Video Game Economics

Global revenue estimates of the video game industry from 1971 to 2018.

Introduction

The modern day video game industry is one of the most profitable and fast-growing industries in the world. With over $180 billion dollars of generated revenue in 2021 and 3 billion players, video games are cementing themselves as a staple among recreational activities, and with the help of the recent covid-19 pandemic, the numbers only continue to grow. Despite the seemingly overwhelming amount of positives that have come from this new industry, however, there are ethical issues that come with this success. This article will be focusing on the ethical economic dilemmas that video game companies face when marketing and designing their products.

History

Video games emerged in the 1970s with the introduction of Atari. Games such as Pong and Space Invaders swept the world, generating over $2 billion in revenue in the first 10 years, primarily through arcade consoles in malls, restaurants, and storefronts. From 1978-1981, revenue increased 18 fold, sky rocketing from around $50 million annually to $900 million, quickly surpassing pop music and Hollywood combined.

With the introduction of the Nintendo Entertainment System in the 1980s, video games continued to boom - a trend that continued through the 1990s when playstation was invented. Revenue only increased, and at the end of the century, video games were generating over $30 billion annually. The 1990s also saw huge changes in graphics. 3D polygon graphics became the standard for all games, and the introduction of the internet allowed for multiplayer and competitive modes to exist.

The 2000s served as the era of smart phone gaming with the introduction of smartphones. iOS and Android devices became popular modes of gaming, boosting the industry's revenue even more. Mobile gaming continued into the 2010s, surpassing both console revenue and personal computing gaming. With a market size of several billions of dollars, eSports (competitive gaming) was birthed, only increasing the popularity of video games.

The 2020s have seen the peak of the industry, with an average annual revenue of over $175 billion. The covid-19 pandemic resulted in a 20% market growth from 2019-2020, and even though the pandemic caused several issues such as the global semiconductor chip shortage, the video game industry has experienced net positives from covid.

Ethical Concerns

Although video games provide endless hours of joy and excitement, there is a dark side to the billions of dollars the industry generates. Ever since the industry was created, there have been countless ethical debates surrounding the subtopics below. From addictive engineering to targeted advertising, the video game industry has been under constant accusation of unethical practices.

Audience & Design

The first component of any ethical debate about video game economics is the audience these companies sell and target their products towards. It is no secret that gaming companies design their games to be extremely addictive. Through systems like level-based rewards and loyalty programs, video games are specifically engineered to keep their players returning. Similar to other addictions, video games cause an instant release of dopamine in the brain - the chemical in the brain that "makes you feel good". Since there are no limits on when you can play, video games become a dangerous source of this chemical. In a study done by the mayo clinic, video game addiction has similar effects as tobacco, alcohol, or drug addiction. Video game addiction can damage your health, both mentally and physically, as well as relationships. It has been linked to other symptoms, such as insomnia, depression, loss of social skills, anxiety, and behavioral problems. These symptoms exist because the brain processes virtual scenarios as if they were real. For example, if a game depicts a violent scene, the body of the gamer will react accordingly. This is where the argument stems from. If it is known that video games cause these negative effects in users, why do game companies continue to try and keep players coming back? Don't they have a responsibility to manage their product in a way that is not harmful to society? The answer is not as simple as it seems. While it's true that these games have negative side effects, these companies are ultimately selling a product so it is hard to fault them for trying to maximize consumer engagement and retention. Additionally, almost all modern video games come with warnings about excess screen time and setting daily limits. While none of these are strictly enforced, the companies do provide information about potential harm that these products can cause as well as ways to mitigate this harm.

Microtransactions

The large majority of video games on the market are free, meaning there is no upfront cost to play the game. However, nearly all of these "free" games offer micro transactions, or in-game purchases for virtual goods such as cosmetic upgrades, extra game currency, or downloadable content (DLC). The ethical debate here is that most of these free to play games that offer these transactions make it almost impossible to play or reach a certain level without an in-game purchase. Games will commonly give heavy advantages to players who have purchased these micro transactions, creating an imbalance between the gamers who purchase these, and those who do not. This is especially dangerous in mobile gaming, as a vast majority of mobile gamers are children. This is an issue because children are not equipped with the same knowledge as adults, and cannot clearly understand what is going on. In a study done by the UK Royal Society for Public Health, it was estimated that 1 in 10 children go into debt over these micro transactions. When surveyed about this behavior, the most common answer that children provided was that they wanted to impress their friends, which is exactly what video game companies design these upgrades for.

Gambling or Gaming

Another debate that has gathered significant attention over the last 10 years is the loot box system in video games. Loot boxes are items that can be purchased for money that grant users a random item. These items typically are categorized into different rarities, with the most rare items having drop chances of under 1%. While statistics about these randomized loot boxes are published, this system has been directly linked to addiction and severe debt. Like a slot machine, you pay money and hope to gain a grand prize, but the majority of the time, you'll end up with a worthless item. The entire system is essentially gambling, only being classified otherwise because of the fact that these items are technically classified as objects that are "not money or money's worth". In 2018 alone, the U.S. spent over $30 billion on these loot boxes, and that number is only increasing.

Industry Examples

EA and Starwars Battlefront

One of the most popular and well-known cases of video game economic controversy and regulation was related to Electronic Arts (EA) and one of their video games, Starwars Battlefront II. The base game was sold for $80, which is already significantly over market average for the cost of a game. On top of the high price tag, the game included several in-game upgrades which could be obtained by earning "crystals" via multiplayer combat, or by purchasing loot boxes. Shortly after the game's initial release, players complained that the crystal system was set up in a way that forced players to purchase loot boxes if they realistically wanted to obtain these upgrades. By limiting the amount of crystals players could earn via multiplayer combat, EA received unprecedented backlash since the loot boxes awarded players many more crystals that the actual game itself. After many legal threats and player dissatisfaction, the company eventually removed the in-game purchasing system altogether, but not without opening the door for other companies to do similar things. Many economists and players point to this as the beginning of the video game industry's modern economic battle.

