Loot Boxes: Financial Necessity or Profit Enhancer?

When you make the decision to buy a video game, among the first things you’ll look up about it is the price.

Traditionally, this is located on the game’s box and is the only thing standing between you and being able to play the game you’ve had your eye on.

Given the tenure of this system, it’s no real surprise that our initial impressions of the money that game publishers make are often intrinsically linked to it.

However, for today’s game publishers, physical game sales are just one of the avenues available to them, as they look to boost their revenue and expand to new horizons.

Digital distribution has enabled them to create and offer more content to gamers than ever before, but it’s also provided the basis for the implementation of a different and controversial way of monetising the experience.

Loot Boxes.

To many people, they represent aggressive corporate monetisation of games at its worst.

A way of charging players to access content, but also miring it in a game of chance that can leave you swimming in duds just as often as it does riches.

However, to others, including many game developers, they’re believed to be just another necessary means of offsetting the perpetually increasing cost of game production.

So, what do the actual numbers say?

Are loot boxes essential to the economic viability of today's AAA game publishers, as they often claim, or are they just another tool to engorge ever-growing profit margins?

The first fact to get out of the way when discussing the financial impact of loot boxes is that they certainly do currently generate a lot of money for today's game studios and publishers and, as you can see above, the figure is expected to continue to rise drastically going forwards.

Though, this might seem rather self-evident and unsurprising.

Of course loot boxes generate a significant amount of revenue for publishers, or those publishers wouldn't deem the potential negative repercussions integrating loot boxes can have on their reputation within the gaming community as a risk worth enduring.

Therefore, the more pressing questions regard how this money fits into the overall landscape of game publishers' revenue sources and whether it's providing a necessary boost to help offset the increasing costs of producing and maintaining games.

For developers working on games, the idea that this is true, at least to some extent, is often the basis of how they reconcile the idea of programming something they disagree with into the games they're working on.

This is the case for Daniel Cole, a junior programmer at Sunderland-based studio Coatsink, who states: "I tend to avoid loot boxes as far as possible, solely because I don't like the idea of having to spend more money on a game I've already paid for", adding: "but the way that basically all games are headed nowadays, going towards an ongoing live service, there has to be something that pays the bills."

This view is also echoed by another developer, who spoke on condition of anonymity, due to a fear of backlash from their employer, explaining: "As a consumer, I generally see loot boxes a band-wagon model and count them as a 'strike' against a game, but as a developer, I have some small appreciation for the exponentially expensive and expansive scale of game development, versus the relatively static price point the product is sold for."

As both developers elude to, it's the increase in focus on post-release services by games companies, maintaining and adding large amounts of content to online games once they've already come out, that's usually identified as the newly costly aspect of modern game production that loot box revenue pays for.

As Abhay Ramakrishnan, a game designer at Deca Games, describes: “These games are expected to have live events, major content infusions, robust customer support and server infrastructure. This all costs money.”

However, one only has to take a look at the revenue stream of any publisher that uses loot boxes extensively to see that while post-release content and services for online games are costing more than they used to, they're also providing more revenue than ever before.

For example, here's a quick breakdown of the recent finances of a company whose FIFA series, among others, has become hugely synonymous with loot boxes since 2010, Electronic Arts, or EA.

As illustrated above, post-release services now account for the vast majority of the money generated by EA on a yearly basis, having grown to surpass game sales to become the chief revenue source over the past decade, as the latter has experienced a gradual decline.

This seemingly backs up the anonymous developer's assertion that if publishers were continuing to rely on traditional game sales to provide the bulk of their revenue, as game production costs have increased, they might have encountered some problems.

The anonymous developer argues that in order to eliminate the need for loot boxes to provide a significant chunk of the now-predominant service revenue, game purchase prices will have to increase considerably or audience expectations would have to change: "As it stands, developers and large teams are constrained to create large-scale and now, unending, experiences for users who can be perceived as wanting more and more for an unchanging amount of money. I want to see a world where the average game player is happy to either pay £120 for a game or where AAA can release small products reliably that actually make some kind of return."

