Our Predictions

Artificial Intelligence

The last edition of L&T’s Interactive Entertainment Insights covered the games industry navigating the wild west that is generative AI. With the recent agreement of the EU’s AI Act and Steam’s change in stance on games using AI, we expect to see developers and publishers take a firmer stance on whether they will use the technology in their game development process.

We are also looking forward to seeing the innovative ways that studios will start to incorporate this new technology; moving beyond the creation of 3-D assets to incorporating it within the game itself to drive storytelling and improve interactions with NPCs. We’re likely to continue to see the influx of copyright AI infringement cases throughout the UK, EU and US as the year progresses.

How can we help? We’ll be publishing a practical, user-friendly 3-part deep dive into AI and the games industry shortly – we’ll make sure our Interactive Entertainment Insights newsletter subscribers get a copy. [Update on 13 May 2024: please see here for our 3-part series.

Loot Boxes

The loot box saga is set to continue throughout 2024. We predict more investigations (as part of the greater scrutiny into ‘dark patterns’ and monetisation methods across jurisdictions), loot box outright bans (as seen in Belgium and the Netherlands) and sanctions for game publishers (as recently occurred in Austria).

User Terms

The DSA places various obligations on game developers and publishers regarding their end user facing terms (e.g. EULA/Terms of Service). These obligations include ensuring terms contain minimum prescribed information (e.g. restrictions on the use of the service), are clearly drafted (e.g. are child friendly where the service is directed at minors) and fulfil DSA reporting and other obligations. Any organisation falling under the DSA should be reviewing and updating their user facing terms now!

Clones and IP Disputes

There were plenty of reported (and unreported) clone and IP disputes in 2023 (including Riot suing NetEase alleging copyright infringement of Riot’s Valorant game) and we expect this trend to continue in 2024. The recent controversy around Pocket Pair’s Palworld and Pokémon aptly demonstrates this.

Protecting Children

2023 saw a renewed focus on the protection of children across jurisdictions, with the passing of the OSA in the UK; the FTC’s fining of Epic $520M for violating the Children’s Online Privacy Protection Act (COPPA) and the use of ‘dark patterns’ to encourage players to make unintentional purchases; and the German USK focussing on interaction risks. 2024 looks set to continue this path, with the forthcoming introduction of the EU Regulation to Prevent and Combat Child Sexual Abuse and continued focus of the protection of child privacy and personal data.

EU Digital Services Act

The Digital Services Act, which came into force in February, is directly applicable across the EU and to many games studios and publishers.

What should you be doing now? If you haven’t done so already, you will need to determine whether the DSA applies to your games and services. If it does, it’s vital you ensure you are complying with the applicable  obligations imposed on service providers – the DSA adopts a layered approach to imposed obligations depending upon which category of service provider you fall under.  You should also be sure to familiarise yourself with the reporting requirements under the DSA.  While the first report is not due to be delivered until early 2025, it’s important to ensure you are aware of the data required and that it is being collected over the course of the year.

How can we help? We can help with the  assessment of your games and services to determine which category of service provider you fall into under the DSA.  We can also help advise you on the obligations that you will be required to comply with and carry out a gap analysis of your current processes to identify key areas requiring change to ensure compliance.

Online Safety Act

The highly-anticipated Online Safety Act 2023 (OSA) finally came into force last October.  We’re currently awaiting the publication of  Ofcom’s published draft Codes of Practice and guidance on the numerous duties imposed onto service providers, which will be published in a phased approach as follows:

• Phase 1: illegal harms – the draft guidance and Codes of Practice were published in November 2023 and the final versions are scheduled to be published at the end of 2024.
• Phase 2: child safety duties and pornography – draft guidance for Part 5 providers of pornographic content was published in December 2023 and draft guidance and Codes of Practice for child safety is scheduled for spring 2024.
• Phase 3: duties on categorised services – the register of categorised services is scheduled to be published by the end of 2024 and draft Codes of Practice for categorised services to be published in early 2025.

While the OSA duties will not be fully enforceable for some time, video game developers and publishers should use this time to navigate the extensive and complex obligations under the OSA and identify gaps in its processes before the illegal harms duties become enforceable in 2024.

What should you be doing now? First, you will need to determine whether your games or other services are within the scope of the OSA and, if so, whether they are at risk of being registered as a Category 1 or Category 2B service. If your game or service allows users to interact with one another online (e.g. via in-game text and voice chat), your service is likely in-scope as a “user-to-user service.” If your game or service is within scope, you should begin your OSA preparations by:

• reviewing the draft consultations, which can be found here (illegal harms) and here (age estimation);
• reviewing your existing processes and terms and conditions and identify any gaps as shown in the draft guidance; and
• engaging with the consultations, which can be found here (illegal harms) and here (age estimation).

How can we help?  We can help with your risk assessments, decipher the weighty Ofcom guidance and Codes of Practice and identify any gaps in and update your terms and conditions. If you have any questions regarding Ofcom’s latest and upcoming consultations, please get in touch!

