Thursday, 4 November 2010

Why Facebook Places deals announcement is great for location based startups – perhaps even for Foursquare

In the last year working at Yell (the UK’s leading directory company), I have been approached by a number of very interesting location based startups that were keen on partnerships. These are companies that have gone beyond simple location based search, and created unique IP which is augmented by location targeting. Some have already launched whilst others are still in the prototype stage. All face one or more of the following difficulties:

  • Accurate listings information: Most location based apps share a need to do geoproximity searches for useful businesses. Accurate geolocation information, name, address and telephone number are minimum requirements. Getting this information and having it refreshed regularly for a large number of businesses that are started up, shut down or just move premises, is a daunting task.
  • Marketing/distribution plan: Acquiring new customers is the bane of the B2C startup. To date, location based services had to rely on app stores or marketing a standalone site. Whilst Apple does try its best to highlight new apps, with over 300k apps available, gone are the days when an interesting startup could count on leveraging word of mouth alone. Most new entrants are easily outshone or outspent by bigger brands that can invest in mobile marketing. Even those that do, find that this seldom translates virally.
  • Business model: Those that have traffic, struggle to monetize it. Other than paid for apps or paying for upgrades to free apps, mobile advertising is the only option. Those with deep pockets can afford to hire large number of sales people but for almost all startups, that means working with mobile ad networks or Google AdSense. With mobile CPMs on the floor (location based multipliers are still few and far between), you need a lot of traffic before you can pay the rent. The lack of a compelling business model affects their ability to get funding as well.

Foursquare is a great team that has solved all the above problems, but they have spawned numerous clones. The reason for that is whilst the above activities are time consuming and expensive, paradoxically, they are quite simple. It is no wonder that the location based services space has so few hits and limited usage. Foursquare have been around for over a year and a half and acquired just 3 million plus users, despite great interest from the general media and a $20M B round.

Facebook has the ability to alter this landscape dramatically and has a track record nurturing a huge number of startups. This far into the life of Zynga, they had several times the number of users that Foursquare has. The reasons are to do with creating the right ecosystem. First and foremost, this means a rich platform that is already in use by 200M potential mobile customers and growing. The reason it is still possible to virally launch a niche app on Facebook is that it has volume, and a long tail that is highly networked. It is also relatively cheap to target your audience. How else can a 13 year old with little cash get 16k fans in 4 days? Adding freely available local listings and allowing geoproximity searches to this mix is a great enabler. Coupons could be the answer to the ‘Show me the money’ VC or angel question. Whilst the current launch allows businesses to create deals free of charge, Mark Z. has indicated that he would consider making money from deals in the future if it were in the interests of its user community – presumably that could include the app developers.

To be sure, there are going to be challenges. The accuracy of Facebook’s location data is suspect, but then again, that is true of other larger players too. To achieve critical mass, in coupons, you also need volume. Whilst millions of early business adopters are already signed up, Facebook lacks a large sales team to get businesses to publish their offers. However, these issues could be remedied by working with partners, such as directory companies and media sales houses.

And what of Foursquare, that had already invested much effort to create its own platform (and was charging businesses to display deals)? Have they been outmanoeuvred? Perhaps. But Foursquare partly got into the platform business by necessity. If a team that innovative refocused on their core, which is creating a great gaming experience based around local presence, and ported their product onto Facebook, they could yet be the Zynga of location.

No comments:

Post a Comment