This is going to be a relatively short post, because two other writers have already a lot of my work for me.
Step 1: read Rob Fahey’s editorial on Gamesindustry.biz: “How to control free-to-play spending?”
Step 2: read this Wall Street Journal feature: “Mom, please feed my apps!”
Step 3: let’s have a quick chat… Continue reading How long until free to play and in-app purchases are regulated?
This is an opinion post about the need for tech businesses of all kinds to do their part in ensuring that the legal system regulates them fairly, but doesn’t ruin their business.
The genesis of this post comes from this Telegraph article about comments made by Google Executive Chairman Eric Schmidt, which I encourage everyone to read. The article was ostensibly about Google’s views regarding facial recognition databases (which it is against), but it also said this:
“Mr Schmidt, however, warned regulators and legislators against trying to prevent worrying services in such a way that may stifle innovation. “Hopefully the French or any other country won’t pass laws that are so foolish they force Google to not be able to operate in those countries,” he said referring to a French law requiring internet companies to retain unencrypted passwords for a year.
Well-meaning people in government write something which is pretty broad and you have to be careful when you do this kind of regulation,” Mr Scmidt said in answer to a related question. You might affect something and have an unintended consequence. So that is what we are always concerned about”.
It sometimes seems that tech businesses don’t spend much time on thinking about what the legal/tax/regulatory system should be like as part of their business strategy. Instead, this important issue is relegated to the same status as the day to day business legal ‘compliance’ – which can have unfortunate consequences.
As a result, well-meaning governments worldwide over the last decade or so have done a number of things which they think are needed to protect people, but which also stifle innovation or just plain make life hard for tech businesses. Here’s some examples:
Yahoo and the Nazi Memorabilia case: way back in 2000, a French organisation sued Yahoo! for alleged breach of a law against the display or sale of Nazi memorabilia, some items of which was at the time on sale on a Yahoo! auction site. Yahoo! argued (quite sensibly) that it was based in the US and the service was not in any way targeted specifically at France or intended to breach that law. It was just an auction site, over whose contents Yahoo! exerted no control. Yahoo! was still found liable and ordered to take steps to ensure this could never happen again or face a 100,000 Franc fine per day (which, as far as I know, is still running).
Three Strikes: a number of different countries have enacted or are enacting Three Strike type laws (e.g. the Digital Economy Act in the UK). You can debate whether or not they (or any other anti-piracy laws) are a good idea, but it’s clear they impose significant burdens on tech business – principally ISPs – for the benefit of the creative industries. Generally, the ISPs weren’t particularly happy about it (in the UK, two of them even sued the government over it) but they haven’t got much of a choice really.
Street View, Facebook privacy policies, Google Buzz and Sony/PSN: in each of these more recent examples, tech businesses have greatly underestimated the depth of consumer feeling over data protection and privacy issues. It’s just a matter of time before we see governments taking action over this.
Virtual goods: so far, legal developments in virtual goods have been in the East (e.g. here’s what the Vietnamese government said last year) – but with the incredibly rapid rise in the value and importance of virtual goods worldwide, it’s just a matter of time before regulators step in the West as well. As I’ve written about before, I suspect there’s going to be a battle. But I don’t see virtual goods providers doing anything so far to fend off heavy-handed government regulation.
I could go on, but hopefully you get my point – these are tech innovations brought low either by existing laws or because they just didn’t understand the government/legal perspective. All of it was avoidable.
What can you do about it?
There isn’t any magic cure of course – but, at whatever stage your business might be, you still have a stake in shaping how it will be regulated on a range of different fronts: how it should be taxed/incentivised by government, how IP laws should be made fit for their modern usage, how to deal with trade and competition issues – the list goes on.
Here’s some thoughts on what you can do:
Talk with your lawyer – not just about the day to day legal issues that need to be dealt with, but what’s coming up on the horizon and how it could affect you.
Industry events – discuss these issues when you meet your colleagues. Example: if you’re a games business, it’s good to discuss recent business and tech developments, but what about changes to the intellectual property laws that your whole business depends on?