Video Games Expenditure Credit (VGEC)

Since 1 January 2024, qualifying video games development companies (VGDC) can claim video games expenditure credit (VGEC), which replaces the existing video games tax relief (VGTR) regime. VGDCs may now claim up to 34% credit for up to 80% of their qualifying expenditure. Moreover, the subcontracting cap will be removed under VGEC, meaning that companies can claim tax credit on qualifying expenses incurred through subcontractors without limitation.

The existing VGTR incentive will officially cease on 1 April 2025 and companies will need to claim under the new VGEC regime after this date.

What should you be doing now? Game developers and publishers should familiarise themselves with the new VGEC eligibility criteria, a summary can be found here. If you’re unclear of any aspect, please do get it touch.

How can we help? Our team is experienced in advising on  eligibility criteria and can support on all aspects of claiming Video Games tax incentives. From reviewing Development & Publishing Agreements, referrals to industry-reputable tax accountants, we can help you ensure that your company can make the most of the government tax incentive for your video game. 

UK introduces AI (Regulation) Bill

A Private Members’ Bill was introduced to the House of Lords in November 2023 by Lord Holmes of Richmond.  Compared with the EU AI Act, this Bill is relatively short (with only 9 sections). The main objective of the Bill is to (i) establish a new “AI Authority”, responsible for regulating the use of AI within the UK; (ii) set out regulatory principals for the AI Authority to follow (e.g. safety, transparency, fairness, etc.); (iii) require businesses working with AI to appoint an AI officer; and (iv) require the AI Authority to pass regulations relating to AI training data to ensure that such use has been authorised by IP holders and data subjects.

Our view: At the time of writing, the AI Bill is still awaiting a date for the second reading in the House of Lords.  It also remains to be seen whether the Bill will pick up any support from the government, particularly during such a busy election year, and without which it may fail to make it through the various stages in parliament to Royal Assent.   While the Bill does not contain a huge amount of detail at this stage, it does provide a good starting point for secondary regulation in this area. We will be watching this closely over the coming months and continue to provide updates as the Bill progresses. 

The impact of industry-wide layoffs

Despite a strong year for games in 2023, last year’s mass layoffs across the industry were disastrous for game developers – from indies to international corporations like Epic Games, Microsoft, Ubisoft, and Activision Blizzard. The sheer scale of layoffs in 2023 was unprecedented with an estimated 10,500 workers affected.

Unfortunately, the trend does not seem to be ending any time soon as Unity recently announced a 25% reduction of its workforce, equal to 1,800 jobs in January 2024 with Riot Games and Microsoft/Activision Blizzard following suit with 11% and 8% reductions announced in their workforces.

AI-generated content on Steam

Valve (developer of Steam) took a cautious approach to the prospect of AI content being used within games on its platform last year.  There were reports of numerous games being rejected by the platform, citing concerns around the ownership of the IP in the AI training data that had been used to create the content.

2024, however, has brought about a change in policy with Valve introducing new rules on how games developed with generative AI will be permitted on the platform. Valve stated that it would be asking developers to disclose and describe how their games use AI-generated content, under the categories of ‘Pre-Generated’ or ‘Live-Generated’ content. Developers of games with Pre-Generated content (i.e. art, code, music, etc. created using AI and incorporated into the game during development) must provide guarantees to Valve that the content will not include anything that is illegal or infringes on any third party’s rights. Developers of games that include Live-Generated content (i.e. content that is created while the game is running with the help of AI tools), must also provide details of the guardrails that have been put in place to ensure that the AI does not create anything illegal or harmful. These disclosures will also be made clear to customers on the Steam storefront upon purchase of games to prevent any misleading marketing.

Our view: It has been reassuring to see the considered approach that Valve has taken to the rise of generative AI and the impact that this will have on the games industry. The questions that were being asked of developers were informed and showed a real understanding of the potential issues that surround this new technology.  The new policy announcement seems to strike a good balance between innovation and risk and ensures that developers are transparent on the AI tools being used within their games as well as during their development.  As a major player in the industry, Valve’s policy will undoubtedly cause a ripple effect across the games industry and we are confident that we will continue to see more games companies working with AI in new and creative ways.

Mixed results for Epic Games and its disputes with Google and Apple

In December 2023, a Northern District of California jury in the case of Epic Games, Inc. v Google LLP found that Google operated an unlawful monopoly via its Google Play app store and billing service. Epic Games heralded this decision as a “win for all app developers and consumers around the world”. We are yet to see the remedies passed down by the court. Epic Games did not request damages, but instead requested injunctions to be ordered by the court requiring Google to change how its Google Play store and billing services are operated. Unsurprisingly, Google has confirmed that they plan to appeal the decision.

