Selling candy to babies

Free-to-play business models rule the App Store — but should they have free rein over children's games?
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Nathan Ditum has been a games journalist for a decade, and lives in England with his wife and family. When his son was 9 years old, Ditum gave the boy an iPod Touch. That's when the trouble started.

"It was a free football game called Fantasy Manager that caused the problems," Ditum says. "I was playing [real] football myself a day or two later, checked my phone afterward and saw an App Store receipt had come through for £23 ($38.50)."

As Ditum read the bill, another charge came through. And then another, for a total of close to $200.

"I freaked out, rang my wife straight away and she spoke to our son who said he hadn't been doing anything."

The United States Federal Trade Commission recently investigated Apple after hearing "at least tens of thousands of complaints" from parents whose children had made in-app purchases on the App Store. These IAPs are available within many games, are often associated with free-to-play business models and can be for anything from expansion packs to subscriptions to premium currencies.

These purchases can rapidly amount to budget-busting extremes and beyond. One child spent well over $6,000 on a game called Smurfs' Village, the type of story that has led to the game industry coining the euphemism "bill shock." The widespread attention IAPs have generated tends to focus on extremes like this and less on the much more common problem of smaller amounts charged to families like the Ditums.

"This one's text went out of its way to hide that link, and so a nine year-old spent over a hundred pounds within a few minutes."

"I went home and got my son to show me what he'd been doing," Ditum says. "And basically within [Fantasy Manager] you needed a currency called 'shields' to buy [football] players — and it in no way made it clear that this was linked to real money. You know there's normally that blue dialogue box saying do you really want to buy a hundred shields or whatever? This one's text went out of its way to hide that link, and so a nine-year-old spent over a hundred pounds within a few minutes."

After discovering what had happened, Ditum went further than most parents — as well as contacting Apple, he tracked down the developer behind Fantasy Manager at From the Bench. "I found out his email and contacted him to tell him how unhappy I was and made it clear to both him and Apple that what really bothered me was this issue around the password."

What bothered Ditum was that neither he nor his wife had entered the device password — and there was no way his son could've known it. The family had multiple Apple devices, which was one possible cause, but no explanation was forthcoming about how these IAPs had gone through.

"Neither of them engaged with that," says Ditum. "They just refunded the money." And they refused to discuss the issue further.

Yet that wasn't the end of it. After the fourth charge came through, Ditum's bank put a hold on his account as a precaution, viewing the activity as suspicious.

"That's a flag in itself, isn't it?" Ditum says. "If IAPs can turn up on a system designed to spot credit card fraud, that suggests something's not right."

Child's Play

"In order to be successful in freemium games," says Björn Jeffery, CEO and cofounder of children's developer Toca Boca, "you have to build something that is very heavily gamified and with fictitious constraints, which you can then accelerate by spending more money.

"This is intrinsically different from trying to make something that children will love."

Since 2010, Stockholm-based Toca Boca's games have amassed over 50 million downloads and countless awards and five-star ratings. Toca Boca calls its critically acclaimed productions "toys" because they're free of overtly gamey apparatus-like levels and progression systems.

Toca Band, for example, gives players a stage and multiple characters then lets them mix and match the stage setup to play a song in thousands of arrangements. Toca Boca's games sell for an upfront cost with no in-app purchases and make what Jeffery calls a "healthy profit." In terms of children's app developers, this puts the studio in a vanishingly small minority.

"For Toca Boca, F2P was on the agenda before we even started," Jeffery says. "We quickly identified [IAPs] as a pain point for a lot of parents, creating an insecurity — 'What will happen when I give my kids this device?' — and not really knowing. That was one of the things we wanted to change. Unfortunately, not a lot has changed."

F2P business models are variations on making the consumer play the game first, then monetizing through advertising or, overwhelmingly, IAPs. The latter method of purchase is, as of December 2013, responsible for 92% of App Store revenue and 98% of Google Play revenue. And as these platforms make their way into more homes (55% of America's adult population owns a smartphone, and 42% owns a tablet), F2P models are increasingly dominant in children's games.