Politics – get your trade association involved, go to governmental events, speak with your local MP, get lobbyists involved if need be – do what you can to influence the debate.
I think now is the best time we’ve had in years for authorities to actually listen to the needs of tech businesses – so let’s make use of it.
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The South Korean government intends to impose a form of curfew over MMO games in an effort to combat perceived growing MMO addiction, reports MCV.As for the actual means being proposed, this sounds similar to the ‘graduated response’ system proposed in the EU (and now enacted in the Digital Economy Act in the UK), albeit focused on combating online games addiction rather than copyright infringement. Will we see gamers in South Korea and elsewhere voicing the same kind of opposition to these methods as gamers in Europe have?
[Image credit: govdocs.evergreen.edu]
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I wrote just now about the report that Vietnam’s Ministry of Information and Communications (MoIC) is working on a draft decision regarding online games in Vietnam. You can read my views on that here. I wanted to write a separate post about the most interesting aspect of that draft decision: its implications for the timebomb issue of virtual goods ownership.
The report:
The MoIC draft decision, according to Vietnam.net, said this about virtual goods:
“Related to virtual assets in games, the draft said that virtual items are not assets and they can’t be converted into money or assets in any form. An MoIT official remarked that objects in online games are not recognized as assets in the world and conflicts between gamers and game providers are not civil conflicts.”
This superficially innocuous statement actually conceals a great ongoing debate as to the legal ownership of virtual goods, the resolution of which will have significant implications for any games company that sells or interacts with virtual goods.
Caveat: the following is a whirlwind tour through the issues over virtual goods and is not meant to be a detailed exposition! If you want more information, look at sites like Terranova or tVPN.
The issues over virtual goods:
As I and many others have have been saying for some time, virtual goods ownership is a ticking timebomb of a legal issue, which has been around ever since virtual goods themselves but has been growing increasingly important with the massive growth in the sale of virtual goods over the last few years. These are the critical questions:
The question as to whether virtual goods are ‘property’ in the legal sense is complex (and way too detailed to be resolved here). Many games market virtual goods as being ‘property’ which you can buy and do anything you like with, in return for which you have to pay real currency. There is now good academic analysis which argues that, for this and other reasons, virtual goods should be classified legally as ‘property’. In particular, two academics called Lastowka and Hunter have argued with force that virtual goods have all the characteristics of property and therefore ought to be treated as such – in which case all of the above issues come into play. On the other hand, in some basic sense should ‘virtual property’ – for which there is no concept of limited supply, for example – be different to ‘real property’?
The meaning of ‘virtual goods’ has become increasingly complex as well. Is a product which you can code from scratch in Second Life and use as you wish the same kind of ‘virtual good’ as some corn seeds or livestock which you can purchase in Farmville and only use as the game designer lets you? As a result, should they both be considered property? The answer to that is entirely unclear (and it’s worth keeping that in mind during the rest of this post…)
How are virtual goods dealt with currently?
To date, games companies have dealt with virtual goods in their legal paperwork (typically a EULA) by stating that all aspects of a games whatsoever belong to the game company, to which player can have access on a strictly defined licence basis and which the games company can revoke at any time for stated reasons.
This works fine for the player’s access to the game itself, but does that argument work when you encourage a player to ‘buy’ an item from you? Again, there is good academic analysis suggesting that it isn’t enough. In a very short nutshell, it is said that the problem with the current EULA model of dealing with virtual goods is that they are a contractual attempt to deal with a property issue. Terms and conditions etc can impose limits on the use of purchased virtual goods, but they do not resolve the question of whether those virtual goods are property or something else instead.
Take a real world example: if Alan and Bob sign a contract in which Alan says that a particular car is his property and can be used by Bob on certain conditions in return for a monthly payment, that contract does not of itself mean that Alan (or Bob, for that matter) owns the car. You have to look at real world property questions (like ‘did Alan pay money for the car?’) to establish ownership. The same applies with virtual goods (or so the argument runs).
