Apple Proposed Settlement Resolves In-App Purchasing by Kids – For Now

Apple Inc. has agreed to a preliminary settlement of a class-action lawsuit that alleged the company failed to properly notify parents when their kids made iTunes purchases.

The settlement, which will be presented to a federal court judge on March 1 for approval, could result in refunds to as many as 23 million people. It could also impact how Apple handles in-app purchasing, a key revenue generator for many iOS applications.

Monetizing Gaming Apps: Paying For Smurfberries

“We’d like to think that our actions already had a hand in forcing Apple to make a number of changes,” said Michael Boni, a partner at Boni & Zach, which represents some of the plaintiffs in the cases filed between April and May 2011. “When we filed our lawsuit, and consistently thereafter, Apple has made a number of improvements to its system of in-app purchases.”

Apple now requires app buyers to enter an iTunes account password before purchasing the app, as well as for the first in-app purchase. Once a password has been entered, however, there is a 15-minute window during which additional purchases do not require a password. However, parents can also elect that their device require a password for every purchase, closing the 15-minute window.

The so-called “freemium” model, in which the initial application download is free but advanced features or virtual items must be purchased, has gathered steam in the past two years. Instead of selling an app in one go, the freemium model allows developers to potentially collect an ongoing stream of revenue for each user and possibly extract more money overall.

But the practice attracted criticism from parents who found their children had racked up purchases, some as many as hundreds of dollars each, without their parents’ knowledge. The complaints were directed at games, and focused on “Smurf’s Village” in particular, which allowed players to spend as much as $99 at a time to obtain in-app currency.

The settlement, however, covers all in-app purchasing, which has become a dominant source of revenue for a wide variety of applications. An estimated 69% of all revenue generated by iOS apps, and 75% of Android app revenue worldwide, came from such freemium models, according to a survey released in October by analytics firm App Annie Intelligence, which tracks more than 700,000 applications.

The model works perhaps too well with children. The U.S. Federal Trade Commission in 2011 indicated it would look into the practice, but has not yet taken any action on the matter.

“We think that the whole practice itself is a bit predatory,” Boni said. “To be able to charge almost $100 for a wheelbarrow of virtual Smurfberries is a bit predatory.”

Apple, which receives 30% of the revenue generated by iOS applications, declined to comment.

Under the proposed settlement, parents whose kids made unauthorized in-app purchases would be able to file a claim for a $5 iTunescredit. Those whose charges exceeded $30 would also have the option of requesting a cash refund. If the agreement is approved, Apple would notify about 23 million U.S. iTunes customers who were potentially affected.