Amazon's Suicidal FTC Move and Why You Should Avoid 'Free'

By Rob Enderle July 15, 2014

It is never a good policy to allow a practice that leaves a bad taste for customers.   As long as customers get a good value from what they spend, they’ll keep coming back - but leave a bad taste for a customer only once, and they have a high probability of becoming an ex-customer forever because they stop trusting you and getting trust back, once lost, is  pretty impossible.   Currently, the FTC and Amazon are locked into a battle with regard to in-app purchases and while I can understand that Amazon doesn’t want any government agency to dictate their business model, in this case, customers are the ones being short changed and if that doesn’t stop, Amazon will have more to worry about than just the FTC.  

I spent a few weeks looking into this personally and the controls over in-app purchases are clearly inadequate.  It is far too easy to spend hundreds, potentially even thousands, of dollars on a game with a value of less than $20 and that is both wrong, but also potentially suicidal.  Let me explain.

Free Isn’t

I could and will blame this on Google because before Android the vast majority of games were either purchase or subscription.   You paid for a fixed service and you received that fixed service if the game sucked you were only out the price of the game.  Well this model didn’t work on Android because there was so much free stuff and developers were losing their shirts except for those that had in-app purchasing.   Early on with Android the developers making money were those that provided “free” games that weren’t free at all - in fact they generated a ton of money.   Now it was hoped that in-game advertising would cover the costs but clearly that didn’t work very well either and thus we ended up with the current broken model.

To try this out over a period of time, I installed a number of free games on my Amazon Kindles and started playing them buying Amazon Coins in $90 increments as needed.  One game would regularly crash during purchase so the game maker got the coins but I never got the value.  There was no easy way to get a refund (I did call a couple of times) and the end result is that game pulled around $200 before I deleted it.    Another game just chewed up money if you wanted to do anything and in the first few minutes the expenses got crazy before I pulled the plug on that game and stopped.   Now, not all free games are like this and many are far more reasonable and this problem isn’t just on Android or Amazon given Apple just got nailed by the FTC for similar practices (though, anecdotally it seems far worse on Android and Amazon than on Apple).   But this needs to be fixed regardless. 

Kids Are the Biggest Issue

Adults often don’t have great impulse control and can run up hundreds of dollars before they figure out they were mislead - but kids don’t yet understand money and can be tricked into spending far more over a longer time as a result.   Doing so with adults is bad enough but with kids it tarnishes the brand badly and over time folks start looking at the firm like it is dishonest and this could easily spread from their consumer to their business efforts given both have the same Amazon brand.

I expect, if this isn’t corrected by the FTC, Amazon will start bleeding customers and certainly there will be an increasing number that will no longer accept free apps from the company which should have an adverse long term impact on revenue and profit. 

Wrapping Up:  Doing the Right Thing

There is a model that works that harkens back to when I was a kid in camp.  That is to give kids an allowance to spend on store items in the camp so they can buy some things but never have the opportunity to go crazy.   Game revenue should be tied to a similar model with reasonable limits placed on how much, over a given period of time, can be purchased so the child and adult, don’t have the opportunity to feel cheated.   The problem with efforts like this is that executives can look at an action like the FTC’s and see it as a fight for control and power, or see the revenue stream as so attractive they don’t want to mess with it.   Instead, they should be sitting back and thinking about their customers and deciding that screwing those customers is a bad idea regardless of who points that out to them or how much money they can initially make.   Firms should do the right thing and this action showcases that both Amazon and Google increasingly share one unfortunate trait of putting doing what is right last on the list.   

I’ve got one suggestion for you, avoid “Free Games” because they generally cost more than you can afford.  

Edited by Stefania Viscusi

President and Principal Analyst, Enderle Group

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