LBS Smacks of dot-com Era Hype

Foursquare, a location-based social network startup, is all the rage at the moment. Valued at $95 million before the latest $20 million infusion from Silicon Valley venture capital firm Andreessen Horowitz, Foursquare appears to be slated for super stardom in the combo social media and location-based services (LBS) arena.

But not all that glitters is painted in gold or banked in silver. The year-old Foursquare has yet to show any visible means of generating serious revenue. Given its soaring popularity and its pitiful profit record, this begs the question of whether Foursquare may turn out to be the MySpace-flash in the location based services (LBS) pan.

MySpace, as you may remember, was a forerunner in social media. It was a near overnight sensation with apparently endless potential, albeit with the sketchiest of business models. Still, nearly everyone was certain MySpace was a long-term hit. Indeed, it was billed as “the future” as many technologies are wont to be. But its popularity waned as quickly as it rose and other social media giants sprung forth — namely Facebook, Twitter and LinkedIn — to shove MySpace aside.

Today, MySpace is an albatross around media mogul Rupert Murdoch’s neck and hemorrhaging money almost faster than can be counted. Its once impressive numbers of unique visitors are plummeting monthly with only the tiniest of reprieves to cushion the fall: MySpace Music and a glimmer of a shot as a gaming site in its MySpace Games Lab. If those two attempts fail too, Murdoch will have trouble giving the site away. That’s one bitter pill considering he paid $580 million for it.

Now Foursquare is flashing plenty of promise at investors but few rewards to users and merchants. While “checking in” is of some amusement initially the actual reward for users is more of the same in a quaint and silly game. There’s nothing to hold user momentum and precious little to benefit merchants in the long-run.

For there to be any real value to Foursquare specifically, and LBS in general, there must be a shift from game to utility. Perhaps Foursquare will make that leap soon. Certainly Andreessen Horowitz is a savvy group with a long record of making successful companies out of startups. The firm has undoubtedly sized up Foursquare’s many shortcomings and the competitive threats rising from the likes of Loopt Star and Gowalla .

But Rupert Murdoch is no business slouch either. The media magnate owns such profitable companies as Fox and Wall Street Journal, and the London Times as well as many others. Yet he failed miserably with his now washed out, watered down social media venture. His Midas-touch worked on everything but MySpace. Business and investment savvy, then, may not be enough to overcome a fickle social-network-empowered group of users.

“With competition running rampant, Foursquare is faced with leaping tremendous hurdles in order to keep pace,” said Kevin Green, vice president of Social Media Marketing at Digital Influence Group. “The MySpace analogy is a perfect example, but the challenges facing all LBS is the limited payoff for users.”

Indeed, LBS is set for a major shock in the foreseeable future said Ray Wang, founding partner and research analyst for Enterprise Strategy at Altimeter Group. “A consumer backlash is coming. The first time something big happens like a stalker uses LBS to find and hurt someone or a tax dodger is found by the IRS, users will withdraw to ensure privacy and safety.”

Some of Foursquare’s competitors get the user payoff issue and have already moved to rectify that problem at least.For example, Loopt Star is turning LBS into a loyalty based offering. It is essentially a virtual loyalty card tucked neatly in a social LBS game structure. Gowalla, meanwhile, has teamed with USA Today on travel content and travel reward programs. One of the user awards is to be profiled in USA Today if you win the game. Now there’s a benefit that strokes a user’s ego!

Loopt and Gowalla are sure to rain on Foursquare’s parade at some point. Foursquare has other problems as well. “It works on the honor system and I think that’s probably going to be its downfall,” said Wang. “People can falsely report on Foursquare which brings up a trust issue with merchants and other users.”

Then there are the security problems that plague all LBS efforts.

Wang said Foursquare could secure its leadership position by correcting the false reporting issue and bringing into play a LBS loyalty program that strongly aids merchants. “If merchants could learn from Foursquare who their top 20 patrons are, the time and days their most influential customers come into the store, what offers drew which customers, in other words, offer some useful analytics, then Foursquare would have a solid, sustainable offering.”

uTest conducted a recent study showing Foursquare’s check-ins grew 50% last month with nearly 900,000 check-ins on June 4th alone. uTest conducted a recent survey of some 300 professional testers from nearly 40 countries who ranked LBS check-in offerings across several key features including programming bugs, location accuracy, social media integration, and ease-of-use. Foursquare performed best at 59.4%; Brightkite came in a close second with 57.3%; and, Gowalla with 44.7%. However, opportunities to receive special deals/discounts received a historically low score across all three apps.

“Location-based services are unquestionably among the hottest segments in the mobile app space,” says Matt Johnston, uTest’s VP of Marketing and Community. “That said, I wonder if they will take off as a standalone category like social networks did, or if they will become a critical feature within social networks.”

The answer to that lies in whether fickle users decide to play and stay and whether merchants see enough advantage to pay.

“It’s all about when things become mainstream,” said Peter Shankman, the man that turned a Facebook page into a PR powerhouse company, HARO (Help a Reporter Out), and sold it for untold millions to Vocus, a PR management software vendor. “Enough people now have GPS in their devices — and enough restaurants and stores see the value proposition of getting their people in the door — that I don’t see Foursquare going away anytime soon.”

A prolific and versatile writer, Pam Baker’s published credits include numerous articles in leading publications including, but not limited to: Institutional Investor magazine,, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, NY Times, and Knight-Ridder/McClatchy newspapers.She has also authored several analytical studies on technology and eight books. Baker also wrote and produced an award-winning documentary on paper-making.Baker is a member of the National Press Club (NPC), Society of Professional Journalists (SPJ), and the Internet Press Guild (IPG).