Weekly Update

What App Distributors Can Learn from the Ringtone Craze

The worldwide ringtone craze peaked about six years ago ago, and nobody enjoyed those days more than Jamster. The former VeriSign subsidiary (and its famed Crazy Frog) made almost $600 million in revenue in 2005 thanks largely to big-budget marketing campaigns that offered a number of ringtones, games or pieces of wallpaper for a monthly fee.

That success came with a huge price, however. Jamster, like many others, has repeatedly been accused of targeting teens with fraudulent ads, and for making it difficult for users to stop the subscriptions. Multiple ringtone vendors, carriers and others continue to battle class action lawsuits. The 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.

Why am I bringing this up now? Because I think of Jamster every time I read a story like the one that appeared last week in the Washington Post. Seems an eight-year-old girl racked up an impressive $150 in charges playing Tap Zoo, a free iPhone game that allows players to, um, enhance their gaming experience by buying virtual currency. Buckets of stars sell for $19; a bucket of coins goes for a whopping $99. The story echoed last year’s news of a seven-year-old who incurred $1,200 in charges playing the free game Tap Fish, and my colleague Kevin Tofel last year wrote that his step-daughter incurred $375 in charges through a free aquarium game.

These games take advantage of Apple’s (and soon Google’s) support for in-app purchases, offer tremendous potential for developers to generate revenues: As my colleague Ryan Kim recently wrote, they’re an ideal vehicle for the kind of freemium offerings that enable users to test drive a game before deciding to buy. In-app purchases are already generating 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 could create the same kind of speed bump that slowed ringtone sales several years ago. Parents are the first line of defense against scammy developers — as they should be — but the industry must do a better job of policing itself than it has in the past. Carriers no longer play the crucial role they once did in the world of mobile content, because Android Market and the App Store operate outside their domain. So it behooves app distributors like Apple and Google to take more care in ensuring developers aren’t swindling underage users to make a quick buck.

What can they do? Apple’s use of a password to download content from its App Store is a good start, but that’s not enough. 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.

I’m not absolving parents of their responsibilities – if you hand a kid your phone, you are accountable for the content that is accessed and for the costs involved. And no, I don’t really believe that Apple or (especially) Google will do much more than they already have to police their storefronts. I’m simply saying that in-app purchases represent a huge opportunity but also a big threat for mobile content. App distributors with a long-term view of the market should heed the lessons that should have been learned during the ringtone craze.

Question of the week

Should app distributors be more aggressive in controlling in-app purchases?