Regulation May Alter MMO Landscape, Part 1

by: Troy Racki

Online game customers are putting a new spin on the old rule of thumb that one unhappy client will tell 10 people about his or her negative experience. Now it appears that purchasers of virtual items are taking their complaints a step further, to their governments -- and with startling results. On May 9, the Wall Street Journal reported Japanese mobile video game firm Gree Inc. would discontinue certain online games that involved the purchase of virtual items that utilize a chance factor akin to lottery gaming.

On Gree properties, as with many other online games utilizing micro transactions, customers buy mystery packages that, when opened, reveal virtual objects worth little to a lot depending on their rarity. Shares in Gree slid 23% after the specific virtual game mechanic known as "kompu gacha" ("complete gotcha") was ruled in violation of Japanese law. Other developers using the mechanic, and likely to see an impact on their game revenues, include Konami, Klab, Namco Bandai (OTC:NCBDF), Sega, and Zynga (NASDAQ:ZNGA). The ban has not yet gone into effect but is expected to shortly.

While an extremely lucrative income stream for game developers, the sale of such mystery item mechanics like "kompu gacha" has drawn criticism both because of its close similarity to real-life gambling and the fact that many online game users are minors. Whereas Vegas strip locations refuse entry to children, the majority of online games ignore the age issue or resort to unconfirmed "of age" check mark boxes. Also, despite many online games having user agreements that forbid the selling of virtual items between individuals for real-life currency, this has not prevented highly sought after objects from appearing on auction sites like eBay. Since the contents of some virtual $1 mystery package items sell on the online auction house for $100 or more, the result is essentially gambling.

Power to the People

The source of the "kompu gacha" crackdown was a direct result of increasing complaints to Japan's Consumer Affairs Agency. In 2010 only five complaints were filed against the business model, then 58 in 2011 and up to 688 during the last four quarters. Parents submitted complaints after their children racked up massive charges, in one case more than $5,000. Another child was able to burn through $1,500 in only three days.

It is easy to see why players can be compelled to purchase. Some games opt to display global game announcements whenever a player reveals a high-value rare prize, inciting jealousy or renewed feelings that one's luck may change. Others readily hand out part one of a two-part package to entice participation. For example, players are freely given a treasure chest but in order to open the chest, a key must be purchased with real-life currency from the game's micro transaction store.

The mystery package mechanic is very popular in Eastern cultures where gambling is more widely accepted than in the West. For the many free-to-play games that generate all their income through their micro transaction stores, sales of such mystery packages amount to a large portion of some games' operating revenue -- sometimes up to half of total sales. One such example is Perfect World Entertainment (NASDAQ:PWRD), which retails the mystery package system across most of its online intellectual properties, including the Western game "Star Trek Online."

European Investigation Rumors

Since February, "Star Trek Online" has been experiencing the transition from West to East after its developer, Cryptic Studios, was purchased by Perfect World. Perfect World, a China-based company, immediately incorporated the mystery package system into the game in order to boost its revenue stream. Complaints about the game's "lock-box system," which involves purchasing a key with real currency in order to open a virtual safe, has drawn wide criticism across the game's community regarding issues of product misrepresentation, interference with game play, and a lack of published odds. On the game's official forum, the most viewed topic is not a welcome message directed to new players, but a long-running rebuke regarding a lock box named after the iconic television show's business shrewd alien race, the Ferengi. Some unhappy customers have gone as far as to take the time to develop and circulate banners panning the mystery package business practice.

Click to enlarge image.Star Trek Online Player Boycott

While currently unconfirmed, last week it was rumored that the Danish Ministry of Justice and Danish gambling authorities are investigating the lock-box system of "Star Trek Online" in relation to possible violation of Danish law after multiple customer complaints were filed, likely in part because the game developers have declined to release any sort of schedule of odds related to the sale of the virtual items. Perfect World may be wise to reconcile with their players before a "critical threshold" of complaints are received, triggering a Japanese-like response.

At this point it should be noted that in Japan there is a difference in mystery package mechanics. On the base level is the "gacha" mechanic. "Kompu gacha" took the system a step further, requiring multiple rare prizes to be won from the random "gacha" system before the grand prize would be awarded. While the ban in Japan is specifically only on "kompu gacha," which is only used by a select few games, the possibility of a move against Perfect World in Demark would be considered against the base "gacha" level mechanic that many more games practice. While Denmark may be just one country, there is a distinct possibility, however low, of a domino effect that cascades regulation from Japan to Europe, Europe to Japan, or even to North America. Such a result would lead to a major revenue loss for free-to-play game developers who depend on the "gacha" level mechanic for a significant portion of their sales.

Continue to Part 2 >>

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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