Dark clouds are starting to roll over the app stores, as the US Federal Trade Commission (FTC) rains down on the digital kids space like never before. While many are familiar with the FTC/New York Attorney General’s landmark US$170-million fine against YouTube in 2019, this may just be the beginning of what is about to be a monsoon of penalties many in the industry are not prepared for.

“I think that settlement is going to change what happens with apps, and I think apps are more complicated than YouTube,” says Josh Golin, executive director at Campaign for a Commercial-Free Childhood (CCFC). “My hope is the YouTube settlement will lead to a whole bunch of improvements across kids media.”

Everyone is waiting with bated breath to see which companies will be struck down next, and it seems like the app stores are likely candidates. In late 2018, a coalition of 22 consumer and public health advocacy groups, led by CCFC and Center for Digital Democracy, filed a complaint with the FTC asking it to investigate and sanction Google for how its Play Store markets apps to children. Last year, Apple and Google were also ordered to remove from their stores several dating apps that allowed kids under 13 to sign up. And while slow-moving, the shift is a long time coming: In 2014, Apple was ordered by the FTC to refund at least US$32.5 million of in-app purchases made by kids.

Yet despite the risk of penalties, predatory methods are still the most effective way to make money online, which is why most developers continue to employ them.

“Gaming apps tend to be the worst because they use both manipulative purchasing techniques and illegal data collection,” says Golin. “It’s not uncommon to see apps with multiple offenses.”

Bad actors aside, kidtech is trying to clean up its act by following COPPA and GDPR (and other internet privacy regulations for kids across the globe). But they’re not only struggling with different (and ever-changing) regulations. Kids app makers—even ones with the best of intentions—need to make money to sustain their businesses. And the monetization techniques that are the most lucrative, such as in-app purchases or advertising, are all impossible to make work when targeting kids.

To tackle this issue, developers who don’t believe the reward is worth the risk are coming up with different ways to monetize, ditching what’s worked in the adult app space in the past. The question is: Will these new approaches work?

Avoiding the whales

One of Budge Studios’ most profitable apps is the licensed title Barbie Dreamhouse Adventures.

A few years ago, apps were largely paid experiences—it cost at least US$0.99 to download anything. But at such a low price point, most of those products offered little value to the user, says Michael Elman, CEO and founder of developer Budge Studios.

A couple of “free” apps burst onto the scene and took off. While the content is free, players’ lives eventually run out or levels become too difficult to pass…unless users cough up some cash. Following the massive freemium successes of apps like Angry Birds and Candy Crush, everything became free-to-play, including kids apps. While on the surface the apps are free, their monetization methods, for the most part, violate kid privacy and safety guidelines. At its core, this model is built on the understanding that while the majority of users will never pay anything, a small group of “whales,” or big spenders, will support the entire free-to-play business model. Aggressive “buy more lives now” and “get more booster” splash pages encourage whales to pay to play. But kids are particularly susceptible, and COPPA strictly prohibits these kinds of pressure tactics. What’s more, encouraging kids to spend real-life money to get in-game currency or items continues to be highly criticized by children’s advocacy groups.

To offer a pressure-free, COPPA-friendly app, free-to-play needs parental buy-in, says Elman.

“But parents aren’t interested in constantly pouring more money into games without understanding what they’re getting for it,” he says.

While there’s no single solution, what’s worked best for Budge is a “free to try” subscription approach. It has found success in two revenue models. The first is a straightforward one-week free trial, which Budge uses for one of its most profitable subscription apps, Budge World. For US$7.99 a month, the app offers a world of licensed mini-games from brands like Crayola, Garfield, Hello Kitty and Thomas the Tank Engine.

The second model, which Budge uses in its other most profitable app Barbie Dreamhouse Adventures, is more like an onion, with multiple layers and tiers kids (through their parents) can unlock.

Based on the TV show of the same name, Dreamhouse is a mobile game available for all platforms that lets kids design rooms, make friends and participate in activities like pool parties and baking. The app gives users a tiny amount of free content to test before a trial is even introduced. That free content is always available, but to unlock more, players must sign up for a free trial and are then encouraged to commit to a US$9.99 monthly subscription. Once kids (and parents) have a taste for the game, they can buy more activities—all for less than US$5.

“We’ve found that you have to create much more robust, deeper experiences that are unique because there’s such a low barrier to entry. There are so many products on the market that you really have to build something quite big to get people’s attention and convince them to invest in it,” says Elman.

Break the wheel 

Kinzoo is researching a new way to monetize.

Still in beta, Kinzoo is a new family messaging app that hasn’t ironed out its monetization model yet. Allowing users to share texts, videos, pictures and audio, it faces a particularly difficult proposition because no one has figured out how to monetize a messaging app. Even the biggest players (iMessage, Facebook Messenger and WhatsApp) are free, and only Facebook serves up ads—though all of them collect and sell user data. But as Kinzoo actively targets families with kids, and because data collection explicitly violates COPPA and GDPR, the team is using the product launch as an opportunity to start from scratch and create something a little different.

They know they want to use some version of the popular “freemium” model, but have struggled with identifying what features people would actually be willing to pay for, says chief growth officer Brittany Skolovy.

Kinzoo is so early in development right now that Kinzoo the company doesn’t know what these features will be, but it’s considering holding message history for a fee, offering organizing and storing memories as paid options and interactive mini-games.

“How can we as a community think of new ideas more creatively, acknowledging that kids are a different segment,” says Skolovy. “[We need to accept that] what works in the adult market may not be applicable to kids.”

The cost of living

Azoomee, top and bottom, uses subscriptions to monetize but has recently hit some snags with its model.

Launched in 2015, Azoomee originally opted for a subscription model—not for financial reasons, but because it was something content creators understood, and it allowed the fledgling streamer to secure catalogue and show rights. But as a subscription service, it had the added benefit of being COPPA-compliant.

Upon launch, Azoomee could have explored alternative options, but the risk wasn’t worth it, says COO and co-founder Estelle Lloyd. Priced compatibly with costs of living globally at roughly US$4.99 a month, the app began growing rapidly. But recently, it has found an AVOD-loving wall blocking its path.

While subscription VOD is a tried-and-tested method in plenty of markets, there are also many that are ad-supported markets through and through. In India, for example, it has been difficult for Azoomee to break in, which Lloyd attributes to the ubiquity of AVOD offerings. Azoomee is subscription-based in India, but the app isn’t fairing well. Now, the streamer is trying to figure out if it should bother to try something new entirely.

“We’re asking, what’s the point of killing ourselves trying to break into a market that is never going to be a subscription market?” says Lloyd. “Can we look at a different model?” Yet AVOD, exclusively reliant on advertising, remains a precarious proposition for kid-appropriate monetization. YouTube, after all, is an AVOD.

Subscription is the worst form of monetization—except for all of the other models the kids industry has tried, Lloyd says.
Ultimately, kids app makers better start figuring out what worst form of monetization they’re willing to live with, because a lot more fines are coming, says Fil Lourenco, industry expert and VP of digital media at Havas Media Canada.

While this seems overly negative, it’s also the chance for app companies to get in on the ground floor with new digital monetization models and set the industry standard for positive strategies—be the ray of sunshine on a cloudy day, if you will.

“In an age where data, transparency and privacy are absolutely paramount, it’s not worth the risk. We’ve seen what’s happened with Facebook over the past two years, and it’s been scandal after scandal,” says Lourenco. “It’s not worth it, as a company, if there’s even a small chance of going through that. And if you’re not willing to make those types of sacrifices to properly monetize, then you’re in the wrong game.”