Supercell and Clash of Clans

To the surprise of many, the mobile gaming market outgrew and surpassed the console market, with an estimated market size of $118.34 billion in 2022. Clash of clans is commonly known as the most popular mobile video game of all time, with annual revenue peaking in 2015 at $1.3 billion. The object of the game is to build a powerful base and army and to attack other players and defend against rivaling armies. Although the game's popularity and revenue have decreased since then, the game still generates around $500 million per year. Similar to Starwars Battlefront II, Clash of Clans features an in-app "gem" currency. These gems can be used to enhance a player's base, greatly speeding up upgrade times for certain elements of a base. For example, players can build cannons to help defend their base against foes. These cannons can take up to 20 real life days to upgrade. During this upgrade period, the cannon is inactive, leaving a base vulnerable to attack. The only way to speed up this process is with gems. While players may earn gems "naturally" through playing the game, the cost of expediting an upgrade is so high that it is only feasible to do so if a player has purchased gems in a micro transaction. Though the game is free to play, like most of these games, players who spend the most money will have the strongest bases and armies, meaning that the only way to "be good" at the game is to spend money.

Riot Games and League of Legends

League of Legends is the most popular PC game of all time, with over 8 million active players daily. Since its release, League of Legends has grown exponentially, going from earning $1.29 million in 2009 to $1.63 billion in 2021. The League of Legends world finals had over 5 million viewers last year, making it one of the most watched events of the year. Unlike the previous two examples, League of Legends is a game that does not reward the purchasing of in game items; they have no effect on the actual game and are purely cosmetic. However, League of Legends generates the most revenue out of any video game annually. Despite the fact that there is no advantage to purchasing in game items, Riot Games has been heavily accused of using predatory tactics in order to exploit players. League of Legends' in-game currency is called RP, or Riot Points which can be used to purchase cosmetic upgrades for characters. The cheapest of these "skins" sells for 450 RP. The smallest purchase a player may make is $5, which grants 490 RP. If a player were to purchase this package and then purchase the only thing they can buy with that, the 450 RP skin, they would have 40 RP left over . This means that unless a player buys more RP, their leftover points will be useless, giving Riot a significant portion of the money back since the RP will never be used. Items are also priced strategically such that a bundle of skins may be priced at 1000 RP when there are only packages that give either 950 or 1500 points, forcing the user to go up a level even though the item they desire does not require that many points.

Epic Games and Fortnite

Taking the early 2000s by a storm, Epic Games' Fornite Battle Royale swept the market, earning over $20 billion in revenue from 2018-2021. This game is another Free-to-play game, but the concept of a "battle pass" gained significant popularity because of Fornite. A Battle Pass is an in-game purchase that players can make that grants them access to rewards based on how much they play the game. For example, in Fornite, players earn cosmetic upgrades and XP each time they surpass a battle pass threshold, either determined by time played or XP earned. This form of micro transaction both encourages players to spend more time on the game as well as spending. One of the most heavily criticized games, Fornite received heavy complaints about this system. The company was labeled exploitative and manipulative of children under several lawsuits, the biggest being a $520 million lawsuit in which Epic Games was accused and found guilty of manipulative market practices in order to trick gamers into making purchases. This lawsuit gained additional popularity due to the average age of a Fornite player being significantly lower than that of the average game, meaning their tactics were targeted specifically to children. The case, led by the Federal Trade Commission, forced the company to refund $245 million to players world-wide. FTC chairwoman Lina M. Khan said that "Protecting the public, and especially children, from online privacy invasions and dark patterns is a top priority for the commission, and these enforcement actions make clear to businesses that the FTC is cracking down on these unlawful practices." This was the largest penalty the FTC has ever collected. Additionally, the FTC claimed that “Fortnite’s counterintuitive, inconsistent, and confusing button configuration led players to incur unwanted charges based on the press of a single button. These tactics led to hundreds of millions of dollars in unauthorized charges for consumers.” According to the case, Fortnite's own employees raised concerns about targeted marketing and these manipulative tactics back in 2017, when the game was launched. Despite these complaints and concerns, the company did not act. Since 2017, it was cited that Epic Games ignored over 1 million complaints, making it the largest video game case ever. Since the lawsuit, Epic Games has revamped their game and algorithms, and players have been refunded portions of money spent on the game. This lawsuit has brought several tactics into light, and the FTC now closely monitors video games and their in-game purchase systems.

Takeaways

Video games have become one of the most popular forms of leisure. Accessible to anyone who has internet and a device, video games allow for an individual to be transported to a new world. With the new introductions of virtual and augmented reality, these games are becoming increasingly realistic and addictive, characteristics that also drive up cost for consumers. The games are programmed to maximize user retention and spending. While a player may not realize it, the goal of video games to the company that makes them is to maximize revenue. Games feature systems and designs that induce spending, though sometimes so subtly that a user may not realize it until they find themselves pulling out their credit card for the 3rd time in a week. While no game actually forces a player to spend money, many heavily encourage and almost require it, resulting in a multibillion dollar industry.

References

Karlsen, F. (2022). Balancing Ethics, Art and Economics: A Qualitative Analysis of Game Designer Perspectives on Monetisation. Games and Culture, 17(4), 639–656. https://doi.org/10.1177/15554120211049579