6 Tips to Identifying the Real Costs of Virtual Goods

Though selling virtual goods isn’t new, marketing these items to kids is. Apple has changed their purchasing policy in response to overwhelming outrage by consumers, and federal and state law enforcement bodies. At issue was the lack of clear notice and information that ‘virtual’ purchases cost real money, and the 15-minute policy that said after a password is entered for a purchase on Apple’s IPhones and IPad devices additional purchases could be made without reentering the password.

The idea behind Apple’s previous policy was to allow users to be able to quickly make several purchases without having to enter their password every time, but it did not foresee the in-app purchase confusion this could lead to.

In practice the old policy meant that if a parent bought a game for their child to play, then handed the device over to their child, purchases could be racked up without the parent’s knowledge or consent, and without the child realizing that the charges weren’t in ‘virtual currency’.

After hearing of exorbitant charges facing families whose children had naively purchased items, Washington State Attorney General Rob McKenna’s office wrote to Apple in December of last year.  The policy change “is a victory for consumers,” said Paula Selis, senior counsel for State Attorney General Rob McKenna. “Our attitude about enforcement is that we are most effective with positive change without litigating, and talk an issue through with a company to affect change.”

McKenna’s office wasn’t the only one to take notice; last month the FTC’s Chairman Jon Leibowitz informed congress that he was looking into Apple’s practices as well as the marketing and delivery of these types of mobile applications. And Rep. Ed Markey (D-Mass) went so far as to call Apple’s practice deceitful marketing.

Apple isn’t the first company to come under fire for their virtual purchasing policies, nor is this issue a ‘mobile’ problem. Facebook took a beating last fall over ‘Farmville’ an app became hugely popular among users. Kids racked up enormous bills through purchases made on that service as well, sending families into the same kind of purchase shock that Apple’s users now face.

Learn more in my blogs Scamming Users Part of Social Gaming Company Zynga’s business model, Could Facebook Go the Way of MySpace?, and TechCruch’s article Social Games: How the Big Three Make Millions.

Though selling virtual goods isn’t new, marketing these items to kids is

The Smurf’s Village and Farmville have been lightning rod for protests, but the business model of selling games cheaply (or giving them away) and then charging for virtual items within the games or ‘worlds’ is widespread, and far from new.

Back in 2007 when the app-de-jour was Second Life and the buzz was over their “Linden dollars”, companies like Reebok (see example), scrambled to create a presence on the site and market their real products through interactions with consumer’s avatars. What companies discovered however was twofold:

  • While the ‘inhabitants’ of Second Life spent millions of dollars on digital clothes, homes, even perfume (!) for their avatars, they were largely disinterested in using virtual sites to purchase real world products.
  • The tangible tie between Linden dollars and real currency, as well as the lack of kids on the site, largely meant consumers were conscious that they were spending real money for items.

A couple of business model iterations later, the lessons of how to successfully sell things online is much clearer – Virtual goods are best sold in virtual environments while real goods sell best through web versions of real stores.

Game developers have seized this model to make their games enormously profitable – what could be more ideal than making money from digital goods? They don’t cost to ship or store, they aren’t taxed and they don’t rot, and when fashions change, you aren’t stuck with costly inventory.  It turns out that the fable of the Emperors new suit by Hans Christian Andersen was off target; he failed to account for consumer’s desire for entertainment.

The questions that will need answering over the next few months as these issues are fought over are: Did developers deliberately targeted youth with their products? (Given titles like Smurfs’ village, and Farmville it is hard to argue otherwise, but that doesn’t mean they won’t try.)  Did they deliberately sidestep the consumer protections in place for products and advertisements targeting youth? And, do new laws and regulations need to be put in place to better protect consumers of all ages, but youth in particular?

In the meantime, here’s what this means to you and your kids

There is nothing wrong with paying for entertainment as long as you understand all of the potential costs, and herein lies the rub. Consumers of all ages are struggling to see the fully burdened costs of online entertainment, and kids have no skills by which to measure the impact. Until better controls are in place, consider the following possible ‘costs’ before purchasing or downloading a game or service:

  1. Identify any financial costs that may be associated with the application. Your review needs to identify any the up-front costs, as well as potential in-app costs. While these should be clearly understandable, until better business practices are developed, or regulation is set in place, the onus is on you to tread carefully. To date, efforts to increase the transparency around real costs has fallen short – many believe the steps Apple has taken to rectify problems will still not be enough.
  2. Does the company behind the application make money off of you through other means? In addition to the actual costs, will you or your child be exposed to advertising while playing? If so, are the types of ads offered ones you feel are appropriate? Are these marketing techniques ones your child understands and knows how to appropriately evaluate?  Does the company resell user information? This question may be impossible to answer, but many of the largest game brands have been caught doing this – see my blog 10 most popular apps that Facebook’s 500m users play or use to share common interests, have been selling user’s information to outside companies
  3. Look for supervisory tools. These should be built into products and give parents the ability to block or limit any potential costs that minors want to (or are) playing.
  4. Consider the ‘opportunity cost’. We all need downtime and fun-time, but if you or your child is going to use the application, what are you/they NOT going to be doing? Work or homework? Exercising? Getting fresh air? Spending time as a family?
  5. Understand the application’s values, do they benefit or ‘cost’ you? Does the game or other application match your personal values? Is it reinforcing the values you want to instill in your child? Is it creating an instant gratification or impulse purchasing pattern?  How commercial is the game – how much can you do for existing cost vs. how quickly do you need to spend more to keep playing or keep it interesting?
  6. Has the application been tested for malware? Just because an application is offered through a web store does not necessarily mean it has been tested for safety, or that it complies with safety guidelines.  Similarly, the number of users on a site is no guarantee the application is secure. Just last week it was discovered that 21 mobile app games downloadable from the Android Marketplace contained malicious code. See my blog More Mobile Apps Caught Inappropriately Collecting User Info and Installing Malware. Identifying which applications are safe and responsible is no simple matter, so follow these three principles: 1) Only download from sites you trust AND that test applications for malware and policy compliance before allowing them on their marketplace. 2) Research the company behind the application. For example, you should feel very confident about the ethical standards behind products built by well-known companies with sterling brands, but if the application is developed by a company that has previously been found to use unethical or malicious practices, or is unknown, you may want to turn away or tread very cautiously.

Once you’ve worked through the answers to these – and any other concerns you may have – you can make an informed choice.



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