Here's How Big the In-App Purchases Market Is for Apple and Google
Apps might be free, but consumers spend a lot of money once they're using them.
Last year, Adobe (NASDAQ:ADBE) launched a commercial for its Marketing Cloud service that instantly struck a chord with thousands of people. Set to the melody of Edvard Grieg's "In the Hall of the Mountain King," it depicted a nearly dormant company that makes and sells encyclopedias springing to life as demand for its product suddenly surges. Ramping up production, the company begins frantically shipping more encyclopedias, ordering more trucks for delivery, and chopping down more trees for paper. At the the end of the ad, however, it's revealed that 100% of the company's orders originated in one home where a baby is playing with a tablet, clicking the "Buy Now" button over and over again.
Here's the commercial:
The idea behind the commercial reflects a real-life concern that has been raised by thousands of parents: There just aren't enough roadblocks in place to stop a child from going overboard with in-app purchases. So far Apple (NASDAQ:AAPL) is the only big tech company that has faced lawsuits over the issue. Last year, Apple settled a class-action lawsuit with over 23 million frustrated parents for over $100 million. With that settlement, consumers had until January 13 to claim $5 iTunes gift cards for any charges they incurred without giving their consent. Read more about that here.
Yesterday afternoon, the Federal Trade Commission announced that it had reached a settlement deal with Apple regarding its case against the company on the same issue: charging customers for purchases that were not authorized. More specifically, the FTC alleges that many parents were not aware that by entering a password to activate an app, they were also opening a 15-minute window within which children could make unlimited in-app purchases without any kind of parental input. According to FTC Chairwoman Edith Ramirez, the issue first came to the agency's attention in late 2010 and early 2011 when it received thousands of complaints from upset Apple users.
As part of this latest settlement, Apple will pay a minimum of $32.5 million to fully refund consumers who were charged for purchases made by their kids. Additionally, Apple will be required to overhaul its in-app billing practices to make sure that consumers give informed consent before ever hitting the "buy" button. The company will have until March 31 to make the changes. (For more details, see the FTC's official press release here.)
An example of an in-app purchase.
Just how important are in-app sales for Apple? According to the app analytics firm Distimo, by November of last year, a full 92% of Apple's App Store monthly revenue came from in-app purchases. In January of 2013, that figure was 77%. It must be noted: Distimo's figures do not include ad revenues earned by app developers; the numbers only take into account direct revenues to the App Store.
And Apple's definitely not alone: In-app revenue on the Google (NASDAQ:GOOG) Play app store accounted for 98% of total revenue in November of last year, up from 89% in January of 2013 (also excluding ad revenues to developers).
This massive share of revenue can be attributed to the the so-called "freemium" model for app sales, wherein users can download an app for free, and then buy additional content through in-app purchases. According to Distimo, 71% of apps available on Apple's App Store use the freemium model.
It's not known how much of Apple's App store revenue came from children -- or even toddlers, like the one in the Adobe commercial. However, given that the settlement figure is $32.5 million, and that consumers spent over $10 billion in the App Store in 2013, Apple seems to have gotten off pretty easy.
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