In-App purchases could fundamentally change Apple's App Store

Apple sent an email to iPhone developers today announcing that they would now allow free applications to use the In-App purchasing mechanism.  At first glance, this may not seem like a big deal (do you classify these apps as free or paid?), but it has the capacity to fundamentally change the way the Apple App Store ecosystem works.  Here's why:

Up until now, if you've wanted to do In-App purchases, you have to have a paid application.  Even at $.99, there are a lot of people out there only looking for free.  Most of these people don't want to pay money until they've seen and used the app they are purchasing.  They need to be hooked.  This new model will let developers hook their customers before buying - and at the same time, customers won't be able to feel cheated when they've played with an app before buying.

That's just the tip of the iceberg.  The trend above will force more and more application providers to go free with upgrades.  In fact, I expect the number of paid apps to plummet.  Don't believe me?  It has been only a few hours since the announcement and  Ngmoco's Rolando 2 has already adapted this free model.  Boxcar has too.

What effect does this have?  For one, iTunes affiliate link providers won't be able to make any money if their links are free.  An affiliate makes 5% of the purchase price of an app in exchange for directing one of their readers toward the App Store.  5% of nothing is nothing.  Advertisers, bloggers and other publishers will be less "incentivized" to direct traffic toward the App Store.

On the flip side, this new policy could thwart piracy.  Right now, paid apps are distributed on torrent sites cracked so that they can be used by jaibroken iPhones.  However, if the Apps are made such that the first bit is free, even hackers with the application won't be able to get the good parts without ponying up the money.  The in-App purchase mechanism has yet to be hacked.

This system should also allow developers to create updates.  Recently Tweetie 2.0 got a lot of negative publicity for daring to ask for payment for an update - which was really just a whole new application.

For developers, it is also a double-edged sword.  They will be forced to add development time to their apps to build in the In-App purchase functionality and also aquire hosting and adding payment tracking codes to their apps.  

The good thing is that they will have more contol over their app.  They'll be allowed to add levels and content without having to go thru the App Store approval process every time.  They also won't have to build the "lite" version of the app and the full version.  With In-App purchases, they only have to build one app.

So we'll see how it goes, Apple has a very successful App Store ecosystem and they just shook things up.  Hopefully the pieces land in a way that is more beneficial to all.