loopt1Location based social networking keeps getting tremendous hype, but the question is whether it will live up to its potential.

The buzz continued this week when Loopt, one of the earliest location-based social networks, announced the acquisition of GraffitiGEO. Loopt recommends places to go based on your location, and informs you of friends around you. Several industry observers have raved about the potential of location-based social networks for businesses and advertising. “Context awareness is critical when you want to buy something, and advertisers get higher targeting based on our patterns and social contexts,” said Massachusetts Institute of Technology researcher Nadav Aharony in a recent BusinessWeek article.

Yet, Loopt’s user base of more than one million users is a little more than a rounding error when compared to more than 150 million Facebook users, for example. This begs the question, why aren’t location-based networks growing like they were expected to?

We decided to try out several of these apps ourselves and talk to the companies and several industry experts to find out. And what we found out is that there seem to be four factors holding these networks back: Users are hesitant to join unless their friends are already on board, businesses won’t join up without a critical mass of users, many phones still can’t handle the necessary technology, and there are privacy and behavioral concerns.

However, I suggest several ways these services can improve their growth. Facebook and Foursquare, in particular, are interesting to watch. Facebook has intriguing potential, but has yet to enter this area in a serious way. Foursquare has limited distribution, but is showing momentum.

Users are slow to join up

I installed Loopt on my iPhone when it was launched more than a year ago. I stopped using it soon after, since none of my Facebook friends or Gmail contacts were on it. Now it has more than a million users, so last week I installed it again — along with several other apps — but I didn’t have much luck this time either. The closest I came to a successful experience was with another mobile networking application, Foursquare, where I was able to find a few friends — most of whom haven’t yet responded to my invites. I’m inclined to think it’s not because they don’t like me but because they signed up for the service and never checked in again.

foursquareMy original thought was that most users of such networks belong to a different demographic — younger and hipper than I am. So I decided to ask a few hipper, younger folks I know whether they were active with any location-based social network. Of those who responded, all but one said they’d never used any of these networks. “It would be great to have a mobile application that can tell me whether some of my friends are at a local bar so that I can join them,” said one of them, Joy Xi, 22 and a recent Harvard graduate, who is traveling around the world before she starts working with a strategy consulting firm in New York City. But she hadn’t heard of any of the location-based networks I mentioned to her, and though she was excited to hear some of the “perks” of joining such a network, she didn’t sound too tempted to join one unless her friends were already on board.

The one “hip, young” person I talked to who had used a location-based social network before, on the other hand, seemed to have very specific interests that made the service valuable to her. She’s Courtney Skay, second year MBA student at MIT Sloan. She uses Foursquare and is already “mayor” of at least three places (with Foursquare’s service, if you check into a location more often than anyone else, you get the mayoral rights to that spot). Courtney loves to eat out and even maintains a personal blog on food. “I often (use Foursquare to) see where my friends eat, and then check their reviews to decide whether I should go there as well,” she said.

So is there any location-based social network that can solve this chicken-and-egg problem? Here are some of the key players (scroll down for more screen shots of the various apps):

Foursquare, founded by Dennis Crowley, the winner of Top 35 Innovators Under 35 award by MIT Technology Review magazine, starts with a home page where you can see places of interest in your neighborhood. So even if you don’t have any friends on the network, you still have something useful to start with. Contrast this with Loopt, which starts with a map of friends. Loopt does allow you to check into a place of interest, but the feature seems to be more of an afterthought. Foursquare also allows engaging game mechanics — the right to be mayor of a place you especially like, for example.

goingGoing takes things a step further, but lacks Foursquare’s game mechanism. In addition to checking in places, it lets you look for cool events happening near your location. “We approach the whole social life area, not just location.”, says Roy Rodenstein, MIT Media Lab graduate and co-founder of Going. Going has its own ticketing engine, maintains guests lists for events, and allows comments on photos to show if they are cool or not. The company says it has nearly a million users and will soon have broader AOL community contributing as well.

