenue will reach $143.5 billion. The gaming market is one of the U.S.’s quickest expanding markets, and the fastest growing division in the entertainment industry. In 2017, the gaming industry will surpass movie tickets sales by $38.6 billion, and within three to four years, exceed sports earnings.
Gaming Industry Growth
Projected Growth until 2020
In 2016 alone, revenues from video games summed to be $101.1 billion, a 6% increase from the previous years, and is projected to experience a 10.7% increase in 2017.  However, over 50% of revenues were accounted by the top 10 gaming companies: Tencent, Sony, Activision Blizzard, Microsoft, Apple, EA, NetEase, Google, Bandai Namco, and Nintendo. By 2020, the global games market revenue will reach $143.5 billion. The gaming market is one of the U.S.’s quickest expanding markets, and the fastest growing division in the entertainment industry. In 2017, the gaming industry will surpass movie tickets sales by $38.6 billion, and within three to four years, exceed sport entertainment earnings.
As the industry is rapidly increasing its prevalence, so are the implementation of microtransactions. The 2012, EA COO Peter Moore explained that while some games may be free to download, like walking into a store, the content will have to be purchased, and further predicted that microtransactions would become part of all games. This business strategy proved most efficient for EA’s 2017 fiscal year: $1.68 billion, or 58.5% of total revenue resulted from microtransactions. Similarly, Take-Two CEO stated that net bookings were comprised of 43% of microtransactions, and will promote “recurrent consumer spending opportunities.”
Monetization strategies such as microtransactions have received a clear response from the gaming community. Most recently, a triple A developer Electronic Arts (EA) experienced an 8.5 percent drop in stock value after releasing its most recent game Star Wars Battlefront II (SWBII). Shortly after the game’s beta release, reddit user TheHotterPotato posted an analysis in which he determined that it took about 40 hours of gameplay to unlock loot boxes which contain heroes such as Luke Skywalker or Darth Vader. THP also included a spreadsheet with statistics for gameplay minutes required to unlock various other perks as well. The post quickly gained popularity, with more than 10,500 upvotes in reddit’s SWBII community forum until EA’s community team responded: the extended gameplay is meant to “provide players with a sense of pride and accomplishment for unlocking different heroes”. Gamers within the community critiqued EA’s response and made it the most downvoted post in the history of reddit with over 683,000 downvotes. Reddits previously most downvoted post peaked at about 24,000. As a response to outcry from the gaming community, EA removed the loot box system. Hours before the game’s international debut, EA spokesman Oskar Gabrielson issued a statement: “we’ve heard the concerns about potentially giving players unfair advantages...this was never our intention. Sorry we didn’t get this right.”
Reactions on Youtube
Search “microtransactions” on Youtube and the website provides 172,000 videos on the subject. Users such as Dark Jak Gaming, The Act Man, and The Angry Joe Show make regular posts denouncing the use of microtransactions and downloadable content. The comments section of each user is flooded with comments from gamers condemning monetization strategies within video games. In the most popular post, made by Angry Joe, he debates the use of microtransactions in Battlefront II live on camera with EA representative Paul Keslin. Keslin expresses how EA has been receptive to the gaming communities responses and how they are influencing the future of their games. The caption of the video reads “baby steps guys, we are having an effect.”
Although there is dissatisfaction among the gaming community, the financial benefits which contribute to the revenues of companies clearly explain the implementation of microtransactions. While those who are enraged with recurrent consumer spending within games, there are those who agree with the strategy. Those individuals, however, are very difficult to identify. As demonstrated by the Redditt down voting experience, those particular players are scorned by their peers. There is an entire population which needs to be investigated to further understand the impact of microtransactions.
Moreover, there are other markets which need to be explored. There are financial exchanges that occur among players. For example, in Counter-Strike: Global Offensive the interactions have not been regulated and there is a lack of research on the prevalence and impact that such actions have on its users. Further investigation is needed on the psychological effects of microtransactions. Another interesting aspect to consider would be the occurrence of microtransactions among different age groups. This casebook study focuses only on the implementation of microtransactions in video games and the response from the gaming community, but it is recognized that further research is necessary to understand the effect of microtransactions within the gaming industry.