US 'app' lawsuit against Amazon will 'crimp' retailer's aspirations

Children's ability to buy apps from Amazon, using parents' accounts without authorization, lands the online retailer in hot water with the FTC, which has sued it. How much will the suit slow Amazon's bid to expand into the app industry?

A federal lawsuit against online retail giant Amazon has the potential to damage the company’s growing mobile in-app business, imperiling its efforts to catch up to Apple and Google Play in this burgeoning industry.

The US Federal Trade Commission alleges, in court papers filed Thursday, that Amazon’s in-app purchase process makes it too easy for children to buy apps that are not authorized by their parents. Amazon has reaped millions of dollars since November 2011 from purchases that weren't confirmed by their accountholders, the FTC charges.

“Amazon’s in-app system allowed children to incur unlimited charges on their parents’ accounts without permission. Even Amazon's own employees recognized the serious problem its process created,” FTC Chairwoman Edith Ramirez said in a statement.

Amazon refutes the allegations and says it installed a password system in March 2012 for purchases of more than $20. The company also says it has offered refunds to customers who have complained. The FTC counters that those steps did not stem the flow of children's unlimited and unauthorized spending on products that are “final and non-refundable.” 

According to the FTC, Amazon keeps about 30 percent of revenues resulting from in-app purchases made on its site – and the market appears poised for massive growth in the US. More than 41 percent of all revenues for mobile games industrywide last year came from in-app purchases, market research company eMarketer reported in December. It forecasts that in-app revenues will rise to nearly 48 percent of total revenues by 2017.

What makes in-apps so lucrative is that they are “impulse services” that appeal to children, says P.K. Kannan, chairman of the marketing science department at the University of Maryland in College Park.

“Amazon is trying very hard to get a foothold in the market and become a big player in mobile backend services, and any FTC-related issues that put more constraints on its business model will put a crimp in how [Amazon] can attract mobile [software] developers to be a part of this service,” Professor Kannan says.

Most in-apps can be downloaded to mobile devices such as the Kindle Fire and iPad for free. However, to engage the games or services on a deeper level, accountholders must buy virtual currency, or points.

The Amazon App Store lags market leader Apple, which controls more than half the market, and Google Play. However, last year Amazon announced that it is expanding its service to 200 countries. Amazon’s commitment to in-app retailing was also confirmed in June, when it announced its first branded mobile phone, which will be marketed as the primary platform for the company’s app store.

In a letter last week to the FTC, Amazon said its app retailing process is “responsible, customer-focused, and lawful” and offers “effective parental controls, real-time notice of every in-app purchase, and world-class customer service.”

In its complaint filed in a federal district court in Washington, the FTC says it wants the company to issue refunds for consumers, as well as a court order forcing Amazon to install password requirements on in-app charges, especially for apps that appeal to children. The commission cited internal Amazon employee e-mails that show the company is aware of the problem.

Amazon will find it difficult to prove that unlimited purchases under $20 are not harmful for its accountholders, Kannan says.

“When it comes to kids, you’re on shaky ground because they are really impulse services, and kids can really fall into a trap,” he says. “Parents will tolerate it to the extent of small purchases, but when they add up to $200, it becomes a big deal.”