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Summary:

Location-based services such as Foursquare have become so popular that rumors have been swirling the company might be acquired for $100 million. But angel investor and startup advisor Dave McClure says such services will have to show users the money in order to achieve mass appeal.

It’s become obvious over the past year that location-based services are the new black, to the point where some are speculating that Yahoo might acquire market leader Foursquare for as much as $100 million, and explorers are racing to the North Pole to be the first to win a special badge. Although it’s still not clear whether location-based services will go mainstream or not, the theory is that if companies can tie location to something tangible — advertising messages or marketing offers, direct sales, etc. — they could drive significant revenue, and that’s going to appeal to everyone from Yahoo and Microsoft to Facebook and Google.

Angel investor and startup advisor Dave McClure, however, says that all the talk about badges and game mechanics is nonsense, and that location-based services need to come up with ways to tie their behavior to cash incentives before anyone is going to care about them. Check-ins are “a classic case of early-adopter lust for shiny objects,” he says, and don’t have anything to do with “long-term sustainable mainstream consumer behavior.” McClure argues that no one normal is ever going to consider doing it “until you give them $5 off their next beer or 5-dollar foot long.”

His other main point is that accomplishing this — going mainstream with enough scale to make it worthwhile — is going to require huge sums of money, and that only a few players have that kind of heft and resources, including: Microsoft, Apple, Google and possibly Facebook. McClure says he believes that Facebook will win. With 400 million users and an active user base, as well as users’ familiarity with connecting through Facebook Connect, “they are the easy pick front-runner.”

Bijan Sabet disagrees. The Spark Capital partner, who has invested in both Twitter and Tumblr, says that there are “tons of non-geeks using Foursquare right now,” including his wife and other friends, and that badges and the utility of being able to see where friends are is enough to get people using the service, even without payments. Sabet also disagrees with the “Facebook can offer this and kill everyone” argument, and says that the ‘focused startup’ has many advantages over “the big, broad based established players.”

So who has the edge in this debate? I think McClure does. The reality is that location-based services don’t have an obvious utility for “normal” people (i.e., non-geeks). In fact, many people I know think that telling people your location all the time is madness, and the creation of Please Rob Me probably didn’t help that impression (even Om is skeptical of their appeal). So how do you convince people to check in somewhere? You reward them. And badges probably aren’t going to be enough for the vast majority of people — in other words, your service either remains FGO (for geeks only), or you broaden it by adding real incentives like discounts on merchandise.

As for Facebook taking over as the king of location-based services, I think there is a good chance it will. Without seeing what kinds of features the social network has planned, it’s difficult to say whether they will dominate, or whether they will federate (i.e., make it easy for Foursquare, Gowalla, etc. to work within Facebook). But the most important point — as Om noted in a post earlier this year — is that location doesn’t feel like a service all by itself — instead, it feels like a feature that belongs inside something else, such as a mobile app or platform, or as part of a web service or network. Regardless of whether users are paid in some way, that feels like the ultimate end-game.

Why The Location Wars Are a Dead End

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  1. Phil Hendrix, Ph.D. Sunday, April 11, 2010

    Matt – for a much more optimistic view, see the 60pp. report on Location Innovation (overview at http://bit.ly/9ugm2M – full report at http://pro.gigaom.com) (full disclosure – I’m the author). Dave does raise valid questions re: business models, valuations and scale, issues that will be discussed in the upcoming GigaOm Bunker Session (April 28th). However, your comment that “location-based services don’t have an obvious utility for “normal” people (i.e., non-geeks)” is a much too narrow view of location-based services, equating them with “check-in” apps such as FourSquare. Viewed more broadly, location-based services are useful to a broad range of end-users and will prove indispensable in the future. The evolution of phones into location-aware devices is likely to accelerate, driven by sensors embedded in devices, low-cost, accurate methods of location determination from Skyhook and others, geotagging and the explosion of location-specific content via Twitter, Yelp and others, proximity and visual search (such as Google Goggles), augmented reality (which provides a compelling new lens for discovery of location-specific content); the emergence of geo APIs (like SimpleGeo’s); and others. All of these and other key developments are discussed in the report “Location – the Epicenter of Mobile Innovation.”
    Dr. Phil Hendrix, immr

    1. Thanks, Phil — I will definitely read the report. And you are quite right that there is more to location than just check-ins. Thanks for the comment.

  2. I’m still thinking that /checking in/ is still too much work. It’s the same if not greater friction of the earlier iterations of the “simple” Twitter update.

    Multitasking mobile devices are going to open up possibilities that were previously reserved for… oddly enough, decidedly non-social software solutions.

    For example, the parental-only access child tracking applications are an interesting approach and could be extended to social graph. Taking a harder edged approach, the corporate truck roll and fleet management tools already capable of real time dispatch/routing could be watered down.

    The masses might like to be able to see screen that lets them know where they can run into others -and- retailers might want to drive flocculation of consumers. The weighting of this will be a critical line to toe.

    The current FGO friction needs to move from Neo’s following of the white rabbit to a more realistic notion of friends and family flash get together as a vibration in consumer pockets.

