Apple has introduced an in-app purchase feature for free iPhone apps that allow you to fulfill transactions within the iPhone applications themselves -- no Apple App Store required. The feature was previously available for paid applications.
By enabling in-application transactions, Apple makes life easier for developers who no longer have to make "lite" or teaser versions of applications along with ones that cost iPhone owners money. If you like the free version of Ragdoll Blaster Lite and want to upgrade to the $1.99 full version, now you may have the option to upgrade within the application itself -- no App Store needed.
Apple's decision to allow in-app purchases was unexpected, as the company's stance on this matter was that free apps should remain free, and users shouldn't pay for anything from within a free application. As with paid apps, Apple will still facilitate the backend billing and take a cut out of the sale price of the in-app purchase.
In-app purchases from within free applications, though, could have a widely beneficial effect in the iPhone app store economy. Using the example of a magazine application, a developer wouldn't have to charge for its application, but could charge for the actual content. This could make more customers download their app.
There is a lot of potential from in-app purchases from within free applications for games developers, who could offer for free a limited-functionality version of their game and then charge users for further gameplay levels. The App Store will also be relieved from the thousands of "Lite" apps and could eliminate customer confusion.
But this trend of in-app purchases from free apps might not be picking up very quickly. As developer Marco Arment notes in his blog, for existing apps with a free/paid version split, "there's no practical way to transition the existing paid customers to a new "free+" version without making them pay again like a new customer."
And as an interesting note, Apple also said in its letter to developers that using in-app purchase "can also help combat some of the problems of software piracy by allowing you to verify In App Purchases." -- which would be the first time Apple acknowledged iPhone app piracy as a problem, considering there are now over 4 million jailbroken iPhones in the wild and that Apple is trying to solve this problem by shipping jailbreak-proof 3GS models.