Is Geolocation a Real Business or Just a Feature?

1Executive Summary

If there was any doubt that location-based services such as Foursquare, Gowalla and Hot Potato are the next hot web thing, the South by Southwest Interactive conference in Austin in March hammered the point home (Om said 2010 was “the year of location”). The annual gathering of technology geeks saw thousands of “check ins” from different venues, and the emergence of “flash mobs” as all the attendees saw crowds forming at various spots and rushed to join them. Watching a time-lapse visualization of those check-ins is like watching the outbreak of a virus on a medical show, or the firing of synapses in a brain.

Foursquare has gotten the most attention of all the location-based mobile applications, with Gowalla and Brightkite taking second and third place, although Hot Potato is coming up in popularity quickly. In part, Foursquare’s profile is a result of having attracted the most users — it recently hit one million users, a number that doubled in less than three weeks, and it only launched a year ago. There have been unconfirmed reports recently that some Internet giants are looking to acquire the startup: one rumor has Yahoo looking to pay as much as $100 million for the company.

So there’s no question that such services are popular — but are they a business? Or are they a feature that belongs inside another business or service?

The Services:

Most of the location-specific apps such as Foursquare and Gowalla share the same general structure: users sign up, or connect and share their credentials with the service using Facebook Connect, and then they can choose people to share their location with. When they get to a new spot — a club, restaurant, store or public landmark that is in the company’s database — they can “check in” and record their location, which is then shared with all of their friends.

Foursquare’s focus is on winning “badges” for checking in from multiple locations (Explorer, Bender, etc.) and also on being named the “mayor” of a location by checking in multiple times over a certain period at that spot. A secondary focus is on sharing information with other users about a location — for example, users who have had poor service at a restaurant can share that with others who might come to that spot by posting “tips,” like posting a public notice on a bulletin board at the town community center. Gowalla’s focus is more on a “passport” model, where users check-in at various sites and get stamps, post photos related to the location, etc. and can then compare their travels with others.

And location services aren’t confined to iPhone and Android apps like Foursquare, Gowalla and Brightkite. The connection between consumers arriving at a specific location and wanting to share information about that place seemed like an obvious add-on for a service like Yelp, which exists to help users share reviews of restaurants and other services — so the company recently added a “check-in” style feature to its reviews. In an interesting additional feature, Yelp also uses the check-ins by users as a way of building reputation within the service, so that other users can see whether the person whose reviews they are reading should be trusted or not.

The Business Challenge:

So how do such services make money? The short answer is that they don’t, at least not so far. Foursquare has done deals with services such as Zagat, the travel guide company, as well as several entertainment companies including HBO and Warner Brothers — and a local news vendor in Toronto — but it’s not clear whether those are generating any revenue or not.

One possible revenue opportunity is to cut deals with retailers to offer incentives and build relationships with their customers. In a recent blog post, angel investor and startup advisor Dave McClure argued that location-based services will never get anywhere — and will certainly never reach broad or mainstream acceptance — unless they “show users the money,” i.e. until they offer users some kind of tangible reward for participating by checking in that is better than just a badge or mayorship. His recommendation: virtual coupons that give users a discount on a purchase when they check-in to a location. However, plenty of retailers already offer special deals to people who get a badge or become the mayor of a location — without the help of Foursquare of Gowalla. It’s not clear how either would be able to monetize these transactions.

McClure also made a fairly persuasive case in his blog post that only a giant, deep-pocketed entity such as Facebook or Google would have the reach and the scale to make something location-based work and go mainstream, since it would require millions of users and millions of relationships with participating retailers or services. His estimate is that the eventual “winner” in the location-based services game would need to spend in the neighborhood of $100 million to sign up between 1 and 2 million businesses and 20 million users.

That’s bad news for the smaller plays like Foursquare and Gowalla. Especially because two of the giants of social networking — Twitter and Facebook — are also busy integrating location into their networks and services. Twitter has implemented geo-tagging of tweets, partly by buying MixerLabs for its geo-location API, and Facebook is widely expected to launch some form of location-based features (although it didn’t do so at its f8 conference, as some anticipated). The social network has telegraphed its intentions in a number of ways, including a reference in its recently updated privacy guidelines, where it hinted at the idea of a page — for example, the fan page of a local restaurant — being considered a “place” for the purposes of Facebook behavior.

A Future as a Feature?

As Om described in a post earlier this year about location, many mobile industry insiders believe that location will eventually become a core offering of major platforms such as iPhone, Android and BlackBerry, or major web platforms such as Twitter or Facebook or Google. With that kind of integration, users will be able to use location in virtually any app — such as watching a movie and checking in with Flixster or checking in at a restaurant with your Urbanspoon app — instead of using a specific app like Foursquare or Gowalla. In a recent development that lends some weight to that view, Nokia just bought location-based service company MetaCarta so that it could build location features into its mobile devices, including mapping services related to search on its phones.

Regardless of whether location features wind up being standalone apps such as Foursquare, or become integrated into social networks such as Facebook, or are built into devices and platforms, companies that want to take advantage of the potential in this space will need to do several things:

  • Offer real services to your users/customers: One of McClure’s points is that badges, mayorships and other simple game-play rewards based on location will only take you so far, and that the real end-goal should be to offer customers discounts based on location, check-ins, etc.
  • Make it easy for users/customers to take advantage of these features: If you are a company or service provider, you shouldn’t put all your bets on one horse, regardless of how prominent you think a specific player is. Play the field.
  • Be clear about what data you are using and how: The last thing you want is a privacy blowup like Facebook had with Beacon, its ill-fated offering from a few years ago that tracked people’s behavior around the web. Let your users/customers know what you are collecting and make it easy for them to opt out.
  • Don’t expect a home run right away: services that involve new features such as location inevitably take some time to get adopted by regular people (i.e., the non-early adopters). Give this kind of experimentation some time before you decide whether it is working or not.
  • Test and re-test: Don’t just set up a location feature or service and leave it. Watch what your users/customers are doing, and tweak what you are offering, and then watch them some more.

We’ll be discussing these issues and others at our GigaOM Bunker Session on Wednesday, April 28 at 9:30 a.m. You can view a livestream of this exclusive event here.

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