MoneyWatch Tech

iTunes Fraud Shows that Apple Is an Unsuccessful Control Freak [Update]

By Erik Sherman

Updated on: July 6, 2010 / 12:52 PM EDT / MoneyWatch

A recent report suggests that Apple (AAPL) iTunes has been hit by widespread fraud. Both user account hacking and developer shenanigans have shaken perceptions of the company's tight grip on its operations and product ecosystem.

Apple is widely known as a control freak. It has benefited from that reputation among consumers, who often assume its products will "just work" and that the media and apps marketplaces can be trusted. However, the iTunes problems are only one example of the ways in which Apple's public displays of control have slipped. Growing evidence suggests that rapid expansion may have caused Apple to outgrow the mechanisms it once used to enforce its will, and that the it lacks the operational discipline to accomplish its goals.

The AppleInsider story pointed to iOS apps with "very suspicious" purchases that placed one developer's products in "an overwhelming 40 spots of the top fifty apps in the books category."

The books in question are a low-quality series of mostly Japanese manga titles all published by "developer" Thuat Nguyen, whose publishing company is listed by Apple as "mycompany" with a website of "Home.com." It's impossibly unlikely that 80% of the American App Store's book sales were legitimately dominated by sales of shoddy anime book apps that are not localized, appear to violate intellectual property rights, and were all dumped into the App Store at once over a period of a couple days. Even more worrying is that sales of the junk apps are being reported by multiple users in iTunes as fraud activity. User ratings on the titles frequently complain about having discovered the purchase as part of fraud activity on their accounts. A flurry of positive reviews say simple things like, "it's great" and "good, this story is very interesting," creating the appearance that they have been added by the same group behind the fraud sales.

Not only did people complain about unauthorized purchases on their accounts, but the apparently feigned popularity of the titles pushed others farther down the list, probably damaging their sales.

[Update: Apple tossed the developer in question off the app store, but, as Engadget notes, never said that some of its customers had been defrauded. Furthermore, it took days for Apple to notice the activity and react to it, far slower than many online retailers who use real-time fraud detection to identify patterns of potential problems as they begin to occur.]

The fraud create problems for both legitimate developers and consumers, but as retail technology site StorefrontBacktalk notes, security breaches can also create ill-will toward Apple:

There's an irony here. Apple's customers expect simplicity and elegance. They believe Apple's products will "just work." When an iTunes customer's account is used fraudulently, that customer sees it as an iTunes failure. Security didn't "just work." And then when the customer faces the traditional process of challenging the credit-card charge, that makes him feel like he is being required to do the work for what he sees as a security failure on Apple's part.

There have been other cracks in Apple's operational image:

There was the alleged Steve Jobs email that tried to calm an unhappy iPhone 4 customer -- Apple disputed it through its press contact, but the original source, Boy Genius Report, insisted it is real.
Although Apple changed its iOS developer terms to prohibit Google's (GOOG) AdMob from delivering mobile ads, the service is still active on iOS devices.
Although Apple's developer agreement prohibits the use of cross-platform development tools, the number of tools that generate native code for multiple smartphone platforms continues to increase, raising the question of whether Apple can actually discourage developers from going cross-platform.
Apple's usual total control over product rollout took a hit when reports of iPhone 4 prototypes became news.
Apple's reputation for products secure from hacking took a big hit.

I think what we're seeing is nothing more than the difficulties of scaling a business. For years, Apple was the niche market player working on a small enough magnitude to satisfy its need for control. But as the products, customers, and revenue grow, business complexity increases. From its fiscal year 2006 to 2009, Apple's revenue increased 220 percent. Riding that type of growth is difficult and Apple's daily operations haven't sufficiently kept pace. It's not surprising. Expansion of this magnitude in a mature and large company is virtually unheard of. Nonetheless, management must find a way to keep pace. As long as Jobs and company insist on doing business as usual, Apple will fall further behind, and the company will begin to suffer.

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Image: Flickr user somegeekintn, CC 2.0.