Apple's In-App Purchase Feature: A HUGE Win for Virtual Goods

Apple (APPL) today previewed the iPhone OS 3.0 due to launch this Summer.  in addition to the expected improvements such as Cut & Paste, MMS, and Push Notifications, Apple intelligently moved to the forefront of the virtual goods line by implementing a system called "In-App Purchase".  

This will allow users to purchase additional items from within an iPhone app rather than forcing them to either buy a separate app to fund their currency or forcing them to leave the app to finish the purchase - this could be game levels, virtual goods, Kindle digital books, in-app songs, etc. but the absolute key to this feature is that there is already ONE WALLET in the Apple system.  Unlike the vast majority of social media sites which have ignored this approach, Apple has a central wallet which allows for one-click purchasing from a trusted source rather than forcing users to sign up for some whacky wallet system for each application they are using.  It's almost impossible to express how much smoother this makes the overall purchase effort, thereby significantly increasing not just the initial revenue from a user, but all follow-on purchases, as we have found at Meez when we implemented it

Electronic Arts (ERTS) demoed The Sims 3 on stage using the system to purchase additional avatar items from within the app, and one can easily now imagine the wide array of revenue models this will open up for app developers, all of whom will be thrilled to share 30% with Apple in order to tap this capability, which will start to drive increased profitability from the Apple Store.  It's the same options everyone has been begging for from MySpace and Facebook for months, but with no results for reasons few can understand, although the 3rd largest social media site Hi5 this week announced a similar system.

The only downside I can see is that Apple is currently limiting the functionality to paid applications, and not for free ones.  I'm not 100% sure why that would make sense unless they are trying to favor the paid applications by holding back this compelling functionality since the "free to play"  virtual currency model obviously makes more sense for "free" applications like Poker than it does for paid applications which will have fewer users by definition of being premium.   The advantage from Apple's view is that this should focus more developers on paid models by giving them another revenue source on top of the initial payment, and it will leave the free applications as true demos or lite versions.

In any case, this is a huge step forward for the virtual item-based world since it will trigger an increased level of innovation in this area, which is what we at Loki Partners have been preaching for months since it's the perfect complement to the declining advertising business, and it will supplement the premium model as well.  It's great for developers and it's great for Apple as well.  Now let's see what the other mobile competitors do, as well as the big social media sites.

Comments

[Gregg]

Wow. Very cool. Wonder if the next step is opening up that payment system to publishers across the web? I would love to offer people the ability to buy JibJab subscriptions with value in their iTunes account and would be willing to pay hefty payment processing fees to offer it (since I bet conversion would skyrocket with a 1-click apple powered payment option). Do you think Apple can leverage their brand, consumer reach and the fact that most people are used to using their itunes accounts to make micropayments a reality? Gonna be fun to watch...

[Mark Donovan]

I was at the Apple event and their stated reason for not allowing a Free --> Paid upsel was to "reduce consumer confusion" and "ensure that free means free."

Apart from demos or lite versions, we're seeing an increasing number of free ad-supported apps and the data I've seen shows pretty clearly that ad-support can work as a monetization strategy for (some) developers.

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