"The F2P space for kids is unfortunately a highly predatory one," says Jeffery. "There are a lot of developers doing things they must know and feel are not the right things to do. It is predatory, and it is lucrative. We make six apps a year. Companies like TabTale make 200. It's a machine, a freemium converting machine."

Moshi Monsters Village

"The bottom line is that it's extremely difficult to build a successful kids' mobile game with an upfront price," says Michael Acton Smith OBE, CEO and creative director at Mind Candy. "The vast majority of games in the App Store are free with IAP."

Moshi Monsters Village is Mind Candy's first F2P app, released on Dec. 24, 2013; its second F2P, Moshi Karts, followed it in February. Moshi Monsters Village is a town-builder; you start with one monster and, over days and weeks, collect more and build a village for them to live in.

The game's system is constructed around classic F2P principles: Players begin with a small quantity of premium currency, which they are immediately taught to use to speed up building times. There are countdown timers, an energy ("Gloop") meter limiting certain activities, and huge jumps in construction costs. It is a design meant to compartmentalize and artificially slow the player's progression so the player becomes tempted to buy a boost through IAP.

It is a game designed specifically for kids to play. It is also designed specifically to encourage players to spend money. These potentially conflicting goals are not lost on either Mind Candy or Apple.

As part of Apple's iOS 7 release for its tablets and smartphones, Apple introduced a kids category to the App Store. It divides apps into three age ranges, demands compliance with the Children's Online Privacy Protection Act and places restrictions on advertising and data collection. Apps placed into this section are, according to Apple, "suitable for children."

The Kids category in iTunes is meticulously curated, well-organized and unfortunately doesn't contain nearly as many apps as it should. There is no room here for F2P games like Nemo's Reef or SpongeBob Moves In, city-building games that sell premium currencies, nor for infamous apps like My Little Pony: Friendship is Magic, which sells a pony costing roughly $70 worth of premium currency.

"Apple making a kids' category with guidelines is a good first step," Jeffery says. "But what's happening unfortunately is that a lot of developers are not fitting within that category. They're making kids' products but not putting [them] in that category to avoid those constraints. I think that speaks for itself."

"They're making kids' products but not putting [them] in that category to avoid those constraints."

"There's no real agreement as to what constitutes a kids' game," says Jas Purewal, an interactive entertainment lawyer who works at the firm Osborne Clarke. "Angry Birds, Cut the Rope, Where's My Water? — are they kids' games? Cut the Rope is rated 7+ so it's a pretty good bet that's intended as a children's game, but if you ask people you might get a variety of answers. On the other hand, is Mind Candy's Moshi Monsters Village a kids' game? Almost certainly yes. It just is."

Yet Moshi Monsters Village is not in the App Store's Kids section. Neither is one of the most successful children's games released last year, a movie tie-in to Disney's Frozen.

Candy Crush Saga is one of the most successful F2P games ever, and the scale of this can be seen in developer King’s recent IPO filing which shows that over the last three months of 2013 players spent $493 million in its mobile apps (78% of whom are playing Candy Crush Saga). Disney's Frozen Free Fall, a tie-in to the children's movie, copies the formula of Candy Crush Saga thoroughly, to the extent of introducing the same match-three mechanics (such as T and L shapes) at the same pace, using purchasable power-ups for the same functions, and using the same progression structure, albeit with fewer levels. Disney Interactive is a division of the largest media conglomerate in the world, and it made an F2P tie-in to the biggest children's movie release of 2013 based on a design proven to successfully monetize its audience in a big way. Frozen Free Fall is not listed in Apple's kids' category.

In Moshi Monsters Village, the premium currency, called "Rox," can be used to skip timers or exchanged for other in-game currency. It is impossible to miss that the Rox menu icon is highlighted over and above its surroundings with an eye-catching, shiny effect that no other icon shares. Mind Candy claims this works differently for users under the age of 13, although it seems to work for players registered as young as 7.

"We've tested the product extensively and have had no complaints about it," Smith says. "In fact our users are very happy to pay for additional currency, and our feedback has been very positive. The users should be the judge of the design decisions.

