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Microtransactions: Death by A Thousand Cuts

Let's talk about microtransactions in video games.

kids playing video gamesIntroduction

We live in a vibrant new digital age. Much of what was difficult or expensive to acquire in ages past has become cheap and accessible. From online shopping to digital music streaming, our needs and wants can be met at the click of a button with less friction than found on a typical water slide. 

This revolution has been a mostly positive one for the populations who have taken part. But from the individual perspective, there are downsides to all this frictionless spending. The digital world is very good, it turns out, at finding our blindspots and hitting us there: Making gigantic impulse purchases late at night, dopamine-induced scroll fests on social media, and targeted advertising are some of the most talked about. 

But there is another danger that has crept in slowly, bit by bit, and it is focused on exploiting, in part, our children. It has a name as compounded as its deleterious effects on personal finances. As the title suggests, we are discussing the blight of Microtransactions (or MTXs) in video games.

What even are MTXs?

MTXs are most prevalent in mobile games and, on the surface, MTXs appear harmless. You're playing a game (often one you downloaded for free), having fun, and then you see you can buy a little outfit for your character to make them look like a cyberpunk robot. The cost is usually in a virtual currency and after some evaluation (and perhaps a go with a calculator)  you figure out it's about $5.00 USD. You make a purchase for some virtual currency that cost $8.00 and acquire the item. Even better, some of the virtual currency is left over. Nice.

There's something more going on there though. When did the game choose to put that item in front of you? How did the game know to show you the outfit? Why is the purchase price in a virtual currency instead of in real-world dollars? Why couldn't you get the exact amount of virtual currency you need for the one item you wanted? The answers to these questions get at the crux of the problem here and how it exploits our blind spots. 

Let's look at a handful of basic types of MTX found in gaming today and discuss each individually. Then we'll wrap back around to answering these questions. This list will by no means be comprehensive. It will just be a sampler platter of some of the basic shapes of MTX in modern-day gaming.

A Brief Taxonomy of MTX

Perhaps the least pernicious and most ubiquitous form of MTX is the Cosmetic MTX. A Cosmetic MTX is one that has no material impact on gameplay but changes something in the visual or audio presentation of a game (or both). These range from simple alterations of UI elements to fully transformative costumes for in-game player characters. These are desirable because they are often more exciting and well-designed than what is available for free. In online multiplayer games (games where multiple players can connect and play together over the internet), Cosmetic MTXs also create social pressure to spend. If all of your friends in school are dressing up as Superman in Fortnite to run an all-Superman Squad, you may find yourself left out of the fun or even just feeling excluded if you don't purchase the costume too.

The next type of MTX is a bit more underhanded and less well accepted: the Convenience MTX. A Convenience MTX is one that is purchased to make some part of gameplay easier. These can range from a temporary or permanent experience booster to expanded item storage to even skipping whole chunks of the game. A well-known example is the Mighty Eagle in Angry Birds which lets a player pay to skip a level. These MTXs create what's known in economics as a Perverse Incentive for the developers creating the game. Because they want to sell you a Convenience MTX, they need to make that Convenience MTX desirable. To make a Convenience MTX desirable, a developer needs to make the free version of the game frustrating, tedious, or both to incentivize players to pay to remedy it. These Convenience MTXs are often presented by the UI in the context where the player is also most likely to experience that negative game design. Just failed to beat a level multiple times in a game? Well here comes a nice flashy UI presenting you with the Level Skip MTX for only 100 virtual currency! 

The final type of MTX we will discuss today is the most egregious and also the most dangerous for children. It is the Loot Box MTX. Loot Box MTXs take many different forms from treasure chests to card packs. They may even have gameplay in between the purchase of the Loot Box MTX and the actual reward to obfuscate their nature. But they all have one thing in common: A player pays a fixed amount for an uncertain reward. 

Loot Box MTXs can contain either of the previously mentioned types of MTX as well as small amounts of the virtual currency used to buy them. They are often also stuffed to the brim with undesirable items that are used to lower the odds of getting the item the player actually wants. Most perfidiously of all, the contents of the Loot Box MTX are determined the moment the player opens them, and most games that implement them likely use the player's profile to determine results most likely to encourage further spending. It is often the case that the Cosmetic MTX outfit we discussed previously instead of costing $5.00 outright would, through Loot Boxes, end up costing many times more.

"Someone is paying real money for a chance at the desired reward." You might hear that and think, "That sounds like gambling." And you'd be right. The governments of Belgium and the Netherlands have both ruled Loot Box MTXs qualify as illegal gambling and removed them, and any games that refuse to remove them, from sale. The European Union is poised to do something similar. Further, The Gambling Commission of the UK ruled that Loot Boxes blur the line between gaming and gambling even if they don't legally fall under gambling regulations in that country. However, a study in the UK linked Loot Boxes to an increased rate of problem gambling in the country. So far, the United States has not taken any action.