In the wake of Epic’s victory, the US Supreme Court declined Apple and Epic’s respective appeals relating to the dispute that was last heard by the Ninth Circuit Court of Appeals last year. Following this rejection, Apple announced that it would no longer block iOS app developers from allowing customers to use alternative payment methods.  However, Apple have since announced that it will require developers to pay a 27% royalty on revenue arising from these alternative payment methods. While on its face this appears to be a 3% reduction from Apple’s standard 30% cut when using the Apply payment services, developers will likely be subject to fees from their chosen payment processor which, together with the 27% payment to Apple, offers no better alternative to using Apple’s payment method. It is no surprise that this announcement has met criticism, including from Epic Games CEO Tim Sweeney who announced that Epic will contest the “bad-faith” compliance plan.

China’s regulatory rollercoaster

In December 2023, China’s National Press and Publication Administration (NPPA) proposed new restrictions on video game monetisation and other player engagement measures to protect players from excessive in-game spending. Some of the proposed changes include a prohibition on player rewards for daily logins and in-game spending as well as setting limits on in-game spending. Another notable restriction targets probability-based lucky draw features (gacha games in particular form a substantial part of the Chinese mobile games market) to minors.

Tencent and NetEase suffered from these changes immediately, with their respective market values taking sizeable hits. Following the criticisms raised by industry players, the NPPA has promised to review the response to its proposals with the view to improve its proposals. The NPPA consultation closed on 22 January 2024, however the proposed changes have been removed from the NPPA website, causing speculation that the NPPA will cancel or revise the proposed reform.

Microsoft is bringing AI characters to Xbox

Following Microsoft’s landmark acquisition of game giant Activision Blizzard last October, the tech company announced that it will be partnering with Inworld AI to create a generative AI tool that will function as an ‘AI design co-pilot’ to help developers simplify the development of scripts, dialogue trees, and characters. As the implications pervading generative AI made headlines last year, we expect to see more companies establish a clearer stance on whether they implement AI tools in their game development processes. It will be interesting to see if Microsoft’s announcement will urge others in the industry to follow suit, especially Activision Blizzard’s game subsidiaries.

Blizzard revives its Overwatch esport with Overwatch Champions Series announcement

Last November, Blizzard Entertainment announced that its competitive Overwatch League has come to an end after a 6-season run. Most professional Overwatch teams voted to terminate their contracts with Activision Blizzard in return for a termination fee of $6 million. Several factors put a strain on Overwatch League’s success, from the reduced community interest in Overwatch 2 (due to the lack of content updates in the original Overwatch and Blizzard’s decision to abandon its Hero Mode in Overwatch 2), Blizzard’s lawsuits over the company’s alleged culture fostering sexual harassment and discrimination, and not least of all the pandemic.

Blizzard has now announced its new partnership with ESL FACEIT Group for its new Overwatch esport, which will also now be integrated on the FACEIT platform. The Overwatch Champions Series (or “OWCS” for short) will be open to players in North America, EMEA and Asia and featuring multiple stages where regions will have their own “Open Qualifiers” with players forming their own teams and competing for a place in the main event.

More on Epic v Google

“A Fortnight in Court” – Read via The Verge

The fastest-growing consumer app ever

“Generative AI’s wild 2023” – Read via Reuters

The US is hopping on the AI regulation bandwagon

“Fact Sheet” – Read via White House Briefing Room

In our last edition, we covered the EU’s draft AI Act, the world’s first legislation mandating the regulation of AI tools. Although previously silent on AI regulation, US President Joe Biden released an executive order last October that aims to address the legal and ethical concerns about generative AI, including misinformation and deep fakes.  The order covers eight areas, including: AI safety and security standards, privacy protections, equity and civil rights, consumer rights, jobs, innovation and competition, international leadership, and AI governance. Under this order, companies developing AI models must prove to the federal government they are safe before rolling out for wider use by following the US National Institute of Standards and Technology’s ‘rigorous standards’.

UK Supreme Court rules that AI cannot be a patent ‘inventor’

Last December, US computer scientist, Stephen Thaler (founder of the ‘creativity machine’ DABUS) was found to be unsuccessful in his attempt to register two patents created by his AI system DABUS under the British patent regime. The UK Intellectual Property Office (IPO) rejected his application, stating that all patents must be invented by a ‘natural person’ or a company, not machines or artificially intelligent entities. This was reinforced upon Thaler’s appeal to the UK Supreme Court. Thaler was also unsuccessful in a challenge brought to the US Supreme Court’s ruling that DABUS’s inventions could not be patented. Interestingly, the High Court granted a trained artificial neural network a patent (Emotional Perception AI v. Comptroller-General of Patents) on the grounds that it was distinctive from a computer programme. The ruling of this case therefore binds the UKIPO to apply this reasoning to future cases relating to the patentability of AI-related systems, but not generative AI systems.

Getty Images v Stability AI dispute goes to trial

The Getty v Stability lawsuit first made headlines last year when Getty alleged that Stability AI (owner of generative AI tool Stable Diffusion) was using their copyrighted materials to train their AI models. In a ruling from December, the High Court of Justice determined that evidence regarding the Stability AI’s presence in the UK may be incomplete or inaccurate, based on media statements made by Stability’s CEO Emad Mostaque.

Our view: This is one out of many cases where generative AI tools have been under fire for training on copyrighted materials. We will be keeping an eye out for legal developments in this area.