"If IAP isn't allowed for kids' products then the economics are such that very few developers will ... be able to make amazing entertainment for kids on mobile devices. That's a very sad scenario for all concerned."

Legislation and self-regulation

F2P first rose to mass-market prominence in Asia in the late 1990s, particularly in China and South Korea. Many of the current questions facing Western developers in the F2P market have therefore already been addressed by or for Eastern developers.

Legislation was passed in South Korea in 2010 and among its specifics are that school-age children are barred from playing 19 popular MMOGs like MapleStory or Mabinogi between 12 a.m. and 8 a.m. — this legislation is referred to as the Shutdown Law, or the Cinderella Law.

"In South Korea [children's F2P games] have been a much bigger issue and they take it very seriously," says Ramin Shokrizade, the full-time economist for the World of Tanks developer, Wargaming. "They have the equivalent of a social security number that you have to input before playing a game so they know how old you are, and they put restrictions on how you can be sold to, how much you can spend if you're a minor, even how much you can play. I think that's pretty cool and ahead of everyone else."

In this instance the South Korean government was acting after several years of consultation and research into the issues; but legislation is not always born of considered reflection. "With kompu gacha [in Japan] the way it happened was that moral panic took hold of the media," says Dr. Vili Lehdonvirta, an economic sociologist specializing in virtual economies, a research fellow at the University of Oxford's Internet Institute as well as a virtual economy consultant for companies including Habbo and Mojang.

The kompu gacha mechanic is basically a gambling mechanic, using in-game slot machines to distribute various items that have to be collected in sets to acquire "rare" items. The Japanese newspaper, Yomiuri Shimbun, reported, among many other examples, that one user had spent in excess of $50,000 chasing particular virtual items.

"So regulators needed to be seen ... doing something and eventually declared this illegal," Lehdonvirta says. "Suddenly these companies have very invasive government regulation that restricts what they can do. If they'd been smarter — there was a lot of discussion and public indignation about gacha, so they could have self-regulated and possibly avoided this by putting softer self-control in place."

The potential for a Western moral panic around F2P games aimed at children is obvious. "I don't know what will happen [with IAPs in children's games]," Lehdonvirta says. "But I think it would be very smart of the industry to do some self-regulation."

Self-regulation, however, requires first acknowledging a problem. Disney and Nickelodeon, both of which develop a wide range of children's apps including multiple F2P titles with premium currencies, declined to comment for this article.

"I don't think companies like Disney will take any action without regulators making them," Shokrizade says. "I've been putting pressure on Disney and I've not been alone in that regard. Especially considering they have some of the most offensive products, and I've let them know this."

In October of 2013, Shokrizade spoke to the International Consumer Protection and Enforcement Network in Panama and demonstrated the F2P mechanics of Marvel Super Hero Squad Online, a browser game, in front of Disney representatives. He's yet to see any action on the issue.

"I don't think companies like Disney will take any action without regulators making them."

"I'm absolutely certain Disney will not improve the quality of their products without being forced to," Shokrizade says.

Many companies argue that, in such a fast-moving field as mobile games, rushing to judgement will be counterproductive. The European Commission, in the last few weeks, has nevertheless announced that it will hold meetings with the industry to discuss four issues around IAPs, one of which is "direct exhortations to children to buy items." Further action is possible, but the European Commission's initial attitude will be to try and work within the existing legal framework.

"All of the laws exist already," says Purewal. "Consumer protection, data privacy, IP laws, but their application to an industry that is very young is still uncertain. The starting point is always what existing laws do we have, and how can a regulator try to use that existing framework to achieve the outcome it wants — in this case the protection of consumers."

The biggest stakeholders in the IAP question are easy to identify — the platform holders. If appropriate legislation already exists, and developers will not voluntarily limit their own activities, then Shokrizade believes the gateways themselves, places like Apple's App Store, are where interventions must be made.

