Making apps pay

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There are several options available for developers of mobile apps to monetise them. These include the traditional ‘pay per download’ model, in addition to the more recent (but now common) use of in-app purchases and mobile ads. It is important to consider the legal implications of the different monetisation options as part of the development process and not leave it to the last moment.

We now look at certain points to consider for each monetisation option and summarise some of the legal issues that underpin them.

Pay per download

With 'pay per download' mobile apps, users make a one-off payment often between £0.69 and £4.99 to download it to their device (although some mobile apps charge more – for example, ‘TomTom UK & Ireland’ navigation mobile app is currently available to download for £27.49 from Apple’s App Store). The advantage is simplicity – the developer submits the mobile app to the relevant app stores who, in turn, make it available to users and pass the revenues generated from such downloads back to the developer (minus a revenue share of about 30%).

The disadvantage is that once the developer has received the revenue for the downloads, that is where the monetisation ends. In addition, the fact that any charge for download discourages users (particularly those in emerging markets who may not own credit/debit cards), means that developers have often turned to other monetisation models.

This option works well for some developers and, provided the mobile app complies with the content requirements of the relevant app stores, the developer has few legal issues to consider. This is because the app stores process the payments from users and interface with them (not the app developer).

Nonetheless, it is useful to have terms and conditions for the mobile app (often referred to as an End User Licence Agreement or ‘EULA’) to limit the developer's liability and to inform users what they can and cannot do with the mobile app – particularly important if it will feature user-generated content. These terms and conditions should also contain certain provisions mandated by the platform providers under their agreements with the developers. In addition, the inclusion of a privacy policy is important – it will help protect the developer from falling foul of data protection laws. It will need to set out what the developer will do with users' personal data, such as location data.

In addition, if mobile apps are distributed outside the relevant app stores such as on the developer’s website (it is, for example, possible to install or ‘sideload’ mobile apps on the Android platform) it is vital to consider the practicalities of the strict "distance selling" laws. These require, for example, a refunds mechanism – a process that would normally be carried out by the relevant app store.

There is also a problem with the users of some mobile platforms (such as the Android platform) sharing mobile apps with others in a manner which circumvents the relevant app stores. Although illegal, it is clearly not cost-effective or feasible to pursue all the pirates.

In-app purchases

The use of in-app purchases is another monetisation model that has become popular. This model involves the sale of game play extras to users in order to add an extra revenue stream. For example, the hugely popular mobile app game ‘Angry Birds’ now encourages users to purchase the 'mighty eagle' add-on to enable them to skip difficult levels by unleashing a powered-up bird. Even with non-game mobile apps, it is common to see subscriptions to publications or other services available as in-app purchases.

The advantage of using in-app purchases as a monetisation model, as opposed to the 'pay per download' model, is that users are more inclined to download free mobile apps. If they like them they will tell their friends, post positive reviews and then make in-app purchases, or perhaps even purchase a 'pay per download' version (the rationale behind so-called "lite" mobile apps).

The use of in-app purchases, particularly in respect of mobile apps which target children, could breach the Consumer Protection (from Unfair Trading) Regulations 2008. The UK’s Office of Fair Trading (‘OFT’) announced on 13 April 2013 that it was investigating web and app-based games to check if these are misleading, commercially aggressive or otherwise unfair. The announcement comes shortly after reports that a British boy spent £1,700 playing 'Zombies vs Ninja', and another purchased £980 worth of virtual donuts in 'The Simpsons: Tapped Out'. The OFT will focus on the mobile app games which include unlawful “...direct exhortations to children - a strong encouragement to make a purchase, or to do something that will necessitate making a purchase, or to persuade their parents or other adults to make a purchase for them.”¹ It is also often ignored that it is not possible to enforce a contract with a minor.

Whether or not the small print in the terms and conditions for mobile apps is sufficient to provide a defence remains to be seen. Developers are therefore advised to make it clear to users before the point of download (as well as within the mobile app itself) the extent to which in-app purchases are required to use the mobile app, or alternatively explore other monetisation models. Blizzard, for example, has adapted the traditional in-app purchase model with its recent launch of a new Warcraft-themed online game, where users purchase collectable cards bought in shops. These cards are replicated in the online game in which users battle with others using the spells and weapons from the collectable cards to help defeat an opponent. This could be a new approach in an area where the law most certainly lags behind the technology.

