foursquare, Facebook and the Strategic Landscape of Mobile Location-Based Social Networks

Alex Gordon Developing Strategies for High Tech Firms

Prof. Raul Katz May 3, 2011

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Location: The Next Frontier in Social? Since Google acquired Dodgeball in 2005 mobile location-based social networking has

evolved quickly. Even though Dodgeball foundered as part of Google many new companies entered the space in the years that followed; most failed to gain traction due to low consumer awareness of location-based services and minimal penetration of sophisticated smartphones.1 Mobile location-based social networks became more viable when Apple’s iPhone and Google’s Android platforms were introduced in January 20072 and November 2007, 3 respectively, and as the high-speed 3G network became more widely available. These mobile platforms’ associated application stores, launched in July and October 2008, respectively,4 offered easier discovery and downloading of user-friendly applications based on location. With the launch of foursquare (the f is intentionally lowercase) at the South by Southwest Interactive festival in March 2009, the second phase of mobile location-based began in earnest, as foursquare, Gowalla and, most recently, Facebook Places all went live. Winners in the space are beginning to emerge, with some older players already bowing out: Brightkite, a location-based social network that was in public beta in April 2008, then acquired by mobile social network Limbo in April 2009, 5 announced in December 2010 that it was eliminating its check-in option to pivot towards the latest mobile trend: group messaging (though it will continue to offer location sharing).6

With Facebook’s entry into location-based in August 2010, the basic check-in – recording “I am here” – became commoditized,7 and the companies still in mobile location-based networking are seeking to exploit multi-sided network effects by building more value for users with hope of bringing merchants, marketers and developers to their platforms.

This paper will explore the mobile location-based social networking space with a focus on the players that, in my estimation, best embody the struggle between a multi-sided network and a nested bundle as of April 2011: foursquare, the pure-play scion of Dodgeball representing the network, and Facebook, the behemoth would-be enveloper. 1 As of February 2011, 69.5 million people in the US owned smartphones, or 29.7% of the total mobile phone-toting population, with three platforms accounting for 87.1% of all smartphones: Google (33%), RIM (28.9%) and Apple (25.2%). comScore MobiLens. “comScore Reports February 2011 U.S. Mobile Subscriber Market Share.” April 1, 2011. http://www.comscore.com/Press_Events/Press_Releases/2011/4/comScore_Reports_February_2011_ U.S._Mobile_Subscriber_Market_Share. In April 2009, smartphone penetration was only 11%. Flosi, Stephanie Lyn. “Americans Get ‘Smart’: iPhone, Android and the Accelerating Adoption of Smartphones.” comScore: June 15, 2010. http://blog.comscore.com/2010/06/americans_smart_iphone.html 2 Business Insider. “iPhone.” http://www.businessinsider.com/blackboard/iphone 3 Wikipedia. “Android (Operating System). http://en.wikipedia.org/wiki/Android_%28operating_system%29 4 Wikipedia. “List of digital distribution platforms for mobile devices.” http://en.wikipedia.org/wiki/List_of_digital_distribution_platforms_for_mobile_devices 5 Schonfeld, Erick. “Mobile Socializing: Limbo Merges With Brightkite And Announces $9 Million Funding Round.” TechCrunch: Apr 7, 2009. http://techcrunch.com/2009/04/07/mobile-socializing-limbo-merges-with-brightkite-and-announces-9-million-funding-round/ 6 eMarketer. “Beyond the Check-In.” January 2011. Pg. 4. 7 Andy Ellwood, Director of Business Development at Gowalla, noted that, “We started saying around April of [2010] that the check-in was close to being commoditized. And when Facebook Places came out, that was the final nail in that coffin.” eMarketer, “Beyond.”

