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From the way location-based services are used today, we’d forgive serious investors from dismissing them as games — think of Foursquare with its “mayors” and “badges.” But there’s a real business in cajoling consumers into sharing their whereabouts. And it’s advertising, advertising, advertising.

This is no secret to the smarter set in Silicon Valley. Google earned a patent recently on location-based advertising. Gartner is forecasting that the overall mobile advertising segment will become a $7.4 billion market by the end of 2014. And Apple is expected to announce a mobile advertising platform today in conjunction with the launch of its new iPhone OS 4.

VentureBeat asked the experts what they think of the location-based ad space, mobile advertising and new technologies around it, such as augmented reality, in which digital information is superimposed on a real-world environment on the user’s screen. (Yelp, the business-reviews site, is experimenting with augmented-reality techniques in its iPhone app shown here.)

Alistair Goodman, CEO of Placecast, a San Francisco, Calif.-based ad company that specializes in location-based ads; Forrester Research analysts Julie Ask (based in the U.S.) and Thomas Husson (based in France); and to mobile product manager Eric Singley from Yelp shared their insights.

VB: When will location-based ads finally take off?

Goodman: Location-based marketing provides brands that have a physical presence with an unparalleled way of driving traffic into physical stores, and it is taking off today. We are seeing large brands like the North Face embracing these types of programs, and small- and medium-sized businesses are also starting to use tools like social check-in services. Consumer research also indicates that consumers are interested in receiving location-based marketing on their cell phones from their favorite establishments, provided that it is opt-in and perceived as a valuable service.

Ask: I think it is hard to define ‘take off.’ What is holding this back? I think it’s the lack of inventory of mobile ads plus the ability to identify user location. The proliferation of smartphones in the market, 4 billion downloaded applications from the Apple App Store, increased mobile browsing—search being one of the most frequently used mobile services—means that the inventory is broadening constantly. Most of it is generic, and only some tied to location, but this will grow over time.

Singley: For Yelp, location-based ads are definitely something we’re looking at, but not in the near-term roadmap. We’re currently focusing on getting other platforms like Android and Blackberry up to parity with where we’re at on the iPhone, and improving the features of our existing apps.

VB: When they do, will they help back-street vendors compete better with merchants who have their storefronts on the main drag?

Ask: It depends. Most of these small mom-and-pop stores don’t have the ability or bandwidth to pursue a lot of different ad opportunities. It’s very interesting, but very hard to execute. Yelp and Google do some of this today with their local content.

Goodman: There will be a lot learned this year and I expect we will see scalable solutions deployed before the end of the year. I do not believe that a competitive model with local business having to outbid or displace a national brand will ever work. Google has already shown one alternative, which is flat-rate pricing for local business ads on a map, and we can expect to see other types of programs get traction as well.

Singley: We’d argue this is actually the beauty of Yelp. We work hard to show people the best businesses whether they’re on the main street or the back street. Location-based ads are an effective way for technology-savvy small business owners to use their ad dollars in a very targeted way. At the end of the day, though, consumers are going to respond to the most compelling, most relevant ad, regardless of the source.

VB: So will location-based advertising change the game at all for small local businesses competing with the big chains?

Goodman: The strongest interest today is from national and regional brand retailers, but small- and medium-sized business in major metropolitan markets are also jumping on the bandwagon. Providing more value for smaller businesses requires delivering a sufficient number of consumers, making it easy to buy through a self-service process, and providing some kind of return-on-investment measure such as increased store traffic. Enabling local businesses to easily opt-in their own base of customers to a program – similar to following someone on Twitter – is one approach that can gain traction quickly and change the playing field.

Husson: Smaller players may miss some opportunities if they don’t use location-based ads, but it won’t really change the game as far as their ability to compete with national chains is concerned. Budgets for mobile marketing campaigns are still limited, and small businesses can’t spend too much money on early initiatives. If executed well, local campaigns can prove successful and drive foot traffic to small local stores.

Singley: We’re just scratching the surface. Small-business owners want to be able to see how much of their business is coming from consumers who found their business from a mobile app. We’re already thinking about how we can bring these metrics to our free suite of tools as well as meeting with small-business owners to discuss how we can better outfit Yelp mobile for their needs.

VB: Will augmented-reality applications break through any time soon, and will they give the push that location-based advertising needs?

Goodman: Augmented reality is one of the most interesting opportunities on the horizon and holds great long-term potential for location-based ads. However, it will track the penetration of smartphones, and the tipping point for these devices (over 50 percent market share of cell phones) is still Christmas 2011 according to Nielsen’s most recent research. Traction today for location-based marketing is still coming from SMS and local search.

Singley: We were really excited by the response we saw to our AR feature, Monocle [a feature that superimposes information on nearby businesses on the camera’s view.] I think that we’re just starting to see the possibilities that this technology represents. AR definitely has that ‘fun factor’ that could play nicely in a compelling local ad. I see it being useful with things like getting instant information about a business just by holding up your phone in front of it as you look at it from the street.

Husson: AR does not yet really offer object and image recognition, and is not yet a stabilized technology with a proven business model. Still, it is showcasing how mobile could bridge the physical and digital worlds. Having said that, services from start-ups like Layar or even from major players (like [visual search apps] Nokia’s Point and Find or Google’s Goggles) need to be embedded in many more devices to scale and to benefit from the local advertising business ecosystem.

VB: What’s in it for the user? What will make users embrace AR, or location-based ads in general?

Ask: More relevancy. More context. Best deals. Finding the closest place with the product in inventory that the customer wants.

Singley: We’ve already seen such great innovations on a number of fronts from smart phones. As mobile hardware improves, we’ll see more opportunities where we can take AR to the next level on the application front. For us, from a user perspective, we’ve also implemented our Yelp Check-in feature so the user can see where his or her friends are, in ‘AR vision’. However, I think it will be the quality and relevance of the location-based ads that will make people embrace them.

[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]

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