So, there is a decent argument that the current model doesn’t deal with the property issue very well: they simply amount to an assertion that virtual goods are not property, or alternatively are the property of the games company notwithstanding everything to the contrary which is said to the player at the time of the purchase. (This is pretty much exactly what the Vietnamese official said: “virtual items are not assets and they can’t be converted into money or assets in any form“.)
But, there are more sophisticated alternatives that could be deployed to deal with this thorny problem of virtual goods and property:
Alternative #1: virtual goods are a service, not property
One alternative approach is to argue that virtual goods aren’t property but they are services: i.e. ‘you pay us money and we will generate an item for you which we will host on our servers and you can use in our game until such time as we decide to discontinue it or you cease paying us a subscription etc’. If virtual goods are services, then essentially the EULA model could be modified into a services model and none of the above property issues would apply (although there would then be separate issues about what constitutes a ‘service’ and when a games company can/cannot terminate that service).
But is that enough? Does that satisfy the very basic problem that the player is being encouraged to think he is ‘buying’ an item which then becomes ‘his’? What if he spends very significant sums on that ‘service’
Alternative #2: recognise that virtual goods are property, and adapt accordingly
Another option is to recognise that virtual goods are property and to treat them with property law solutions rather than contractual terms and conditions. For example, using some form of lease arrangement (‘this virtual cow is a piece of virtual property, I will lease it to you on these terms’) rather than a EULA/licence model.
Alternatives #1 and #2 are interesting, but diametrically opposed: virtual goods can either be property or services, but not both. Different people have different views on that one, which it would take too long to rehearse here (I realise that’s partly a cop-out, but my purpose is to show the virtual goods issue exists, not to answer it in a short blog post!) In any event, I think the only way this could be resolved definitively is through either a judicial or legislative decision (more on that below).
Does this really matter?
Definitely. If you have players paying millions of $1 or $5 to social games companies per annum, or even individual players paying huge amounts of money for virtual goods (like the guy who spent $330,000 for a space station in Entropia Universe, sooner or later someone is going to turn around and start asking questions about what they ‘own’ in return for their money. What happens if a whole bunch of people start asking for property rights in their virtual goods, perhaps even to the extent of class action lawsuits to force the issue? If successful, it could change the way in which the games industry has approached virtual goods – which to date has effectively been to treat them as the holy grail of games monetisation with relatively little regard to the accompanying legal issues.
In fact, in the past there have been people who’ve asked questions exactly like that. For example, back in 2006 a Second Life player called Mark Bragg brought a case against Linden Labs over their closure of his account, which he said deprived him of access to substantial amounts of virtual goods that were his property. The case settled and as a result there was no detailed analysis of the property issues, but clearly they were there (and the court didn’t dismiss Bragg’s arguments, either).
That said, (so far as I’m aware) no Western court has had to consider the issue in detail yet, nor has any Western government/regulatory authority set out its position firmly on the matter. But, with the sheer amount of money coming in through virtual goods, virtual currency and micro-transactions of all kinds, I think it’s just a matter of time before that changes. There have already been suggestions for some time that the IRS in the States and HMRC in the UK intend to look more closely at the taxation of virtual goods, which inevitably will focus a spotlight on virtual goods more generally.
In the meantime change is already coming in the Far East, as this Vietnamese report suggests. For example, what if the Vietnamese government were to pass a law stating quite clearly that virtual goods are not property? Together with other changes happening over there (such as a recent Korean case on the legality of RMT), this could well have a significant impact on the legal status of virtual goods.
So, if that legal battle over virtual goods isn’t already here, it’s coming. Watch this space…
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Vietnam.net reports that the Ministry of Information and Communications (MoIC) is working on a draft decision on managing online games in Vietnam. This has interesting implications for the regulation and sale of games in Vietnam, one of the big games markets in the Far East.
Managing online games:
Says Vietnam.net:
“According to the draft decision, the Government will assign provincial governments to set opening and closing times for Internet cafes. In locations with no regulations, Internet cafes will not be allowed to supply online game service after 10pm.