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Mobile Social Network and Location-Based User Base Mobile social networking – defined as monthly use of a social network from a mobile phone, either using a web browser or application – has continued to surge in recent years. According to eMarketer, the number of US users jumped by almost a factor of five between 2008 and 2010, from 8.6 million to 38.9M. eMarketer expect this number, driven by status updates of the type popularized by Facebook, to jump nearly 27% between 2010 and 2011, to a total of 49.4M users at the end of 2011, and nearly 80M users by the end of 2015 (a 22.2% compound annual growth rate). Similarly, comScore reports that 52.7M US unique visitors accessed a social network or blog from a mobile phone during a three-month timeframe ending August 2010. (Please see charts in Exhibit 1 for more detail.8) Facebook noted that it had 200M “really frequent” mobile users worldwide as of November 2010.9 Users of location-based services are a even smaller subset of this group of mobile social networkers: Pew Research Center’s Internet & American Life Project found in a November 2010 report that only 7% of Americans who access the internet on a mobile phone use location-aware networks, and that, in total, 4% of online Americans access location-based networks (this latter number includes users who may access some location services, like Google Latitude, on their desktop computers). SNL Kagan found in September 2010 that the top six location-based social networks at the time (Brightkite, Loopt, MyTown, foursquare, Gowalla and Whrrl) had a total of 18.1 million registered users, with foursquare the fastest growing.10 SNL Kagan’s definition of a location-based social network is unclear because several networks not included in its coverage, including Google Latitude, report sizable audiences as well.

Digging further into the demographics, Pew found that 8% of adults aged 18-29 who access the internet on any platform used location-based services, and that men were twice as likely to access these services as women (6% vs. 3%). The survey also revealed that 10% of Hispanics who use the internet accessed location services, far more than active internet users who were either black (5%) or white (3%).11 In a mid-2010 report, Forrester also found that 4% of US online adults have ever used a location-based social network, with only 1% using them weekly (please see Exhibit 3 for more details). However, this small group is influential, according to the research firm: they are “38% more likely than the average US online adult to say that friends and family ask their opinions before making a purchase decision.” Forrester’s findings also echo Pew’s in terms of demographics, finding that the majority of users are young adult males with advanced education: “Nearly 70% of users are between the ages of 19 and 35, and nearly 80% are male. They are also

8 eMarketer, “Beyond.” 9 eMarketer. “A Look at Facebook’s Foray into Location-Based Services: an interview with Emily White, Senior director of local, Facebook.” November 23, 2010. Pg. 2. 10 SNL Kagan. “A New Study from SNL Kagan “Checks In” On Mobile Location-Based Services.” October 21, 2010. http://www.prweb.com/releases/SNL-Kagan/Study/prweb4684854.htm 11 Pew Research Center’s Internet & American Life Project. “4% of online Americans use location-based services.” November 4, 2010. http://pewinternet.org/Reports/2010/Location-based-services.aspx. Pew’s sample size was 3,001 survey respondents. Please see associated data in Exhibit 2.

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well educated with 70% having a four-year college degree or post-graduate degree.” In sum: a typical early adopter.12 Overall, Forrester expects mobile location-based social networking to be the #1 mobile trend for 2011, though it cautions that the sector will generate minimal revenue as various business constituencies (merchants and marketers) continue to experiment with the platform and rapid changes continue.13 Though the absolute numbers are small, mobile location-based social networking is growing, and will likely be boosted by improvements to existing location-based networks, smartphones and cellular networks. Still, it has not largely moved beyond early adopters. Marketers and Merchants Increasingly Move Into Location-Based Marketers and merchants have also been moving into mobile location-based social networking, many of them drawn in by a combination of available data on users who frequent their venues as well as the couponing and special offer functionality that most networks have built. For example, ABI Research predicted in September 2010 that $43 million would be allocated to location-based advertising in 2010 globally, though spending would grow rapidly to hit $1.8 billion in 2015.14 In a recent example, RadioShack extended a partnership it had with foursquare due to excellent results: RadioShack’s CMO noted that foursquare users spent 3.5 times more than the average RadioShack patron, and that the company had great success attracting business using foursquare’s “special offers” feature.15 In a broader example, Gowalla partnered with Disney to create “Disney Parks on Gowalla — featuring over a hundred Disney attractions, challenges, and insider trips that give you a new way to discover the parks when you visit the Magic Kingdom, Epcot and more.”16 Exhibit 5 shows that while about 25% of ad agencies plan to work with Facebook Places and foursquare this year, over 50% of agencies do not have plans to engage with mobile location-based networks at all. As with the user base, mobile location-based is growing but has yet to achieve large, mainstream mindshare with marketers and advertisers. Still, Foursquare says that over 250,000 merchants are on its platform.17 Testing the Need for Mobile Location-Based Social Networks

