Oh no, Apple you dUDIDn’t! Kim Mai Cutler at Techcrunch is reporting that Apple is starting to reject apps that access the UDIDs, which is essentially the identification number that is unique to every iPhone and iPad.

This is a meaningful development for game companies and players because the UDID is the key for how games and apps make money. Think of UDID as your phone or tablet’s fingerprint. Mobile ad, game network, and analytics company use the UDID to target ads, save game data, and track usage. Take away the UDID, and it’s no longer business as usual in the world of mobile games.

Apple is making this move to stave off a potential public relations disaster. Just recently, it was discovered that Path, a popular social networking app, was accessing UDID data to save people’s email address and phone numbers from the phone’s contact manager on their servers without permission. It was then discovered that Twitter, Google, Facebook and thousands of other apps were doing the same thing. This has caused an uproar among privacy groups and even the government getting involved. Last week, two Congressmen have sent out letters to top app developers requesting information on how they handle user data, a step which will lead to public hearings.

Apple stated that the UDID would be de-emphasized in iOS 5 (latest operating system upgrade) but this didn’t stop its usage. This would be be like saying “stealing is de-emphasized” instead of “thou shalt not steal.”

So now, Apple is getting serious about it. According to the Techcrunch article, two of Apple’s review teams are rejecting apps that access UDIDs now, and by next week, that number will rise to four out of ten teams.

This is leading to scrambling by mobile game and app companies. Part of the problem is that no one believed Apple would take this step. I asked a bunch of game companies at the Game Developer Conference two weeks ago what would happen if Apple bans UDID.

Everyone’s response was that Apple would never do it, because the UDID is the linchpin to how everyone makes money and conducts business in Apple’s ecosystem.

The other part of the problem is that there is no clear way to replace the usage of UDID to track users and target ads on iOS devices. The MAC address or open-sourced OpenUDID have been suggested as two alternatives, but there are either still privacy concerns or lack of acceptance among developers.

Obviously, mobile ads are going to take a big hit from this change unless an alternative can be found. You can charge premium ad rates if you can’t target a user on the iPhone, and you can’t target a user without the UDID.

Here’s the bigger issue. The freemium revenue model is dependent on the ad model in two ways. One, only 1 – 3 % of all gamers will buy virtual goods, meaning the majority of gamers can be monetized only through ads. Two, running ads next to virtual item offers actually increases the conversion rate of free to paid players. If you can’t serve ads in game, it could indirectly decrease freemium game and virtual item revenues.

There are some cynical critics who think Apple is doing this to destroy all mobile ad networks so that you can only advertise on Apple’s own iAds. This is a stupid idea. Apple makes billions of dollars in profit a quarter on hardware alone, so they are not going to make such drastic changes just to support the much smaller iAds business.

Apple is getting rid of UDIDs because apps using UDID without user permission is a legitimate privacy concern and Apple wants to avoid both a public relations and possible legal nightmare.

It sucks for game and app companies that have tied their business models to the UDID. But, Apple has been giving warnings about this the past couple months. And, Apple has the right to make this change since they own the distribution platform which is the result of Apple having invested billions of dollars to build it up.

What Apple needs to do now is provide clarity on what’s next.

Should Apple require users to provide app makers permission to share data like Facebook and Google does?

Should Apple create a standard API to share and collect data?

Will Apple create a policy where app makers must agree to return and destroy shared data if a user deletes an app?

All good questions, and Apple should be providing the answers. Removing the UDID is going to cause chaos in Apple’s game and app ecosystem for both gamers and game developers. Providing a long term vision and policy on what Apple proposes to replace the UDID, will bring back stability.