FTC Cracks Whip on Amazon’s Unlawful “Parent Trap”

Edited by Vani Rao

Amazon billed parents millions for mobile app purchases made by children

In recent years, mobile app developers have been raking in significant revenue from in-app purchases despite offering the apps downloads for free. This is mainly because users can buy virtual goods such as weapons for game characters, extra levels, or other goods using real money. The app-store operator typically keeps about 30% of such payments. Hence, it comes as no surprise that many mobile app developers are flouting norms such password requirements and refund requests. Most importantly, most app stores do not have norms for in-app purchases without parental consent.

Federal regulators announced on Thursday, July 10, 2014, that they have filed a lawsuit against Amazon.com Inc. (NASDAQ: AMZN), the world’s largest online retailer, for allegedly making it easy for children to make millions of dollars of credit card purchases without parental consent while playing mobile apps like Tap Zoo, Candy Crush Saga, and Ice Age Village.

bc1The US Federal Trade Commission (FTC) said that Amazon charged parents millions of dollars of unauthorized payments for in-app purchases. In its complaint against Amazon, the FTC said that the company needs to provide prominent notices about in-app purchases. It also wants Amazon to mandate passwords requirement for such purchases and make refunds simpler and easier.

In its lawsuit, the FTC sought a court order for Amazon to refund all families affected by the unauthorized charges that began way back in 2011. It also wants the court to permanently ban Amazon from charging parents for in-app purchases without their consent.

Run-up to the saga

It all began when Amazon launched its app store in November 2011. The apps run on Amazon’s Kindle Fire, Kindle Fire HD, and devices that use Google Inc.’s (NASDAQ: GOOG) Android operating system. When children play games like Tap Zoo, Candy Crush Saga, and Ice Age Village, they are allowed to download the games for free. But the catch is that kids can spend real money for virtual items within the apps such as coins, costumes, stars, and acorns, which are not available for free to advance in the game, without parental involvement.

According to the FTC, at first, Amazon did not mandate a password requirement to stop children from making the purchases. In doing so, the company violated the FTC Act by billing parents for charges incurred by their children without permission. What is more appalling is that even Amazon’s employees recognized the serious problem a long time ago, but failed to take the necessary action.

Conforming to the FTC, just a month after apps were introduced in Amazon’s store, internal e-mails between staff showed that the company was concerned about in-app purchases being made without password protection. The FTC also said that many parents complained to Amazon about charges made by children through in-app purchases. However, it was only in June 2012 that Amazon put in place norms that required consumers’ informed consent for all in-app purchases.

bc2Even after Amazon mandated passwords for purchases over $20 at its app store, complaints kept pouring in, after which, in 2013, Amazon put in greater password protections. However, Amazon allowed for a 15-minute window for unlimited purchases after an authorizing password was used. After the FTC’s lawsuit was approved in June 2014, Amazon further strengthened its in-app purchases policy for newer devices, the FTC said.

Stringent norms going forward

FTC has indeed cracked the whip and is seeking stricter bookkeeping and disclosure from Amazon over the next 20 years. Ironically, the FTC settled a similar case with Apple Inc. (NASDAQ: AAPL) in January 2014, where Apple agreed to refund customers a whopping $32.5 million in unauthorized charges made by children. Apple also agreed to change its billing practices to require consent from parents for in-app purchases. It remains to be seen whether the spotlight will now focus on another major app store, Google’s Play.

Public outcry

Over the past couple of years, many parents and consumer rights activists have criticized the in-app purchases in child-oriented apps that involve spending huge amount of money. For example, in Ice Age Village, kids can purchase gold coins and acorns for as much as $99 per item.

It is indeed a wake-up call for Amazon, which recently released its new phone in a bid to expand its impact on the mobile industry. After several weeks of talks with Amazon about the company’s policy for in-app purchases, the FTC asked Amazon to abide by the same guidelines that it put forward for Apple. In the July 1 letter to the FTC, Amazon said it should not be held by the same requirements as Apple. Amazon said that it prefers to defend its policy for disclosures in court.

The long-drawn legal battle and public scrutiny could harm the reputation of Amazon and cause a dent in its brand value, not to forget the millions of dollars of refunds that it is expected to pay.

Amazon is also facing the heat from a new law in France that prevents online booksellers from applying what had been a maximum 5% discount under national law to the cover book prices. Amazon can only offer shipping discounts but cannot offer the books free. Amazon’s shares were down 0.7% at $327.92 on July 10, 2014, following the FTC’s lawsuit.

Source: Bloomberg
Source: Bloomberg



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