Subscription / Pay-wall

The subscription monetisation model can be lucrative. Publishers such as The Economist and the FT have launched mobile apps where users need to pay subscription fees to access the content (although limited content is made available for free). The advantage is that the subscription monetisation model provides regular income for developers, although it does require investment to maintain high quality content to keep users subscribed.

It is often the case that developers of mobile apps that use the subscription monetisation model encourage users to subscribe on their website (rather than through the app itself). This enables the developer to keep 100% of the subscription fees and circumvent the revenue share taken by the relevant app stores. Nonetheless, the relevant apps stores have strict rules which form part of their agreements with developers – for example, if a developer for the iOS platform allows users to subscribe outside of the mobile app such as on a website, the same (or better) subscription price must be offered inside such mobile apps. The use of links in the mobile apps which allow users to purchase content or subscriptions outside of the app is also forbidden. The relevant app stores will almost certainly remove those mobile apps which contravene the rules.

In addition, if a developer allows users to subscribe outside of the mobile app such as on a website, it is vital to consider the practicalities of the strict "distance selling" laws (as noted above in respect of 'pay per download' mobile apps).

Advertising

Another option is to embed small banner ads and other forms of advertising into mobile apps. Gartner forecasts that worldwide mobile advertising revenue will reach $11.4 billion this year.²

There are many different ad networks to choose from, such as AdMob, InMobi, Adfonic and BuzzCity. It is important for developers to choose an ad network (or number of ad networks) that suit their requirements, target market, geography and budget. The industry standard is for the developer to be paid on a ‘cost per click’ basis – this is where the advertiser pays for each active response from a user to their ads such as clicking through a banner to the advertiser’s site.

The advantage is that the revenue generated from integrated advertisements means that mobile apps can be distributed for free which, in turn, can generate more downloads and therefore more advertising revenue for the developer. This is the monetisation model in the “lite” version of Rovio’s Angry Birds on the Android platform, as well as other well-known developers such as EA, Digital Chocolate and Gameloft.

The legal issues are similar to those in respect of ad networks used on websites. It is advisable for mobile app developers to always check their agreements with the ad networks to make sure that advertisements appropriate for the mobile app are served within it. The ad network should be under an obligation to vet the advertisements and not, for example, display advertisements within the mobile app from websites that sell counterfeit goods. If there is a mistake, however, then the mobile app developer will often seek indemnities in case of third party claims (although no legal contract will, of course, be able to adequately compensate for serious reputational harm to the developer).

Sponsorship

Sponsorship is another option – where a mobile app is developed to generate awareness of the sponsor's brand. The mobile app developer will often receive a contribution towards the development costs at the start of the project which ensures a profit - before the mobile app has even been submitted to the relevant app stores. In return, the developer features branding opportunities within the mobile app, often to the sponsor’s specification. For example, one of the most successful free mobile apps of all time, ‘Waterslide Extreme’, was developed by Fishlabs and sponsored by Barclaycard. Another example is H&M's sponsorship of the 'MyTown' mobile app, which enabled users who checked-in to H&M stores to earn points that could be used to purchase branded H&M virtual products in the mobile app.

What legal issues are there?

It is important to have an agreement in place between the developer and the sponsor. This agreement should make it clear who owns the intellectual property in the mobile app and to what extent each party can market/advertise it. The developer and sponsor also need to clearly set out their respective payment obligations – the sponsor might pay a one-off fixed fee or otherwise pay the developer a revenue share generated from sales through the mobile app.

Conclusion

The best approach is to have an inclusive monetisation model for mobile apps. This would involve targeting users that are inclined to pay to remove mobile ads and add features (e.g. users in developed markets) and also cater for those users who prefer free content (e.g. users in emerging markets). It is also worth noting that Apple's App Store still generates substantially more revenue for developers than Google Play, despite Android's larger user base. It is therefore the case that a combination of these two models is likely to generate the highest revenues.

From a legal perspective, it is important for developers to consider the terms and conditions of the relevant app stores. It is the case that certain monetisation models are simply not allowed, for example, Apple make it clear in its agreement with developers that its in-app purchase API is required (it is not sympathetic to those developers who seek to circumvent its 30% revenue share) and the push notifications system should not be used for mobile ads.

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