Tech companies are struggling to make a profit as parents let children use their mobiles, but don't want to pay up front for apps

Britain's technology companies are struggling to attract a new generation of mobile-savvy children who are using tablets and their parents' smartphones to log on to "free" games. Parents fear this shift could lead to large bills for expensive in-app purchases, which children make once they are playing the games. It also threatens to allow access to potentially inappropriate adult social media sites.

Meanwhile, new media companies – which are being disrupted as much as traditional firms by the shift to mobile technology – are struggling to find ways to make their products profitable.

London-based Mind Candy has more than 80 million children registered to its Moshi Monsters online virtual world, but its chief executive, Michael Acton Smith, admitted at last week's Children's Media Conference in Sheffield that the company has found it hard to follow them to mobile devices.

"We thought it would be easy to move our web stuff to mobile, and it wasn't. It was extraordinarily difficult," said Smith. "There are so many new challenges, not least how the commercial side of things works. We certainly haven't cracked it yet, despite trying very hard with a well-established brand."

Smith was speaking as Mind Candy launched PopJam, a new iPhone and Android app pitched as a safe alternative to Instagram for children aged between seven and 13. Children can take pictures, customise them with digital scribbles and stickers, then share them with friends. "Kids don't have their own app where their voice and creativity can be heard, so they are joining up to grown-up social networks in their droves. Facebook, Tumblr, Snapchat and Instagram in particular are hugely popular with kids," said Smith.

Mind Candy has a team of staff "pre-moderating" images before they are published, and is encouraging children not to share selfie photos of their own faces, unless they are disguised using the digital stickers.

Games for adults, such as Candy Crush Saga and Clash of Clans, have attracted large numbers of children, even though they sell virtual currency in quantities of up to £69.99 as in-app purchases.

"The challenge is that a lot of things possible for adult apps and game apps –in-app purchasing and advertising – are really frowned upon in a lot of kids' content," said Tom Bonnick, digital project and marketing manager at Nosy Crow, a British apps and books publisher.

The alternative is charging upfront for children's apps, but parents are unwilling to pay, which is one reason why their kids may be playing the "free-to-play" games instead.

"I find it really strange that a parent will spend £10 on a beautiful book but would never in a million years spend £10 on a beautiful app," said Antonio Gould, digital producer for Teach Your Monster to Read, an online game that helps children to hone their early reading skills.Companies believe they can provide safe, educational experiences for children through apps, while making enough money to keep making those apps and improving their quality.

Smith said that Mind Candy hopes PopJam will eventually make money from parents paying a small monthly subscription to unlock extra features for their children, while suggesting that his industry must "crack the nut" of children's app economics in response to changing media habits.

"We're living in a world now where kids will have their own devices, not just to play games, but to read stories, listen to music, watch videos, and communicate with other kids around the world," he said.

Dylan Collins of marketing network SuperAwesome, warned that the children's entertainment industry must not underestimate the challenge ahead of it. "The single biggest threat to our digital content industry today is mobile: the thing that everyone thinks is the best thing ever," said Collins.

"Fundamentally, the maths on that does not stack up. If you talk to kids' apps developers, there's not a single one who is not a little bit concerned about the sustainability of their industry over the next one, two, five years."