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Location-based social networks Foursquare and Gowalla, which launched the craze of “checking in” at locations such as restaurants or stores in exchange for points, are often described as games. But they’re fairly simple examples as far as games go. Checking in at a bar with Gowalla (or Loopt, or Foursquare, or Brightkite) is done in a matter of seconds. But new location-based games are emerging that hope to command much more of a player’s attention.

Booyah‘s MyTown, for example, has over 2 million active users, and the population grows by more than 100,000 players per week. Most users of the Monopoly-style game spend on average more than an hour on the app a day. Rather than just check in at a place, a player can “buy” the venue and collect rent from other players who check into the same place. Booyah is trying to get players more involved with new features like in-game purchasing, where players can buy power-ups, and all this seems to be working.

Then there’s Parallel Kingdom (pictured) for the iPhone and Android platforms, designed by a company called PerBlue in Madison, Wisc. It has 125,000 registered users, of which around 15,000 are active on a weekly basis, with an average session time of 18 minutes. Players typically play the game for 1-3 months.

Parallel Kingdom is reminiscent of role playing games (or RPGs) on the computer or a games console in that it is loaded with features such as a fighting mechanism, a virtual aid to the player, leveling up the character, instant messaging with other players, trading items and food and so on. The character can move in a certain area of a map in the game (projected on Google Maps) and proceed to other areas as they play the game further.

Parallel Kingdom used to be completely tied to players’ location, which meant a player had to physically move in the real world before being able to move in the virtual game world—a feature the designers thought would be cool, but the players didn’t. “We learned that the hard way,” says Justin Beck, CEO of PerBlue. “The feedback we got from our first iteration was almost uniform: It sucks!”

Now Parallel Kingdom is more lenient in the way actual location is featured in the game. Players don’t really want anything to hinder their experience of a game. If they have five minutes to entertain themselves, the last thing they need is to be told to get off the couch and move.

“We also found that people in general don’t go to that many locations in their lives on a daily basis. They go to school or work, to the gas station, or grocery store and so on. And if you, as a game designer, make them go to a specific location, then you are playing them. So we try to make things that are fun and location-relevant, like checking out where your friends are in the game,” Beck explains.

Some games are designed to make people move in the real world, though, and fast. A German game called FastFoot-Challenge (check out their video here, subtitled in English) designates one player as a runner and the other players as chasers. Using an iPhone’s GPS function, the chasers get an approximation of the runner’s location after a few minutes of headstart and then they chase down the runner, taking to the city streets.

Another genre of location-based games is the scavenger hunt (or “geocaching“), which entails having an object—a ‘treasure’–in the real world that players must find. A notorious example of this is The Game, which is typically a 24-hour treasure hunt out in the real world.

This way of tying a game in with a real-world experience is what location-based games are all about for Greg Gerber, founder of iSpyApp (pictured above). His iPhone game is based on the children’s game of “I spy”. A player takes a picture of a real world object, say, a statue in a city and uploads it to the game. Then, other players take on the task of finding that statue (they get an approximate location of the geotagged photo—a circle is projected onto a map, and it contains the object within a radius of a few city blocks). When they do find it, they take a picture of it with the cell phone’s camera and upload it, thus “solving” the game. Gerber says this gives players a tangible experience of their surroundings.

“Let’s say you’re in an unfamiliar place and you have a few minutes to kill. You can see if there are any games [one iSpyApp photo riddle is a “game” in Gerber’s discourse] posted, and if there are, you can go and discover something cool in your surroundings. It’s also great for finding stuff that we pass every day and never really pay attention to.”

Gerber and I went out solving a riddle on a Friday morning in the heart of the Financial District of San Francisco. There’s a dedicated iSpyApp player with the handle “Mulvaney”, who dominates the game. He’s an active player whose games are pretty hard to solve. In fact, we walked around for 1.5 hours trying to find a place he had tagged as “Urban Falls”, and failed. But we did solve two other Mulvaney puzzles (one of them, “Open Space View”, pictured here, a photo of a clocktower on the corner of Front and California streets) while looking for the original one, almost literally stumbling onto one. The game is very addictive, and there’s a great moment of discovery when you solve a game. But how does all this translate into business?

Gerber’s iSpyApp and Beck’s Parallel Kingdom are both bootstrapped companies, with very few employees. Both have been talking to VCs and are looking to raise money. Parallel Kingdom is monetized through a virtual goods plan—60% of active players pay for virtual food in the game, although the game itself is free. Beck says the company is profitable. And iSpyApp is completely free, with 4,500 users. The obvious thing would be to go for an ad-based business model, but Gerber doesn’t want to take the simple approach.

“Banner ads or text ads are not going to cut it in the mobile world, they are Internet things. I think mobile should drive people to things. If we are getting people to check out interesting things, what business wouldn’t want to be perceived as an interesting thing? Especially local businesses, which is where I think the revenue is. But the players will never pay for our game, nor will they see a banner ad slapped on it.”

So, at this stage of the location-based game market, the question isn’t so much, how do we build interesting apps and get people hooked, but what kind of business model fits the mobile-game-playing experience.

[This story is part of a weekly series on location-based services, written by VentureBeat’s JP Manninen. If you have an idea for a story you would like to see in this series, drop a line at jp@venturebeat.com]

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