"The platform holders are the only way this can be solved," Shokrizade says. "If there are 40,000 new apps coming out every year there's no way you can go in and evaluate each app to decide if it's meeting regulatory standards; there's just no way. But hold the platform holders responsible and then it's gonna happen. Especially if the platform holder's getting 30 percent, then they have a vested interest in making sure it happens."

And that leads back to the App Store's Kids section and how games like Moshi Monsters Village are avoiding it.

A recent settlement between Apple and the US Federal Trade Commission led to Apple refunding up to $32.5 million to parents whose children had unintentionally spent money on IAPs. But the terms of this deal, and the specific apps it concerns, are not as straightforward as they appear.

"There was some strange language in the FTC complaint that I thought let Apple completely off the hook," says Shokrizade. "What was bothersome was how it talked about games 'suitable for children.' There are very few games that are 'suitable for children.' There are lots of games played by children. And that's where the vast majority of spending and possibly misspending is happening."

The settlement figure for refunds was based on Apple's own estimate of the number of people affected. But Shokrizade believes Apple is not an objective source of information on those figures.

"EEDAR is an objective source," says Shokrizade. And EEDAR found recently that, of parents who play video games on their devices, 80 percent of their children also play mobile games on their devices. Of those children, 22 percent make unauthorized in-app purchases, and when they do, they tend to spend much more than an adult would.

"The difference between the 0.13 percent unauthorised purchase rate [that Apple suggests] and 22 percent is the difference between the $32.5 million Apple spent and the $5.3 billion that they maybe should've spent."

Candy from babies

Games like Moshi Monsters Village are built on a widely used F2P template. Whether the genre is city building or pet collection or racing, F2P games often offer little more than a proven business model with new visuals draped on top. The reason for this is data-driven design.

Data collection in the interactive entertainment industry is widespread; in some games every single action is registered, as well as the time spent on particular screens or sections. Every gaming company in this space has a "business intelligence unit" dedicated to finding out how people play its games and what can be done to fine-tune the design and, thereby, the profits.

"They want to collect as much data as they can about everyone using their products," says Shokrizade. "Then if you have the right people you can use that to change pricing or maybe look at weaknesses in the game — like if everyone's quitting after 30 minutes, why? There are a lot of constructive uses for this information and then there are some less constructive uses."

Less constructive uses are the identification of especially acute bottlenecks — points in the game that squeeze and tempt that crucial first investment, perhaps with a difficulty spike or a locked door, after which players are much more likely to spend money again. Former Zynga executive Roger Dickey memorably described these moments as causing "fun pain."

Such numbers-led design, combined with an increasingly sophisticated understanding of feedback loops, means these games have moved past observing player behavior into attempting to shape it. Are children playing these games, or is it the other way around?

"The term psychological manipulation is a bit alarmist," says Professor David Buckingham, an expert on children's interactions with electronic media who has authored or edited over 25 books on the subject. "You could argue every book we read or movie we see engages in psychological manipulation.

"People who have experience of games learn how they work and how the systems operate. Manipulation implies people are being molded, that they're passive dupes of some all-powerful system, and I just don't buy that."

Professor Buckingham recently led an independent assessment for the UK government called "The Impact of the Commercial World on Children's Wellbeing." He argues that a focus with the F2P business model should be on what children do and do not understand. Many F2P games, for example, rely on ads rather than IAPs to make money — but that is intrusive and ugly, and children think so too.

"With conventional advertising, a lot of evidence makes it pretty clear that young kids understand what advertising is and what it's trying to do," Buckingham says. "They may accept it or not, but they understand it. So on some level you have to see it as reasonable and legitimate."

Many others, however, make money by selling premium currencies and consumable items. It might seem like buying tokens in Despicable Me: Minion Rush to restart races is not a straight comparison with buying Blackbeard's ship for around $40 in Playmobil Pirates, which is not the same as speeding up a construction timer in Moshi Monsters Village. But F2P models all share a reliance on fantasy economies to sell their boosts or items — the IAPs in each case are for quantities of gems, tokens, Rox, and so on.

"With these methods there's a new issue and that is deception," Buckingham says. "Or at least people being very misled. Because what we're talking about is virtual currency, a surrogate for real money, and if children don't fully understand how that operates and what it's worth — then I think there's a problem."