For games that have interaction between gamers with servers, gamers are not permitted to play the same online game more than 3 hours per day. Those that have limited number of gamers and the interaction between them is simple and low-tension, such as chess, game providers are allowed to provide 24/7 service. Cultural and educational games are encouraged by permitting a gamer to play 4-5 hours/game/day.”
I’ll leave it to wiser heads than mine to comment on why the Vietnamese government feels it necessary to restrict the amount of time in which games can be played at net cafes, what effect that could have on games or, for that matter, on the Vietnamese games industry. It does seem though to chime in with reports from other Far Eastern countries, such as China and South Korea, that governments are concerned about the effects of long gameplaying sessions on gamers.
Licensing:
The article goes on to state:
“To restrict small firms with weak capital and technology from distributing online games, which makes the online game market scattered, MoIC and the Finance Ministry will issue licensing regulations. The draft also encourages Vietnamese firms to develop online games and restrict foreign game imports. Accordingly, game providers have to register games one year before they import the games.”
These measures, if adopted, look like a classic protectionist measures intended to benefit domestic games over foreign games – cue the classic free trade v protectionism debate, albeit in a games context. It will be interesting to see whether (i) Vietnamese gamers/games industry support them; and (ii) whether legally Vietnam would be able to pass them, given the inevitable international competition issues it would raise (as a side-note, that kind of measure would never get anywhere in the EU due to EU competition rules).
Virtual goods:
This is the really interesting issue. So interesting in fact that I’ve written a separate post about Vietnam and the battle for virtual goods here!
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The Guardian reports “a mother has warned of the risk of children spending hundreds of pounds on ‘free’ online games available through Facebook after her 12-year-old son ran up bills of more than £900 without her knowledge“. This raises interesting issues about the extent to which she could recover her losses: in a nutshell, only if she sues her son. (Which she won’t, obviously, but it let me write a slightly more interesting headline than usual.)
But seriously – the issue of recovering loss suffered through inadvertant spending on a social game is an interesting one and I think this case is just a taste of things to come. The facts according to the Guardian are that “last month [the mother’s] son…spent more than £900 on FarmVille. He had emptied his own savings account of £288 and had used her credit card to the tune of £625 to pay the bills“. She apparently tried to obtain redress from Zynga, who refused. Facebook has disabled her son’s account. She tried to call HSBC to ask for a refund, but she was “told she would only qualify for a refund if she reported her son to the police and obtained a crime number“.
Sounds rather sensationalist, I know, but HSBC were right: under consumer credit legislation, a credit card company is only obliged to offer a refund to a consumer if the card has been used fraudulently/for criminal purposes, so the mother would have to report her son to the police in order to be able to claim that refund. Which, obviously, she didn’t want to do as it would involve her son being given a criminal caution!
There might be a bit more of an argument over Zynga’s receipt of the money, but I imagine they may argue that they’re right to have refused a refund on the basis that, while in fact they may have received the money without the authorisation of the owner of the money, they accepted that money in good faith without knowledge that the son did not have his mother’s authorisation to use her credit card. Is that sufficient? Hmm. One to think about…
Anyway. The Guardian article goes on to say:
“She does not blame Facebook, Zynga or HSBC, saying that her son was the one using the card and is entirely at fault. But she added: “I do think they need to shoulder some responsibility in this business and put systems in place to stop this happening again. The fact that he was using a card in a different name should bring up some sort of security and the online secure payment filter seems to be bypassed for Facebook payments.”
A spokeswoman for HSBC said that had the credit card been used on a gambling site it would have started alarm bells ringing for “unusual usage”. But because the card had been used to buy Facebook credits HSBC did not consider the transactions to be suspicious, even though £625 was spent in just two weeks“
The idea that Facebook’s social games platform did not put adequate safeguards in place to ensure that a child cannot use a card in another person’s name is an entirely valid parental consideration, but is that really Facebook’s responsibility? Perhaps the mother is right that there should have been some additional security involved which the son could not breach but ultimately, no matter how many levels of security you impose, if a child obtains all the relevant details from his/her parent then it it’s difficult to see why the games company/web site should be at fault.
