At any major sporting event, one could easily recognize the playful Fortnite dance moves performed and displayed on the jumbo screen “dance cam.”  With more than 250 million registered players worldwide, Fortnite has become one of the most popular video games in recent history.

Video games, and the attendant industries that have emerged from them (esports, livestreaming, gambling) are exploding at a rate so fast that esports have been likened to the “new social media.” Indeed, video game livestreaming apps like Twitch are also teeming with users, and deals are being struck everywhere to capitalize on the popularity of gaming and esports.

This explosive growth, however, has drawn scrutiny from some policymakers and regulators.  While some laud the creativity and benefits of the video game industry, others have begun to voice concerns about some innovations’ impacts on consumers and children. The online entertainment industry should pay attention to this new government oversight, which bears some similarities to recent scrutiny of social media giants.

Loot boxes and consumer welfare

“Loot boxes” are locked virtual items within a video game that can be purchased or won by a user with unknown or randomized in-game items inside.  Recently, U.S. Senators Josh Hawley (R-MO), Richard Blumenthal (D-CT), and Ed Markey (D-MA) introduced legislation that would ban the use of “loot boxes” within video games to children.

The theory behind this legislation is that loot boxes create an “addiction economy” much like a casino, and therefore, need to be regulated, particularly when used by kids. These arguments are not new.

In November 2018, in a Senate Commerce Committee hearing with the Federal Trade Commission’s five commissioners, Senator Maggie Hassan (D-NH) highlighted her concerns regarding loot boxes and sought assurances from FTC commissioners that it would investigate. This inquiry catalyzed an FTC regulatory review, in which the FTC pledged to review  practices and consider the lay of the land. The FTC further announced it would hold a public workshop in August to look into consumer protection issues and loot boxes.

Policymakers around the world have also been debating whether loot box systems amount to a form of gambling. In the European Union, Belgium has banned certain types of loot boxes in video games.

What are the takeaways?

The video game industry – and the issue of loot boxes in particular – is one example of congressional inquiries leading to regulatory investigations and proposed legislation.  This illustrates the ways in which Washington (or any state or local government) can disrupt an industry and influence their practices, even where claims of harm can be unclear. And, it’s not difficult to envision other areas of regulatory interest arising out of social media and online communications innovations:

  • Cybercriminals using virtual and online currency, along with social media scams, to launder money;
  • Increased availability of encrypted communication applications, including those having features modeled after social media (e.g. chat groups, channels, and media-sharing), used by bad actors;
  • Persistence of toxic criminal behavior including death threats and “swatting;” and
  • Advertisers and developers using data in unexpected ways, with implications for privacy expectations.

While industries should evangelize their innovations and the benefits to consumers from choice and diversity in technology, new technologies and their uses raise complex political, regulatory, and enforcement issues. It is therefore imperative that companies develop a sophisticated understanding of their regulatory and oversight environment – including the who, where, what, how, and why of potential scrutiny and criticism – to form a strategy for addressing such scrutiny.

So, for example, innovators should familiarize themselves with — and understand — “who” and where the government agencies having regulatory jurisdiction over relevant issues are situated. The Department of Justice, the Federal Trade Commission, State Attorneys General, the Consumer Financial Protection Bureau, each have unique missions and distinctive priorities, but they also share overlapping jurisdiction (such as consumer protection). Numerous federal and state agencies can be described in a similar way.

A similar kind of jurisdictional turf issue also applies to Congressional committees (and the members that make them up). While Committees each have jurisdiction over particular issues, they also possess overlapping issue areas, which can complicate how to deal with them. And that does not account for the multitude of outside stakeholders who play a significant role in influencing regulatory, policy and enforcement considerations.

What the industry can do

Understanding the “who” helps companies gain a clearer picture of “what” animates concerns about certain issues, and “how” and “why” government entities will likely act to address them. Take, for example, money laundering. Are concerns about money laundering opportunities in new tech driven by national security concerns? Opioid addiction? Child safety concerns? Financial markets concerns? Probably all of the above. But understanding the “who” will naturally lead to the “what, how, and why” on a particular issue, which will bring into sharper focus the policy or enforcement actions that companies can anticipate.

Information gathering alone is not enough. Industries can prudently engage in self-regulation or develop best practices, collectively and on a company-by-company basis. This can stave off direct regulation and leave innovators with flexibility to evolve their products and services. Innovators can also develop their own Risk Assessment Guidelines and Protocols.  Specifically, using whatever information that can be gathered, companies should conduct internal reviews to assess consumers’ expectations, evaluate regulatory risk, implement compliance protocols, and plan for third party scrutiny. This type of diagnostic check-in may help to identify risk areas to help companies and entire industries stay ahead of potential scrutiny.

Additionally, as policymakers are widely seen to struggle with fully understanding fast-moving technology, being proactive can be a useful risk-management tool. Congressional staff are eager to learn about technology affecting consumers, and agencies have said they appreciate outreach about innovation and emerging solutions. A company may therefore want to proactively meet and talk to regulators and/or policymakers to foster a clearer understanding of technology and consumers’ expectations. Informal outreach and education can also help educate policymakers about the consequences (positive or not) of certain regulatory or enforcement actions.

The point of all of this is that industries that interact with consumers online and using new technologies, like the video game industry, should be clear-eyed and strategically prepared to proactively address questions and defend their practices amidst potential scrutiny. The warning signs are too prominent to ignore.

Peter S. Hyun, a partner with Wiley Rein LLP, represents individuals and entities in government enforcement actions, congressional investigations and State Attorneys General investigations