Gowalla, unlike Foursquare, does not let you “check in” unless you are actually at the place that matches the coordinates you’re searching — to keep people honest. “We do not limit usability on a city-by-city basis like Foursquare. We want our users to share the places they visit, regardless of where they go — be it a restaurant, a store, a national park or a sporting event,” said Josh Williams, the CEO of Alamofire, the owner company of Gowalla. Gowalla also supports trips, such as the Austin Bar Hop and time-limited events, such as a U2 concert.

Whrrl, created by Pelago, and the first app to be accepted into Kleiner Perkins’ iFund program, claims that its mission is different from most other location-based social networks. Whrrl lets users share their lives in the form of “stories” around places and people through pictures and text. Stories persist and can be revisited, and this brings a collaborative tone to the app. The idea of “stories,” though intriguing, does not seem to attack the chicken and egg problem head on, and does not have same viral effects as winning points or badges in Foursquare for example.

aloqaAloqa, Geodelic, and Where take yet another approach to solving the chicken and egg problem. They look more like portals for several location-based services. Where, for example, if primarily focused on local search, while social features are secondary, says Lacy Garcia of Ulocate, creator of Where. Aloqa offers a search and discovery service for mobile phones that proactively notifies users of friends and favorites close by. It also offers APIs for third parties to create their own channels, which users can join based on their preferences. For example, I can add J. P. Licks to my channels, and I can then find out where the closest J.P. Licks is to my location. The home screen would show me different channels that I can drill down into to see which places are close by. Geodelic (below right) offers similar capabilities.Geodelic

I see three effective strategies in play to tackle the critical mass problem:

Strategy 1: Build apps that can offer value on their own (stand alone) so that they don’t face chicken and egg problem in the first place. Aloqa, Geodelic, and Where are taking this tack. These applications should be able to draw in an audience purely on the basis of their location data. Once they get wider audience, they can focus more on the social element to make those apps more addictive.

Strategy 2: Introduce virality and game mechanics so that friends can multiply quicker. Though the idea of a stand alone app is appealing, it can also be severely limiting. Foursquare, Going, Gowalla are doing a good job of not only starting with a home page that provides value even without friends (so can act as a “stand alone” app), but also of using virality of social connections. Foursquare, in particular, goes even further by offering engaging gaming mechanics. I think they have a brilliant strategy, and are the company to watch in the space.whrrl1

Strategy 3: Provide apps on several platforms and carriers etc. to widen the reach and pull in more users. To be sure, this is easier said that done! Foursquare and a few others lack platform access: they are available only on limited phones. If an app is available only on the iPhone, what is the likelihood that you’ll find your friends on that network? Loopt, meanwhile, has a lead here because it has invested significant time to make sure its application is available on several carriers, including partnerships with Verizon Wireless and Sprint Nextel. Loopt was very early to get to market and to start building these relationships, and deserves credit for that. This puts them at a scale advantage. Further scale and network effects can be leveraged by partnering up with players such as Facebook, MySpace, or mobile operators, who have a huge existing base of users, each of whom already has a large address book that will get more location-aware with time. Google’s location-aware mobile app Google Latitude is the elephant in the room here. It has the advantage of Google’s large user base and brand name but doesn’t seem to be focusing so much on social aspects. Instead, it seems poised to commoditize “Who is nearby” and location technology. And that brings us to the question of what business models are most likely to drive success.

Partnering businesses need better incentives

Getting users on board is hard. But there’s no point in even trying to get users if you can’t get businesses involved (restaurants, clubs, bookstores and many other locations who could benefit from some extra foot traffic). By bringing businesses on board, you can offer incentives to users, and therefore make it more likely that users will join your network. That is why location based apps need to get creative in their business models if they want to succeed in the long term. Foursquare seems to be working on the kind of partnerships that will be mutually beneficial to users and businesses. For example, a local Starbucks might offer you a free coffee if you are “mayor” for the week. However, I think the business models and logistics so far haven’t really been worked out. Consider the following two opportunities:where

Making a location app the equivalent of a Safeway Club Card. Currently several grocery stores offer membership cards to track user purchasing patterns so that they can offer them custom recommendations and also make purchase and operations decisions that fit with buying behavior. Right now, though, there’s no way for a Pizza Hut to track how many times you go there and what you buy. With a proper arrangement and product enhancements, location based apps can easily provide such statistics to restaurants. For example, Going should consider selling users’ check-in information (after appropriate opt-ins, of course) to restaurants and, in turn, give free or cheap offers to users who choose to participate. This will also help restaurants manage their supply chain more efficiently.