Answering the Questions

Let's wrap back around to those questions now: 

  • When did the game choose to put that item in front of you? When you were most likely to buy it. 
  • How did the game know to show you the outfit? Because it tracks what you do in the game (and sometimes outside of it as well). 
  • Why is the purchase price in a virtual currency instead of in real-world dollars? Because it obscures the true cost and makes it easier to spend. 
  • Why couldn't you get the exact amount of virtual currency you need for the one item you wanted? So that you'd have some left over and, fearing they'd go to waste, make you more likely to make another purchase in the future. This is a type of "loss aversion" trick.

All of this is a lot for even an adult with their finances in order to deal with when engaging with a dopamine-filled gaming experience. But in truth, most adults don't make many MTX purchases. The gaming industry has a derogatory term for these people: "guppies." Fish so small as to be almost insignificant. They are just there to feed the larger fish. 

The vast majority of spending comes from a relatively small population. These the industry dehumanizingly calls "whales." One might assume these players are people who have loads of disposable income, maybe a trust fund or two, and can afford to throw it away on MTXs. But in many instances, you'd be wrong. Research suggests that a significant portion of the problem spending comes from children and people with gambling addictions who truly cannot afford it. These are the people most vulnerable to the types of predatory manipulations described above.

The True Cost 

Story after story has come out in recent years detailing family finances impacted by MTX spending. A child who got a hold of their parents' credit card. A problem gambler who didn't realize what was happening until it was too late. Actor and Musician Jack Black famously spoke on the Tonight Show with Jimmy Fallon back in 2015 about his son spending over $3000 on mobile games. Some have spent upwards of tens of thousands of dollars on individual games. These losses are huge and eye-catching. But even more modest spending is a net negative to family finances. The ultimate value of any MTX in a video game is $0 so no matter how much is spent, that money is lost. Even the advertised benefit derived from the purchased item whether it be a Convenience MTX or a Cosmetic MTX is fleeting as the company that runs the game can just shut it down or release a sequel at any point and remove one's access to the item with no consequences.

While a single MTX purchase by design does not seem that impactful – what's $1 or $5 or $10 compared to having fun? – the cumulative effect builds like a snowball rolling down a mountain. Systems designers know this and use "foot in the door" sales tactics to get players to make that first purchase. Often this takes the form of a "limited offer special bundle" priced at less than $1 (in virtual currency of course) but advertised as having a much higher "value." Each subsequent spend becomes easier as sunk cost fallacy and a sense of investment compound to coax a player to spend more and more. By the time the other shoe drops, it may be too late to recover financially from the cost. It is truly death by a thousand cuts.

What Can We Even Do?

The number one thing we can do is be aware of these issues in gaming. Many of us and even more of our kids engage with gaming daily. Video games (at $179b as of 2020) are currently a larger industry than both Movies ($100b) and Sports ($75b) combined. The industry is projected to continue to grow. The way they will sustain that growth is not by expanding player bases (which have already reached to include most, if not all, potential players) but by finding more and more ways to implement the types of MTXs we've discussed here to extract more and more money from the same people. The industry mantra over the last several years has been to "convert players into payers."

Many of the stories about kids spending their parents' savings on MTXs include details about how the children did not understand what they were doing. They saw how their parents made a purchase and imitated it without thinking. So talking to our kids about these issues is paramount to protecting them. 

The other side of that coin is parents being aware of what games our kids are playing and how those games are monetized. Most Free To Play games are saturated with every type of MTX described here and several that were not mentioned (Such as Battle Passes and Negative Purchase MTX). It used to be that most games with a $60-70 price tag would have no MTX at all. But that has been changing in recent years. It is important as parents that we ensure our children are engaging in games safely and that the games they are engaging with treat their time and finances with respect. 

The ESRB committed just a few years ago to put a "Loot Boxes" warning on the game rating label of all boxed video game products that contain Loot Box MTX. However, this is unfortunately not enough. For one thing, most games are purchased or downloaded digitally now and for another, games can be updated through a patch downloaded online to add in MTX after their initial launch. "Crash Team Racing Nitro-fueled" pulled this trick back in 2019, waiting until after release and most reviews had been published to add in their MTX features. Unfortunately, this means that for now, it will still fall to parents and guardians to scrutinize each game our kids engage with.

Communicating openly about finances and the value of saving can be helpful to kids too. A child who understands what money is and how it is earned will have a stronger appreciation for what it means to spend it than one who does not. To that end, Plinqit is committed to providing financial education resources and tools for people of all ages. We hope to contribute to the fight against innumeracy and financial illiteracy and to inoculate future generations against predatory MTX.

References used in this article: BBC, MarketWatch, Commons Library, Parliament Research Briefings, BBC Tech, Science Direct, BBC News, The Tonight Show Starring Jimmy Fallon on YouTube.