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Summary:

In-app purchases represent a huge opportunity for developers to generate revenues and for consumers to enhance the user experience. But the market will only reach its potential if it can avoid the public relation problems that plagued the ringtone market a few years ago.

crazyfrog

Last week, the Washington Post published an account of an eight-year-old girl who racked up $150 in charges playing Tap Zoo, a free iPhone game that uses in-app purchases to sell virtual currency that players use in the game itself. Buckets of stars sell for $19; a bucket of coins goes for a whopping $99. And that was no isolated incident. A seven-year-old last year ran up a $1,200 bill playing Tap Fish, and even my colleague Kevin Tofel has written about the time his step-daughter incurred $375 in charges through a free game.

Those stories remind me of how ringtone vendors and their partners shackled the market for mobile content several years ago. Retailers like Jamster and Buongiorno were repeatedly accused of targeting teens with fraudulent ads that underhandedly touted subscription services. Multiple ringtone vendors, carriers and others continue to battle class action lawsuits. The scary headlines and consumer backlash not only hastened the downturn of the ringtone industry, it created a substantial speed bump for mobile data in general, forcing carriers like Sprint to enact new guidelines to keep their content partners in check.

So just what do the failures of the ringtone era have to do with the rise of in-app purchases? Like the ringtone market of 2005, in-app purchases are seeing tremendous growth. As my colleague Ryan Kim recently wrote, in-app purchases are an ideal vehicle for the kind of freemium offerings that enable users to take a test drive of a game before they decide to buy. In-app purchases are already pulling in more money than mobile ads, according to Alcatel-Lucent, and  Juniper Research last month said they will be a driving force as mobile gaming explodes over the next few years.

But that market will only reach its potential if it can avoid the public relations problems that plagued the ringtone market a few years ago. Eye-catching headlines like the one from the Washington Post story could create the same kind of speed bump that slowed ringtone sales several years ago.

So what should the industry do? Free games that feature in-app purchases and that are targeted at children should feature a label warning consumers that they might not truly be free — especially if they include ludicrous offers like a $99 bucket of coins. App storefronts should feature dashboards that allow parents to set spending limits for each account and phone, automatically rejecting attempted purchases that exceed the cap. (Apple introduced some basic controls last year when it rolled out iOS 4 parental controls, but few users seem to know about them.) And parents should be able to receive alerts when their accounts reach pre-set limits (say, of $20 or $50) every month.

Parents, of course, are the first line of defense against scammy developers, and any adult who puts his phone or tablet in the hands of a minor is responsible for the content that is accessed and the costs involved. But it behooves the industry to do a better job of policing itself than it has in the past.

For an in-depth look at this issue as well as some ways the industry can address it, please see my weekly column at GigaOM Pro (subscription required).

Image source: Flickr user moffoys.

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  1. So, the parent either:
    - gave an 8 year old her own iTunes account hooked up to a credit card
    - gave her the password to their iTunes account or
    - disabled iTunes prompts for purchases then let the daughter use the phone

    That’s their fault. I have kids. They are obsessed with my iPhone. It’s passcoded so they can only play with it when I permit.

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    1. As I wrote, Luc, parents are absolutely accountable for this kind of thing. But too few understand how easy it is for their kids to rack up big bills. And scary headlines about in-app purchases could become big problems for the mobile app industry.

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  2. It would be nice if people were aware of the real price. I prefer to pay for apps and games so I don’t get those ads and other things. One of the benefits of 3rd party app stores is that they can filter out such applications, like the isle in the supermarket that doesn’t have candy on it.

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    1. I think you’re exactly right, Stuart, and I think there are big opportunities here for app stores that cater to specific groups — like parents.

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  3. Great article, however, I think you’re preaching to the choir here. I suspect most people who come to GigaOm aren’t that shady–at least I hope not.

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