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Why the FTC Is Going After Amazon Over Kids' In-App Purchases

By Daniel B. Kline – Jul 11, 2014 at 7:08AM

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The online retailer is accused of making money by allowing kids to make in-app purchases too easily.

The Federal Trade Commission has accused Amazon (AMZN -1.25%) of charging parents for millions of dollars in unauthorized in-app purchases made by their children on Kindle Fire tablets and other devices.

Filed Thursday in U.S. District Court, the suit charges the online retailer with willingly allowing kids to make purchases within apps on mobile devices without parental consent. The unauthorized charges, which ranged from $0.99-$99 per consumer, were usually for virtual items in games and apps.

In many ways, Amazon is being accused of the same thing a number of phone companies did in the 1980s when kids racked up huge phone bills calling party lines and other hotlines without parental consent. Much like Amazon allows purchases with a single click billable to a credit card on file, the various pay-per-minute phone services' costs were added to a phone bill without requiring a new authorization.

Party lines and celebrity hotlines were once big business, as per-minute charges could pile up quickly. Though some psychic hotlines and other pay-per-minute services still exist, most went away as the Internet rose in popularity. Twitter and Facebook make it possible to directly interact with celebrities in close to real-time. That makes spending $3.99 to call the Corey Feldman hotline -- sort of the 1980s Justin Beiber -- no longer necessary.

But, in their day, these pay-per-minute phone lines were guilty of exactly what Amazon is being charged with -- making it way too easy for kids to spend their parents' money without permission.

What the FTC wants
The FTC's lawsuit seeks a court order requiring refunds to consumers for the unauthorized charges. It also seeks to permanently ban the company from billing parents and other account holders for in-app charges without their consent. In most cases, Amazon keeps 30% of all in-app charges.

"Even Amazon's own employees recognized the serious problem its process created," said FTC Chairwoman Edith Ramirez.

How it works
My 10-year-old son has a Kindle registered on my account. In-app purchases do not require typing in a password, so if he decides to buy bonus content, extra lives, or whatever else is being offered in an app, he could do so without my knowledge -- for a time.

When Amazon introduced in-app charges to the Amazon Appstore in November 2011, there were no password requirements of any kind. In March 2012, it started requiring a password, but only for individual in-app charges over $20, according to the complaint. So, kids could still make unlimited purchases under $20.

The complaint explains how the setup in many apps makes it hard for kids to understand when real money is being spent.

Kids' games often encourage children to acquire virtual items in ways that blur the lines between what costs virtual currency and what costs real money. In the app "Ice Age Village," for example, the complaint noted that children can use "coins" and "acorns" to buy items in the game without a real-money charge. However, they can also purchase additional "coins" and "acorns" using real money on a screen that is visually similar to the one that has no real-money charge.

Amazon has since updated its in-app charge process twice. But the single authorization it required in 2013 often opened a window of up to an hour during which unlimited charges were allowed without further authorization. And the 2014 update that asked for account holders' informed consent only applies to newer Kindle tablets.

The FTC has a point. In theory, it's possible to build up big charges quickly. In reality, it's less likely than the FTC is claiming.

Whenever my son, my wife, or I buy something on Amazon, I get an email telling me what was purchased. On one occasion, my son spent a dollar or two without authorization -- he said he thought he was spending virtual coins -- and I knew almost immediately.

We've headed off bigger potential problems by discussing what my son can and can't do while using his Kindle. There is, of course, no guarantee that setting a clear policy for your child will stop him or her from doing the wrong thing. But parents can create consequences -- including the loss of the device -- should a child violate your guidelines.

The FTC may be solving a problem where the best solution is being a slightly more involved parent.

What Amazon has at risk
This is the FTC's second case relating to children's in-app purchases. Apple (AAPL 1.55%) settled a commission complaint concerning the issue earlier this year. The January settlement cost Apple $32.5 million and required the company to employ stricter policies for obtaining consent, including password requests.

In Amazon's case, the FTC is seeking "full refunds for all affected consumers, disgorgement of Amazon's ill-gotten gains, and a court order ensuring that in the future Amazon obtains permission before imposing charges for in-app purchases."

The Apple settlement puts Amazon in a rough spot -- it's hard to see what Amazon is doing differently than what Apple already admitted was wrong.

Amazon needs to fight this
The key issue here is whether a company has a responsibility to make its purchase process childproof. One of Amazon's strongest attributes as a company is how easy it has made the buying process. Users can buy items on a Kindle or through the company's website with a single click. That makes shopping for things you actually need easy, but also makes it just as simple to buy stuff you don't.

If Amazon must establish password barriers, it will likely cost the company some impulse purchases. While that might have come in handy when I spent $99 on a Fitbit exercise tracker on a whim, I like being able to purchase books, apps, movies, and other items in a process that's much easier than shopping in a store.

Stopping my child from making unauthorized purchases is my (and my wife's) responsibility, not a government agency's.

Instead, Amazon should allow refunds on in-app purchases. The company should also offer tools on all its devices that give parents more control.

It should do those things because they make Kindle more marketable as a device for kids, not because the FTC makes it.

Daniel Kline is long Apple. He buys a lot from Amazon. The Motley Fool recommends, Apple, Facebook, and Twitter. The Motley Fool owns shares of, Apple, and Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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