Games and interactive entertainment legal trends 2024: Mid-year update

At the mid-year point we take stock and refresh our top five trends shaping the legal outlook for games and interactive entertainment. How did we do, and will the trends from the start of the year continue in the second half of 2024?

01| Child safety online in focus

Children’s personal data has been afforded a higher standard of protection in various jurisdictions for several years (e.g. the Children’s Online Privacy Protection Act in the US, the UK ICO’s Children’s Code, and advisory guidelines for Children’s personal data in the digital environment in Singapore).

There have also been related developments, such as proposed law to introduce a minimum age for social media use in France and various proposals at a federal and state level in the US aimed at addictive social media feeds and deep fakes. We are also seeing claimants pursuing class actions against platforms for online harms in the US and increasingly in Europe.

With the UK’s long-anticipated Online Safety Act (OSA) now in force, Ofcom has launched a consultation focusing on how it will implement the “children’s duties” in the OSA. This will impact all “user to user” and “search” services and games that offer online multiplayer text or video communication, content creation, virtual reality or metaverse functionality, or livestreaming – with fines of up to 10% of global annual turnover that can be levied against those which violate these rules. 

In-game spending has overtaken traditional revenue streams such as video game purchases and now represents the biggest share of the gaming industry’s revenues. In-game purchases, dark patterns, and their related online harms are another growing concern for consumers and regulators alike. Given increasing potential for reputational harm and regulatory scrutiny, understanding the relevant harms and the regulatory landscape, which is evolving to address those harms, has never been more critical.

And while there are fears that AI can exacerbate online harms in creating and disseminating harmful content such as deep fakes, AI solutions are being used for verifying age and identity, detecting illegal and harmful content, and automating mitigation. 

02| IP strategy in the age of AI

The games industry has a long history of driving and accelerating tech adoption and AI has long been a feature of many games. Now, the significant advancements in AI and GenAI are expected to positively impact more than 50% of the game development process: helping to reduce inefficiencies and the significant costs of video game development, and increase productivity by creating adaptive or intelligent behaviours in non-player characters and bespoke user experiences.

Intellectual property rights  are the main assets of video game companies and represent the backbone of the gaming sector. A pro-active intellectual property strategy is key to investing in, protecting and exploiting intellectual property successfully: to protect assets and revenues, but also prevent reputational damage. However, designing and enforcing IP policies is complicated for video games due to the worldwide distribution model typical in the industry, with multiple jurisdictions to navigate. 

In general, the legal landscape in this area remains complex and in flux. The first AI copyright and personality right infringement cases have been decided in China in favour of the plaintiffs. Cases pending before the courts in the US and the UK should also provide some clarity on the boundaries of legitimate use of copyright protected material to train AI systems. 

AI outputs may also infringe third-party IP rights. Where AI is used to create content in games, robust clearance processes are therefore increasingly complex to execute, yet remain as important as ever. Outputs might further not be protected by IP rights, so that video games companies should balance using AI to ease video games development and at the same time have clear guidelines on how AI can be used. 

The EU’s AI Act will make companies that train AI models subject to transparency requirements, including putting in place policies to comply with EU copyright law and disseminating detailed summaries about the copyright content used for training. Most jurisdictions are also still seeking to find an appropriate balance between content creators and the AI industry, and further regulation is expected. Meanwhile the European Commission has recently closed a call for information on generative AI and virtual worlds: its work taking this forward is likely to put gaming directly under the spotlight.

And while there is an increasing trend of GenAI providers offering indemnities covering customers for unexpected, non-foreseeable infringements, they will not protect customers who knowingly prompted the infringing response or should have known the response is likely to infringe. Customers should therefore, reinforce their internal policies and implement effective risk management (view our webinar for more).

03| Managing the gaming workforce

In 2023 it was estimated that layoffs in the gaming industry reached over 6,000 in the UK as macroeconomic headwinds and the rise of AI has led to studios restructuring. As studio heads and integral employees leave, especially when studio valuations are based on these individuals being at the helm, it’s key for gaming companies to consider if suitable incentives and deterrents are built into deal documentation. 

Buyers are increasingly looking to structure most of their deal consideration as deferred consideration or earn-outs (i.e. financial or game development milestones in 2-5 years post-closing). These mechanisms need to be drafted carefully and account for a variety of scenarios that could happen (e.g. what if main founder/head of studio leaves). 

Consideration also needs to be given to pay transparency, which has been identified as a major hurdle in closing the EU’s gender pay gap. With women reported to earn on average 13% less than men in 2020, the EU took a bold step forward by introducing the EU Pay Transparency Directive in June 2023. To tackle pay discrimination and increase pay transparency, the Directive creates new and far-reaching information and reporting obligations for EU employers which will start to bite as it is transposed into Member State law. 

AI is increasingly becoming a feature of the modern workplace right through the employment lifecycle, from recruitment to line management and promotion, monitoring and surveillance, appraisal decisions and up to termination of employment. The rush of interest and investment in generative AI has brought a renewed focus on the risks of AI to the workplace and the potential impact on the workforce. But alongside challenges, there are opportunities as workforces learn to adapt and collaborate with new technologies and ways to embrace new technology whilst managing associated legal risk.

04| The evolution of in-game digital assets and payments 

As the gaming sector rapidly evolves, new forms of digital asset and payment offerings are emerging. There has been a surge in interest from video game companies in exploring how to enhance their offerings using distributed ledger technology to host gaming applications. This includes facilitating in-game payments through crypto and integrating NFTs in games, which allow players to “play-to-earn” and “play-to-own” in-game assets and to trade them on secondary markets.  

According to JP Morgan, revenue from in-app purchases is set to grow to US$271 billion by 2025 and US$285 billion by 2026. And players, like all other online customers, are more likely to engage in transactions when the process is frictionless and seamlessly integrated into their gaming experience. 

Ensuring that payment options support these ideals should increase transactions, but can also drive growth and market expansion: through leveraging payment-related data on in-game spending patterns to tailor the offering and enhance player retention. Games need to offer multiple payment options, including those which may be impromptu and small-scale. There are a host of options to consider from digital wallet providers to real-time payments, peer-to-peer exchanges, virtual wallets and other local methods of payment. 

As game developers explore these opportunities, they will need to navigate the applicable law and regulation. This is particularly relevant following a sustained period of market turmoil for digital assets and increasing pressure on payments providers to focus on cyber resilience and consumer protection, which has resulted in increased scrutiny, regulatory enforcement, and private litigation. 

05| Stronger momentum for M&A and increasing investment

While 2023 saw a decline in the number of M&A deals in the games sector compared to the previous year, in 2024 investor interest is building – in-step with the huge increase in engagement in video games. At the mid-year point of 2024 projections forecast that dealmaking activity will pick up pace, driven by increased consolidation across the industry.

Pitchbook also notes the possibility of increased investment with several newly launched funds targeting the sector. Given that game development timelines can stretch across many years, diversification of business models can be key to attracting investors e.g. offering online versions of popular products can generate huge amounts of revenue, as has been seen for example with the success of GTA 5 mobile, while GTA 6 continues to be in development since 2014.

At the same time, the need to overcome merger control and foreign investment regulatory hurdles to M&A have been at an all-time high. It remains challenging to predict precisely where and how concerns will arise, and the conclusions different regulators will reach on whether a deal is problematic. This could influence M&A decisions, with only those seeking a real strategic advantage pursuing M&A despite the regulatory challenges.

See our Games and Interactive Entertainment page to find out more about our work and thought leadership in the space.