The developer is certainly right in their assertion that the upfront price of games has remained pretty stagnant for at least the past decade, however, other aspects of this particular revenue stream have changed with the times.

As video games have continued their decades long journey to towards being just as mainstream and lucrative an entertainment medium as film and TV, the overall sales numbers of AAA games worldwide continue to rise exponentially.

The likes of 2013's Grand Theft Auto V have shattered sales records worldwide, hitting numbers previously thought hilariously unattainable, with GTA V alone surpassing 130 million copies sold as of May 2020.

EA's leading title FIFA hasn't been an exception to this trend, remaining the best-selling sports video game franchise in the world, with FIFA 18 having sold over 24 million copies worldwide in just its first year, massive numbers for an annually released game and the highest for the series to date.

On the other hand, the developer's theory presumes that the revenue figure generated by loot boxes is relatively close in value to the costs of game development, perhaps a little bit higher, so as to provide a reasonable profit.

Though, taking a look at EA's profits over the time period during which they've pivoted to focusing on service revenue shows this isn't exactly the case.

As you can see, EA's profit margins as their revenue stream has changed don't paint the picture of a company in a state of flux, employing new money-making tactics in an effort to simply stay afloat.

Instead, EA's annual gross profit, which is the revenue that remains after deducting the costs of making and distributing products and providing the services that come with them, has more than doubled over the past decade, from $1.7 Billion in 2010 to a projected $4.1 Billion in 2020.

Now, inflation may account for some of this growth, but to put it into context, EA's profit of $3.6 Billion achieved in 2019 was higher than the entire individual Gross Domestic Product (GDP) of several small countries, including Liberia, Burundi and Andorra, for that year.

In addition to paying for things like EA's exclusive licensing deal with football governing body FIFA, the exact worth of which is kept a closely guarded secret, you would hope that a good chunk of this money is invested back into the company, rewarding those who work so hard to make the publisher's games and helping to finance future projects.

However, the rise, fuelled by post-release service revenue that includes loot boxes, has also been used to steadily increase the compensation of EA's top earning executives.

As illustrated above, the compensation of EA's top executives, an area one would hope might be one of the first areas to see cutbacks were the company experiencing hard times, has gradually climbed since EA began to implement loot boxes, seeing a particularly stark increase in 2018.

This isn't surprising if you read any of EA's own financial reports, in which they go so far as to highlight that they consider post-release services to represent "a more sustainable revenue source" than traditional game sales, adding that the benefits of services include "lower fluctuation in revenue" and "increased lifetime customer value".

While top executives both within EA and across the industry have certainly felt the benefits of this new revenue stream, their employees largely haven’t, with the average yearly salary for game programmers in the UK remaining at £29,654, according to Payscale.com, which is below the average salary in the UK for 2019 of around £30,420, according the Office For National Statistics.

So, it seems from the numbers that “sustainable” in this context means capable of sustaining a continued exponential growth in profits, not just paying more to staff and financing the production of games.

Games like one of EA's newest titles, 2019's Apex Legends, which, following a model popularised by Fortnite, is free-to-play and attempts to garner all of its revenue via its post-release services, including a heavy emphasis on loot boxes.

While this is a positive development in the short-term, removing the need for players to pay a purchase price for a game containing loot boxes, it also represents a AAA publisher seemingly doubling-down on their growing commitment to raising revenue thorough loot boxes and other post-release services going forwards.

This is a disturbing trend, as although it may increase short-term revenue and profits for these publishers, it also irreversibly lashes the financial future of the publisher and, more importantly, the studios and developers that make their games, to a number of controversial and arguably unethical money-making practices, of which loot boxes are the prime example.

So, don't be surprised if loot boxes continue to become more widespread as we move into the future, but also remember that, no matter what they say, the numbers reveal that this will be primarily driven by AAA publishers' desire to augment the growth of their already considerable profits than the need to pay for their games.