Buckingham has done research with children who are as young as six and seven years old and who "clearly have a very hazy idea about the value of money or what things cost."

There is a significant body of research into children's understanding of the adult economic world. The pioneering work of Anselm Strauss and Karl Schuessler in the early 1950s showed gradual cognitive development in children from ages 4 1/2 to 11 1/2 — from a vague idea that money is used to buy things to an understanding of the concept of profit. Later work by Anna Berti and Anna Bombi in 1981 built on this and, focusing on a younger age group of 3 to 8 years, showed that even the eldest of the sample didn't understand money in a quantitative sense (i.e., the "true value" of a given monetary unit).

More recently in 2000 R.S. Siegler and D.R. Thompson undertook a study, Buy Low, Sell High: The Development of an Informal Theory of Economics. This examines children's understanding of economic concepts from the ages of 6 through 10, and by dividing them into four core areas of understanding shows a clear development — the youngest children understand that people desire goods, and not much else, while by age 10 there is an understanding of profit-seeking, saving and competition.

There is much subsequent research but, even if the exact division of ages and understanding differs from study to study, the overall arc of the evidence is indisputable. Children's understanding of economic concepts develops gradually until they are teenagers; the younger they are, the poorer it is.

"They may understand the advertising and marketing side, but not the money they're spending," Buckingham says. "So I think there's a fundamental principle: Do people understand what's happening, and is there a possibility of deception?"

This must be considered in the context of virtual currency — a layer of abstraction atop "real" money. "Whether you're speaking of children or any other consumer," says Lehdonvirta, "the idea that transactions take place in an unfamiliar unit of currency makes it harder to compare the value in relation to other things. The opportunity cost becomes harder to evaluate."

If children do not fully understand money, and virtual currencies add even more confusion to the mix, then that possibility of deception exists.

The future

A young boy picks up the family tablet and slumps into the couch. He flicks through screens and straight to the IAP-packed Boom Beach. But as the game loads, this player has already been identified as a child, so not a single IAP or purchase screen appears during his playtime.

This is an imagined scenario, but it's not necessarily fantasy. Apple's iPhone 5S launched with Touch ID, a fingerprint recognition service. Current and future devices could therefore easily identify when young family members are playing and automatically hide or disable IAPs, then restore them just as easily for adult fingers. Such a measure would preempt legislation and satisfy any parent, but would also mean games could no longer sell or advertise IAPs to children.

"On both sides there's a responsibility," Nathan Ditum says. "Parents have to recognize that experiences are worth paying for, and there's real value in paying for an experience that isn't going to ask you for more money afterward. And on the part of the industry I think it's unethical to create children's games designed to foster this desire for things with potentially infinite costs."

On March 27 Apple sent out an email to customers who had made IAPs, highlighting the company’s parental controls and saying that it has "improved controls for parents so they can better manage their children's purchases, or restrict them entirely," and "in some cases" will offer refunds.

F2P children's games represent a new intersection of business and ethics worth an enormous amount of money, one in which the target market is comprised of the youngest and most vulnerable members of society.

The demographics for individual apps are either untracked or unknown. The absence of objective external data, in the form of academic and social research, is crippling. Developers and platform holders simply don't want to talk about it.

"If you think these games are the peak of what software can offer children then you are sadly mistaken," Jeffery says. "There are concerns ... that the paid market is declining. But it's up to individual developers not to make products that are intentionally designed to cheat children out of money. That's just awful."

"It's not like I'm an outsider complaining," Shokrizade says. "I'm an insider. I work for one of the top companies in the industry. I'm not giving advice that's fantastical. I'm giving advice that I think would help the income of these companies, including Apple.

"Right now F2P on [these devices] is dominated by a mindset where it's all about tricking the consumer. And right now the most gullible consumers available are small children, or any children. And as long as there's no protection for that consumer group, it's the wild, Wild West."

Layout: Ally Palanzi, Tyson Whiting

Illustrations: Daniel Purvis

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