What Are DLC, Loot Boxes and Microtransactions? An Explainer

Big game publishers now rely heavily on a stream of tiny purchases – here's a guide to the terminology and controversial practices

Team Fortress 2 Credit: Valve

Loot boxes, prize crates, downloadable content, expansions, microtransactions: Even if you don't regularly play video games, chances are you’ve seen one of these terms pop-up in the news in the past month.

While each is a method for earning money from games after the title has been released and sold to customers, the approach each system takes to get that post-purchase cash varies wildly. The complexities of these systems are also what can lead to everything from content, some would argue, mildly addicted players to raging public diatribes on the evils of a publisher that eventually capture the notice of lawmakers.

Whatever one thinks about these systems, though, it's clear that where once the release of a game – and its $60 price tag – was how the game industry-funded itself and eked out a profit, the status quo of big game publishers now relies heavily on an endless stream of tiny purchases.

It all started with downloadable content (DLC)
In its simplest form, downloadable content is exactly what it sounds like: some form of add-on content for a released game that you download to use in the game you purchased.

Arguably, the earliest form of DLC were mods, or fan-created modifications created for retail games that were passed around among players for free, often adding a new look, new maps or new ways to play to an existing game. By the late 1990s, developers and publishers were chasing the popularity of fan-created mods with their own, typically free, add-ons, used to keep people interested in a released game.

By the early 2000s what was once an unusual, but welcome, free add-on or modification on typically PC games, had shifted over to consoles and become monetized. Microsoft lead the charge on this move with its powerful Xbox Live online network for the Xbox 360 and the introduction of Microsoft Points, a payment system that served as a bridge between real cash and money that could only be spent on Xbox Live. The shift brought with it a shrinking of purchasable content from full add-on levels and new storylines to much smaller, sometimes cosmetic items.

The first, or at least most noted, sign of a publisher crossing the line between what gamers found acceptable as a sellable item versus a free occurred in 2006 when publisher Bethesda Softworks Games released a small piece of DLC for The Elder Scrolls IV: Oblivion, which sold armor for your in-game horse. While fans original railed against the release as too expensive and absurd, horse armor went on to become a top seller.

Enter the microtransaction
A microtransaction is exactly what it sounds like, a tiny purchase of a tiny item inside a game that has already been purchased, or downloaded, for free.

After Bethesda proved the model of making money with tiny cosmetic in-game items with its $2.50 horse armor, it wasn’t long before other major publishers were exploring the idea. But that exploration happened less in the game space of computers and consoles and more in the realm of smartphone games, where titles cost much less to produce and experimentation came with much less risk.

The Wild West days of the Apple and Google Play stores saw a plethora of monetization concepts flare up and burn out, with only the most effective surviving. Among the most popular remains the freemium model, which gives the game away and then uses a variety of systems to try and get a player to spend money in the game. These systems include selling more play time, cosmetic items, even game-changing items that can greatly increase a player's chances to win in a game. While this last method, known as pay-to-win, is often attacked, it also remains a major way some smartphone game designers monetize their titles.

The popularity and importance of in-app purchases in Apple and Android games can't be overstated. In 2014, one analyst group estimated that freemium games and their in-game microtransactions made up 92 % of all Apple Store revenue and 98 % of all Google Play revenue in 2013.

As smartphone game developers raked in the money, larger, more traditional game publishers started to take note and experiment with some of these systems on computer and console games. Among the most notable was Valve, which saw such tremendous success with its use of microtransactions in Team Fortress 2 that it expanded the concept to other developers selling games on its online store Steam. A key to that success was combining the fun, trivial cosmetics of microtransaction items with the randomness of loot boxes.

What is a loot box?
Loot boxes actually predate a lot of the different microtransaction systems, but that long, early history mostly happened outside the regular browsing habits of North American gamers, in China. Many trace the loot box to a massively popular, massive online game in China called ZT Online. A 2007 story in China's Southern Weekly describes how players could purchase treasure chests, which promised a chance to earn the game's best gear without grinding. It also rewarded the players who purchased the most chests, setting up a system where some players flushed their money away. As this explosive mix of gambling-mechanics and aggressive addictive play continued to stew in Asia, companies like Electronic Arts and Valve were seeing their own successes with more traditional microtransactions in North America.

Valve's successes and openness about them may have helped spread the loot box, but EA was already seeing tremendous return on its own experiments in its popular FIFA games. For the past few years, FIFA offered a mode called Ultimate Team, in which players would collect trading cards that they could use to build virtual clubs. Although EA initially sold Ultimate Team as an add-on to the main game, in 2010 the publisher started offering the mode for free, relying solely on card pack sales to generate revenue. That move paid off, as Ultimate Team now generates $800 million annually across EA's stable of sports games. And publisher Bioware, another EA studio, took note of that success, eventually using some of those lessons in Mass Effect 3.

Modern Micros
These days, it's more unusual to see a big budget game without some form of microtransaction – be it DLC, loot boxes or subscriptions – than it is to see one with the post-release money maker. And players, it seems have mostly grown accustomed to the idea. Overwatch, for instance, sells for $60, but then includes the ability to purchase loot boxes packed with cosmetic items. They key to that game’s continued success is that everything else, from new maps and characters to new modes, remains free for everyone.

The debate, then, seems to be more about not whether microtransactions should exist in video games – they do and they seem, at this point, inescapable – but rather how those mini purchases are handled and how players are treated.

Earlier this year, gamers were alarmed to read about a patent filed by Activision that seemed designed to tweak gameplay and the way players were paired up to try and get people to spend more money on those items. Activision later said the tech isn’t being used in any current games, but it raised some legitimate questions about how far a developer and publisher will go to squeeze out more profit from a released game.

Electronic Arts learned just how careful a company has to be in the way it uses microtransactions with the release of Star Wars: Battlefront II. While the game sells as a full-priced retail title, it was originally set to have a microtransaction system that asked players to invest extra time or money to unlock major playable heroes. The outcry, which resulted in the most downvoted comment (by EA) in the history of Reddit, led the company to temporarily pull the microtransaction system on the eve of the game's launch. It remains unclear what form those transactions will take when they return to the game. It also led to comments from both LucasFilm and Disney, seemingly condemning EA’s approach to microtransactions in the game.

Is it gambling?
All of this attention surrounding Star Wars: Battlefront II didn't just anger players, it also drew the attention of U.S. and European lawmakers. The key question was whether the game’s use of loot boxes should be considered gambling.

Belgium's gambling authority say it is gambling. U.K.'s gambling authority say it isn't gambling. China and Japan already regulate loot boxes as a form of gambling and Australia considers them gambling.

The United States still hasn't really decided either way, though that could change soon. Last week, Hawaiian state officials raised concerns about loot boxes in Battlefront II and passed the game and its practices on to the state attorney general for an official, legal opinion. The Entertainment Software Association has said they don't view it as gambling.

The question of loot boxes and gambling seems to be not just about the current definition of what gambling is, but about whether the system is deliberately designed to be addictive and uses systems originally created for gambling to get people to spend money.

Hawaiian State Rep. Sean Quinlan also raised concerns that loot boxes could, over time, introduce children to actual gambling. He has said that if the video game industry doesn't do a better job of self-regulation on the topic, he may feel obligated to introduce a bill that would block the sale of such games to minors.

"We didn't allow Joe Camel to encourage our kids to smoke," Quinlan said during a recent press conference, "and we shouldn't allow Star Wars to encourage kids to gamble."