The freemium business model is taking the gaming industry, particularly the mobile sector, by storm. Top developers are making millions off the sale of optional in-game purchases by turning fresh clientele into daily active users, enthralling players with a variety of techniques after the initially enticing “free” download.

You’ve seen them in the iOS App Store: highly rated games downloaded millions of times with polished visuals and usually an impressive, cinematic promotional video. And you wonder, how can this game be free? Well, “free” is a funny word these days.

Usually, the urge to spend emerges long after your initial download of the game. Whether by its addictive gameplay, or charming graphics, or by being epically introduced to the 1,000+ magical creatures available to collect (gotta catch ‘em all, after all), the game hooks you. And just when you love it most, you find that the next armor upgrade, which would make beating that challenging level so much easier, costs 10 magic stones, or gems, or Mobacoins, or whatever. Then a banner pops up, asking you to input your Apple account password to complete the payment.

This is the freemium business model, and it’s working.

Techcrunch reported that today, in-app purchases are generating a whopping 70 percent of game revenues, according to Rajeev Chand, managing director and head of research for Rutberg & Company. “Freemium is here to stay. Gamers hate in-app purchases, but they are still playing and buying,” Chand said.

This seems a contradictory statement. Why would anyone buy something they hate? Well, it is partially clear that the answer has to do with manipulative retention methods.

Making Kids Happy

Supercell is one of the most lucrative iOS gaming companies in the world, and epitomizes the success of the freemium business model. With just two games in the App Store, they are reeling in $2.4 million per day from in-game purchases. The company’s success is not only setting a precedent in the use of the freemium model, but has caused venture capitalists to invest a whopping $130 million in the company. Over the same period last year, investment in mobile gaming was only $107 million. In all of 2007 it was a paltry $14 million.

Though tiptoeing around the contentious business model, chief executive at Supercell Ilkka Paananen told The Guardian, “When you prioritize engagement and retention — making a great game that people play often and want to play for a long time, they are happy to pay.”

I can loosely say this is why I spent $4.99 on gems in “Clash of Clans.” The gems made me happy. And I love being happy.

But so does the 8-year-old girl who was probably ecstatic at the $1,400 worth of “Smurfberries” she purchased in”Smurfs’ Village” with her parents’ iTunes account.

Virtual currency looms like candy.

And parents have, understandably, found this outrageous (especially in game advertised for ages 4+). Just recently, Apple has agreed to pay $100 million to parents whose kids went on unauthorized spending sprees in gaming apps, under terms of a class-action settlement. While measures are being implemented to prevent children from purchasing in-game currencies so easily, the issue remains that susceptible people are being taken advantage of by this model.

Competing Against Impossible Odds

Another force that drives people to make in-game purchases is each other. Competition is one of the greatest rewards in mobile and social gaming, and has caused elements of social interaction to proliferate in virtually all games today. This can be in the form of a prestigious high-score list, or the more direct brutal murdering of an opponent.

The freemium model, many say, upsets the balance of the battlefield. In one corner, you have the players who’ve paid money to be clad in extravagant, superior armor, able to summon awesome spells to incinerate their opponents. In the other corner, you have those who haven’t paid, wearing clunky, unadorned armor and sputtering gouts of flame. Though both sides may “work” just as long to prepare for battle, the latter enters the fray like pigs for slaughter.

After the free player’s inevitable defeat, again a banner pops up, this time advertising a shining piece of armor for only X virtual currency.

Gamers may, as Chand says, hate the freemium model. But the success of it has led Techcrunch to deem the freemium model “irresistible, even for successful gaming companies.” Venture capitalists have played their hand, investing excitedly in the new model. Now it is up to gamers to decide whether it shall continue to reign supreme.