Micropayments the next big headache for parents, cell phone users

Here's a warning for all those parents who remember that first whopper cell phone bill loaded with ringtones and texting fees from the kids: Get ready for round two.

That's because the multibillion-dollar market of mobile phone app makers is looking for their next billion dollars.

And right now that target is roping children (and you) into making lots of small purchases within apps, games and social networking services.

Think of a magic flaming sword in your medieval strategy game. If you want it, it'll cost 5 cents. Or say you want a cool pair of sunglasses for your game's avatar -- 50 cents.

There's the $99 bunch of virtual "Smurfberries" your 5-year-old wanted so badly in the Smurfs' Village app that he happily tapped on the "purchase" button. The charges end up on your credit card or monthly wireless bill.

They're called "micro payments," and they're suddenly a macro-sized fountain of new revenue for app and game makers, particularly those who market through Apple's iTunes store. But, the apps can also be a surprise headache for parents.

The micro-payment strategy is a big change from the way app creator first marketed their products.

Previously, the business model for app or game makers was to take a share of the initial sales price – typically 99 cents – through iTunes or another online store, said Patrick Mork, chief marketing officer of GetJar, one of largest online marketplaces for apps.

Then app creators began offering free, trial versions to tempt people into buying the full version for 99 cents, or $19.99 in some cases.

But now, Mork said, "I've talked to some gaming companies who tell me they're seeing four and five times the revenue from sales of things in the app than the original app."

All from millions of tiny charges.

That revenue stream could only grow as gadget makers like Apple, Samsung, Motorola, and LG are expected to sell millions of new tablet computers, all built to be app playgrounds.

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In turn, parents and politicians have started venting their outrage, especially as children knowingly or not rack up big charges on their parents' credit card for hundreds or thousands of dollars.

The Washington Post in particular documented cases in which children bought $99 barrels of "Smurfberries" in the Capcom Interactive game Smurfs' Village – either with their parent's passwords, or during a special 15-minute window that doesn't require password re-entry by users.

Since the original app purchase was tied to a parent's credit card, the micro-payments simply flowed through to the monthly credit card statement.

This February, the Federal Trade Commission announced plans to review the marketing and delivery of apps that charge fees. One key question – similar to that in the era of surprise ringtone fees – is whether those charges are fairly disclosed up front.

That probe is ongoing.

Meanwhile, app makers, Apple and some cell phone companies have started adjusting how they handle in-app purchases. Apple has a new operating system upgrade that requires an additional password to purchase in-game trinkets.

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But looking forward, app makers, app stores online, and cell phone companies will need to find a balance that makes the most sense for a variety of apps, games or other mobile services, said Todd Murphy, director of the consumer solutions group at Verizon Wireless.

"It's not like the up front payment will go away," Murphy said. For example, Verizon has the ability to sell apps on its vCast online store and process in-app purchases so they flow through to the customer's monthly bill.

"But we have to be sensitive to how we allow developers to present that offering to the customer, because it could be so easy to throw it all on the phone bill. We want to make sure to do this in the right way, so customers can trust us in terms of what they put in the hands of their children."

For parents wondering if there's a way to control their children's in-app purchases – there's an app for that too.

But if you want to disable in-app purchase altogether on the Apple iPhone, iPad or iPod, follow these steps:

• Tap on your smart phone's settings button
• Then tap General
• Then tap Restrictions
• Create, or enter your passcode (Note it down for later) and select "Enable Restrictions"
• Scroll down to "In-App Purchases" and switch it to "Off." Then exit the Settings menu

There isn't a simple way to make purchases in apps yet For Android and Windows Mobile devices but that's' changing. Developers are working on ways to make that happen, and those apps could come out this spring and summer.

Parents will have to learn how to adjust those preferences to block or restrict micro-payments.