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Freemium apps face pressure from regulators, paid app growth

Amazon?s recent decision to not accept a settlement with the Federal Trade Commission over in-application purchases points to growing pressures facing freemium apps as regulators take a closer look at possible misuse and the market for paid apps becomes more clearly defined.

 Some consumers are also losing trust in freemium apps because they have had to deal with unauthorized charges. These developments point to the need for best practices for in-app purchases to be more clearly defined.

?Certainly regulators are taking a closer look, and frankly I?d have to say rightly so,? said  David MacQueen, London-based director of wireless media strategies at Strategy Analytics. ?As is often the case with new business models, although there are plenty of reputable companies using the model effectively, there are some mistakes being made and also some bad practice going on.

?I don?t think the argument is really that people are tired of the freemium model per se, but rather that people are getting wise to specific examples of bad practice, and unfortunately without much action yet, those examples are becoming very prevalent in the industry,? he said.

?It?ll take a while for ?norms? to set in and best practice to become established, and we?d expect the model to regain some of the trust it has lost recently, as has happened in the past.?

Bait and switch
Amazon said last week that it will not accept a settlement from the Federal Trade Commission over allegations that the ecommerce giant has not done enough to prevent unauthorized charges by children in freemium apps. As a result, Amazon faces a possible court hearing over the matter.

While Amazon insists it has gone above and beyond to insure that in-app purchasing is safe, these developments highlights one of the perils to the mobile marketing industry if apps do not embrace best practices.

?Too many times, in my experience, I have found the free side useless and left feeling like I was the victim of ?bait & switch,?? said Paul Alvarez, vice president of sales and business development at Atimi Software, Vancouver, British Columbia, Canada. ?The best approach, in my opinion, is to offer some value on the free side to drive interest/demand, build trust/credibility for your brand so that your target audience will want to pay for even more value. 

?There are many educational apps that target children/toddlers - or more specifically their parents - that allow a ?lite? or ?freemium? version which allows the parent/child to gauge interest and value before making any financial commitment,? he said. ?Parents are generally keen to spend when it comes to education but they sure don?t want to be swindled.

?The freemium approach here is a great way to once again build credibility and trust with the target audience and give them a reason to purchase the full feature app and/or additional content.?

Cash cow
Initially, most mobile apps were paid. But then the freemium model ? which lets users download an app for free but then charges for additional content later on ? started to gain steam, with consumers clearly expressing a preference for being able to download apps for free.

This has proven to be a boon to the popular platforms for downloading apps, as they take a percentage of the sales.

For example, a recent App Annie report shows that 98 percent of Google Play?s income in May came from freemium apps. Overall, 92 percent of the revenue generated by the tops apps across Android and Apple app stores comes from freemium apps.

The discussion of freemium apps is not limited to games. Other categories of apps using the freemium model include dating services, messaging services, educational apps ad and newspapers and magazines.

?We predict that the app economy will become increasingly dominated by freemium,? Strategy Analytics? Mr. MacQueen said. ?There?s no reason to wholesale abandon a business model because of some bad apples; you need to weed out the nefarious companies rather than ?switch off? freemium.

?The discussion is absolutely not limited to games,? he said.

Paid apps
The FTC alleges that unauthorized charges by children on Amazon tablets run into the millions of dollars.

Amazon claims it has already refunded money to parents who have complained. The company also insists that its parental controls go beyond what the FTC requires by enabling parents to limit how much time children spend on Kindle tablets and requiring a PIN for in-app purchases.

In January, Apple paid the FTC a $32.5 million fine over similar allegations, also agreeing to change its billing practices to insure it has obtained express, informed consent from consumers before charging them for items sold in mobile apps (see story). 

At the same time that regulators are taking a closer look at freemium apps, there is also something of a resurgence in paid apps under some specific circumstances.

For example, serious gamers are increasingly willing to pay a premium for certain mobile games.

?There is an increasing division between freemium and paid apps,? Mr. MacQueen said. ?The ASP of paid apps is actually increasing, and there is clearly a market there for consumers who would prefer to pay up front.

??Looking at gaming, where this transition is happening fastest, we see that ?casual? games are almost entirely freemium, whereas there are also a growing number of titles - in many cases retro gaming hits, and/or premium IP - which are paid and have a price point typically $5-$15.

 ?To some extent, there is a rise in mobile devices becoming much more serious games machines, particularly tablets,? he said. ?The audience they are aiming at is an older gamer with money to spend and an appetite for reliving the games of their youth.?

Final Take
Chantal Tode is senior editor on Mobile Marketer, New York