Virtual Goods and Subscriptions for Mobile Devices Nearly $5B by 2016?

November 6, 2011

Fifteen years ago buying ringtones and swapping .3 megapixel photos was cutting edge, now global revenues from mobile virtual goods and premium subscriptions is projected to stretch to $4.7 billion USD by 2016, according to Juniper Research’s “Virtual Goods – Real Revenues on Mobile” study released this month.

Juniper defines virtual goods, as intangible, digital items which cost little to produce and are often sold in bulk at low prices, typically for about $1 USD each. Many virtual goods are digital depictions of physical goods – like the berries in Farmville for example – and Juniper says in-game items are a major source of virtual good revenue for many sites.

The kicker for consumers will be determining if the digital downloads are safe, or carry a bonus malware payload.

In my blog It’s No Accident – Mobile Money and Mobile Malware Set to Go Big in 2011, I explain why the surge in mobile revenue feeds the mobile crime rate:

The revenue potential of turning phones into payment tools for financial institutions is enormous. And the convenience factor for consumers is clear cut – the need for carrying cash or credit cards disappears, and whole new application scenarios are enabled. So what does this have to do with mobile crime?

Follow the money. The same factors that make a favorable climate for great strides in legitimate mobile commerce make a favorable climate for crime.

As the popularity of smartphones skyrockets, smartphone functionality increases, the number of mobile banking, ecommerce, and transaction platforms expand, the number of mobile access points explodes, and the sophistication of criminals grows, we are approaching perfect storm conditions. Here’s how both the good guys and the bad guys look at the landscape:

Size of opportunity: There are now more than five billion connections worldwide and analysts predict this will surpass the six billion mark in 2012. More than 500 million of these phones today are smartphones that enable the rich features companies and crooks need to drive revenue, and this number is expected to exceed 1 billion smartphones by 2013 according to the latest forecasts from Informa Telecoms & Media.  As a point of comparison, there are about 2 Billion computers out there, most running the Windows OS.

Cost of investment drops: As industry pressures condense the number of mobile platforms, developers and hackers alike can better leverage their code to target millions/billions of users with the same services (and exploits) setting the stage for a high return on investment.

Risk – From financial corporations view: Credit card companies and other financial institutions believe they have mitigated the risks inherent in contactless payment systems. Indeed, Visa claims their PayWave system will in fact be safer than using traditional credit cards because their chip creates a unique authentication code for each transaction while never providing retailers with your credit card number. Challenging that claim, security expert and uber white hat hacker Karsten Nohl told CNET that NFC payments still have their security weaknesses and that the technology may need a bit more time to be completely safe. Whatever the case, these companies have long experience earning plenty of money even when crime takes a bite out of their revenues. But they only have to cover one piece of the pain; consumers have to pick up the time and cost of cleaning up their accounts and financial reputations.

Risk – From organized crime’s view: With their successful tactics in phishing, farming, scamming and spamming constantly being honed, consumers using insecure WiFi networks,  security gaps in both service’s and in platform’s code to exploit, antiquated or non-existent laws, police forces woefully understaffed, and careless consumers hell-bent on convenience, what’s not to like? Now add into the mix that phones are essentially wallets and everyone wants to be a pickpocket. The business case for investing mobile malware has finally been made.  Learn more in my blog McAfee Threat Predictions for 2011 – Mobile: Usage is rising in the workplace, and so will attacks, that looks at the historically fragile cellular infrastructure and slow strides toward encryption. McAfee Labs predicts that 2011 will bring a rapid escalation of attacks and threats to mobile devices, putting user and corporate data at very high risk.

We’ve already begun to see the damage. Android (Google) has had at least two embarrassing episodes with their mobile apps – see my blogs More Mobile Apps Caught Inappropriately Collecting User Info and Installing Malware and Twenty-Five New Malicious Apps on Android; 30,000 to 120,000 Users Affected. And as more users go outside the ‘tested apps in walled gardens’ like Apple’s and the ones carriers provide, the insertion of malicious code into apps will increase.

The bottom line: There is no substitute for strong security protection on your device.  There are a number of mobile security suites available to compare these TopTenReviews has created an excellent mobile security software comparison chart for consumers. Be sure you install one.



6 Tips to Identifying the Real Costs of Virtual Goods

March 14, 2011

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.