Making timely offers. Imagine being in a vicinity of a movie theater or Fenway Park. Let’s say the movie theater has some unsold seats for an upcoming movie. It can send discount ticket offers to anyone in the vicinity who’s signed up for such service. My guess is that several people who are shy about disclosing their location today will probably sign up for such incentives. It’s a clear win-win situation for local businesses and consumers.

The underlying technology is only just maturing

A few years ago, finding the location of a mobile phone was extremely challenging. The technologies you need to determine location are complicated; some carriers block developers from determining location, and in many cases each find-location transaction can cost from 3 to 6 cents. This makes location apps cost prohibitive and technically challenging for most developers. Apple’s iPhone and, to a large extent, Google are helping change that.

GowallaApple, for example, has not only given developers free use of location based APIs but has also provided a layer of abstraction so that developers don’t have to worry about the intricacies underlying the technology. Apple’s API, with the help of Skyhook Wireless, gets the best and fastest location information using one of the several methods available. Google on the other hand collects user generated data to build its network base station database that can then be used to find the location of a mobile user. With its Android mobile operating system, Google is making further progress in commoditizing location information. This explains why so many location-based apps are just now coming to market.

Even as location technology is becoming cheaper and easier, it still remains a challenge for a lot of existing and older phones, and several international markets. “Desktop based” social networks, such as Facebook and MySpace, had — to a large extent — no such problem, and were therefore able to gain scale quickly. If location-based networks want to tackle the scale problem, they’ll have to invest more resources. Going, for example, provides a WAP-based interface that can work with most cell phones with browsers. Loopt spends considerable resources on making sure its app works on several platforms. However, it’s only a matter of time before most phones become “smart”, and location based technology becomes a commodity.

Users not keen on being tracked

brightkiteOne final reason location-based networks might be having a hard time getting more users is that it’s hard to change user behavior. Many users are either not very comfortable with disclosing their whereabouts, or perhaps mistakenly think that the app is tracking them all the time (this is usually not possible unless you agree to give explicit control to the application). Perception of location-based privacy needs to change for these apps to take off. A few years ago, I thought it was totally insane to leave messages to your friend on public walls on Facebook, for example. Now it’s become a norm. I wouldn’t be surprised if a similar transition happens in location-based apps. However, I think the industry needs to change the general perception and fear among users and publicize incentives — such as the chance of a free coffee at a local Starbucks.

Clearly the iPhone — and to lesser extent Android, Blackberry and Nokia — are driving the number of apps accessing location. While this trend is likely to continue, the companies behind these apps still face several challenges. Facebook, if it decides to turn on location-based capabilities, can be a formidable player because of its huge scale and user base. However, in my view, Facebook could serve itself better by acquiring one of these startups to get a leg up in location based expertise.

Among the startups I have reviewed, I feel that Foursquare has a lot of momentum. The only problem is that it is available on limited platforms. However, it does attack the chicken and egg problem in some other ways. If it targets the right niche (iPhone users, for example, are potentially a good first target audience, despite the fact that there are only so many of them), the way Facebook did by starting with select colleges only, and then fanning out from there, Foursquare has potential to be a leader in this space. Reading these two paragraphs, you might say “Aha, so Facebook should buy Foursquare!” Well, wish Facebook luck, because Foursquare’s founder Dennis Crowley has been burned before on acquisitions, and may not go for such a deal. His previous startup, Dodgeball, was bought by Google, only to be mothballed by Google not long after. He may want to go it alone.

But here’s my bottom line. The critical mass problem still needs to be solved, but I do think that is going to happen eventually — and that’s when we’ll see a whole lot more action: My hope is that when I launch one of the apps reviewed above a year from now, I will have dozens of friend invites waiting in my queue. That’s what will make me come back. Also, needless to mention, more girls on Loopt Mix would be nice.

Matthaus Krzykowski contributed to this story.