  3. Markus Göbel Sunday, April 11, 2010

    Funny enough: At Friday I was at the launching Party of a German Fousquare clone. Friendticker gives you vouchers for real life goodies in exchange for check-ins, sponsored by brands thatcher want to attract more visitors to their locations.

    Maybe they are up to something big?

  4. Dave McClure Sunday, April 11, 2010

    clarification: i’m not saying check-ins are nonsense / game mechanics don’t matter… just that they become much more powerful with a (small) financial incentive.

    regardless, it’s going to take some serious capital to acquire critical mass of users & businesses, and the road to success still goes thru Facebook, imho.

    nice piece mathew.

    1. Thanks, Dave — and I think you framed the discussion pretty well. Nice use of fonts too, as usual :-)

    2. Dave – great conversation that you started for a lot of companies. Did you check out http://www.dealwerk.com yet, where you can get business deal content as simple through an API as simpleGeo provides geo stacks?

  5. I agree with Dave. Perhaps it’s because I live outside of the Valley and see that adoption rates outside are much much slower. Seriously, Foursquare is a ghost town and I live in Denver, which is a fairly progressive town in terms of technology savvy. Every place I go to check-in, I have to add, which seriously detracts from the enjoyment of the application (lots of work), and there’s not a lot of community around the application if I’m basically the only user I’ve ever seen at nearly every location I checkin at. The other detraction is that I’m required to build yet another friends list (why does it not just use Facebook’s?). I’ve all but stopped checking in because I guess I just don’t get the point of it. I always try to get behind the latest trends I see coming out of the Valley because I think they will at some point affect my life (I work in Telecom and we’re one of those companies that carries the traffic for these applications), but this is one I’m just not getting.

    1. Good points, Clint. I think your experience is probably shared by many non-geeks and non-Valley types. Thanks for the comment.

  6. I’ve been working for almost 3 years in Europe in Mobile Gaming, from 2005 to 2007, for a big publisher. At those times, we were watching mobile phones market as golden mine (it was Java games mostly), because we were assuming that everybody would be ready to buy games for few money.
    Wrong!
    For 2 main reasons:
    – technologic issues (download process, quality of games vs price), strong barriers!
    – consumer mechanism : what would make people be regular buyer of mobile games? Marketing campaign, price strategy have been poorly applied, now iPhone has changed the rules, but it remains a niche market. And just a few companies competing there.
    Now we come to the same situation: everybody understood that this mobile phone (mostly smartphone, mostly iPhone) can be used in some mobile situation for some purposes.
    Obviously to me location base service and gaming are just short term considerations, and what can you do when you finally realized you obsessively update for no other reasons than “I’m here” or “I’m the new Mayor”?
    Why nobody mentions usually MyTown from Booyah! and its 1.6 Millions users, which is significantly much more than Foursquare, and maybe Gowalla included?! They are clearly in the gaming stream and they do it well. And you know what you’re doing there: you play!
    Silicon Valley needs more companies to succeed than Twitter for sure, but Location applications need much more than to show the money to get traction. They need to be useful, like Yelp in the US, or TellMeWhere or Qype in Europe.
    Or they will go through the same destiny than mobile games. And the value of those company won’t be reaching this $100 Millions for sure!

  7. Sanjay Maharaj Monday, April 12, 2010

    I agree, how long before we loss interest in check ins, we need to see tangible results and offers made to the user as an incentive to continue using location based services. If I frequent a location and always check in and know that a special offer or discount will come my way, I will continue to us the location based service religiously. Then it will be a win win for all.
    Although there is more to location based services, enticing users will probably keep them engaged into the future

  8. Location-based advertising is a prime example of LBS value. The stores and restaurants are there and want to reveal their location and special offers to grab the passersby. Consumers want to take advantage of those offers and they do not have to reveal their location. The phone (and apps on it, with consumers’ permission) knows where they are and serves the ad / offer.
    People show a lot of their personal information on social networking sites without being paid. There are other benefits why they do it (and make those sites winners). Same with location – it just needs to be worthwhile (or perceived as such).

  9. Thomas Cornelius Wednesday, April 14, 2010

    We have just launched “dealwerk.com” to provide developers and publishers coupons and prepaid cards in all major markets in the US via API, platform, etc. for use in their geo apps, lb services, etc.

    First clients include coupons.com, centerd.com, adblade.com and a few more.

    NOBODY has to build their own sales team, we do it for them and get them local content – and let the content flow like water through dealwerk API, dailydeal sites, etc. so that developers can focus on building dailydeal apps, lbs/ checkin apps, etc. and even more important on dealing with the consumer and build a great experience for consuemrs. Let the best apps and consumer sites win, but don’t make the mistake Mr. app developer to get into the SMB sales business – you will get crushed and never reach scalability!

    Check the release here about dealwerk: http://bit.ly/cjM3lP (a day before Dave’s post – how timely).

    As a present example – there is groupon and 150 single city groupon wannabes, BUT no wannabe can scale their local 2 man sales show with SMBs to a national gig with products in every city….now with “dealwerk” everybody can – same for LBS, geo apps, etc.

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