This incident also may have implications for banks and other consumer finance providers – is it right that spending substantial and unusual amounts of money on social games in a short period of time should not qualify as “unusual usage“? Looking at it another way, if your card is used to spend a lot of money on social games currncy in a short period with no prior record of such purchases, should your bank give you a friendly call to make sure you authorised the payments? Answers on a postcard please…
Bottom line: money is pouring into social games companies, but it’s just a matter of time before they have to deal with real issues of consumer credit liability and fraud. Best for everyone to get the proper safeguards in place now.
[Image credit: Zynga]
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A quick one: the Guardian carries a quote from me in their article “The Digital Economy Bill: what does it mean for video games“. Have a look!
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The Digital Economy Bill was passed into law yesterday after a late night Third Reading and wash up procedure. More details are here.Follow us at http://www.twitter.com/gamerlaw or subscribe to our weekly email newsletter here
UPDATE (07/04/10):
The Digital Economy Bill passed its second reading yesterday afternoon, despite a rearguard action from the likes of Tom Watson, John Redwood and Don Foster. Here are more details of the second reading of DEB (via BBC). Of particular interest is Harriet Harman’s claim that the controversial measures in DEB will be subject to further scrutiny in the next Parliament.
The government will now take steps to get DEB through the final legislative stages on the way to Royal Assent in the next couple of days. Expect another update shortly…
ORIGINAL POST:
The Digital Economy Bill is nearing its endgame, with the BBC reporting that its second reading will start this afternoon amid wide predictions that the government will try to rush the Bill into law before Parliament is adjourned on Thursday 8 April 2010 for the forthcoming general election. As we’ve written about before, the Digital Economy Bill is likely to have a great impact on the games industry (indeed, all creative industries) if/when it becomes law.
Where are we now?
The Bill has passed the House of Lords and is due to go before the House of Commons for its first detailed debate (the ‘second reading’) this afternoon. After a bill’s second reading, there is usually a committee and report stage where the bill is gone through with a fine-tooth comb. Then there is a (less substantive) third reading and finally the Bill will have to go back to the House of Lords – where it started – so that the Lords can review the changes proposed by the Commons. The Lords can either then accept the changes, or reject them – which can lead to a sort of legislative ping pong between the two Houses (though ultimately the House of Commons will have the final legal say).
But, this process is being severely curtailed due to the very short timeframe left in which to pass the Digital Economy Bill – literally a matter of days now. As a result, the government’s strategy has been to hold the second reading in the shortest possible time (i.e. a few hours) and then try to deal with all the other legislative stages in one go. As a result, it is not clear (at least, not to me) whether the committee/report stage will happen at all, or will be given the shortest possible time (again, a few hours) in which to carry out their work.
This has proven increasingly contentious to say the least, with pro-DEB groups supporting the plan while anti-DEB groups have continued to attack both the Bill’s proposals itself as well now as the accelerated timeframe for their passage into law. Last week, for example, Tom Watson MP vociferously attacked the Bill and described the government’s strategy for making it into law this term as “potentially a constitutional impropriety“. As he pointed out, laws made quickly generally turn into bad laws. (On the other hand, in fairness, Ed Vaizey from the Tories and Don Foster from the Lib Dems both argued the Bill had already been adequately debated).
More recently, the BBC reports that one of the major opposition groups to the DEB, the Open Rights Group, has urged people to write to their MPs expressing concern over the DEB and has taken out a full page advert in the Guardian and Times newspapers, headlined “20,684 of us demand a proper debate on the Digital Economy Bill”.
What next?
Watch this space. The government is under heavy pressure from both sides, both to delay and to accelerate the Digital Economy Bill’s passage into law. How the government behaves at the second reading in Parliament today will give a good indication as to in which direction it is now leaning.
[image author: Andrew Dunn, obtained via Wikipedia]
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