We might infer from the sheer number of companies entering the location-based space, and the rates at which a select few like foursquare are growing, that these types of social networks fulfill a need for users, as well as marketers and advertisers. (Alternatively, we could infer that many

12 Parrish, Melissa. “Location-Based Social Networks: A Hint Of Mobile Engagement Emerges.” Forrester: July 27, 2010. 13 Husson, Thomas and Julie A. Ask. “2011 Mobile Trends.” Forrester: January 24, 2011 14 eMarketer, “Beyond.” 15 Heine, Christopher. “Radio Shack Says Foursquare Users Spend 3.5X More.” ClickZ: April 11, 2011. http://www.clickz.com/clickz/news/2042629/radio-shack-foursquare-users-spend-35x 16 Williams, Josh. “Go with Disney on Gowalla.” Gowalla blog: November 18, 2010. http://blog.gowalla.com/post/1609431856/disney-on-gowalla 17 Foursquare. “About Foursquare.” http://foursquare.com/about

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people would like to build a company that Google or another tech giant might acquire.) Running through the “social networks test” shows that mobile location-based networks like foursquare do fulfill a need, though the question of whether they need be standalone or part of a larger network, like Facebook, remains to be seen.

• What needs does a mobile location-based social network fulfill? o Facilitating the real world process of meeting with friends while on-the-go o Functioning as a diary of where a person has been, with whom, and what they saw or

thought there • Do real-world social networks help mobile location-based social networks?

o Yes: mobile location-based social networks are an extension of a person’s real-world network, and enable a person to connect with that network more easily

• Do non-network solutions provide a better alternative? o Perhaps. The utility of mobile location-based social networks, like all social networks,

is dependent on network effects. If a user were to have no network on a given mobile location-based social network, it would be preferable to use non-network solutions like email, phone calls or texting.

• Are mobile location-based social networks better than other online solutions? o Unclear; while they are growing, phone, SMS and email remain the de facto standards,

as evidenced by the relatively small number of Americans who use location-aware networks on their mobile devices

• How do we determine the competitive advantage of one mobile location-based social network over another?

o Size and growth of active user base o Features

Industry Dynamics With the need for mobile location-based social networks established, we then need to ask

whether it is the case that, as The Highlander said, “there can be only one.” Mobile location-based social networking is not a winner-take-all market, however.

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Test Question Conclusion

Natural monopoly Can the aggregate output be produced more cheaply by a

single firm?

Perhaps in theory (scale with users, location database,

marketers), but extremely unlikely in practice

OR Network effects are strong

and positive Is the product more valuable to a user if more users adopt

the same product or compatible ones?

Yes. Social networks are driven by positive network

effects

Multi-homing costs are high Will most users on a given side of the network affiliate

with only one of the competing platforms?

No. Users can easily switch between networks. However, my research shows that most users do not multi-home in

practice Platform differentiation Do users have relatively

homogeneous needs, and/or can suppliers offer

functionality that cannot be imitated?

No. Users value a range of features, and most features are

easily replicated by competitors

Since this analysis shows that there is room for multiple mobile location-based social networks, we then examine the industry’s structure. According to the traditional Five Forces model created by Michael Porter, location-based social networking is quite challenging:

• Rivalry Among Competitors o Strong

The size of the pie is growing in terms of users and marketers/merchants, but because of strong network effects a network needs to bring in more users to attract other parts of multi-sided network. First-mover advantage is significant.

• Threat of New Entrants o Moderate

While it is relatively easy to create a platform for a mobile location-based social networking in theory, it’s now harder due to entrenched players with functioning network effects and a shortage of experienced mobile developers.

• Threat of Substitutes o Strong

Given the attractiveness of the industry, we see the substitute threat in evidence from the envelopment attacks launched by Facebook and Yelp.

• Bargaining Power of Suppliers (Marketers and Merchants): o Moderately Strong

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Each constituency has many choices among networks, but will naturally prefer to partner with those that have larger networks (as dictated by multi-sided network effects)

• Bargaining Power of Buyers (Users): o Moderately Strong

Again, users have many choices among networks, but will prefer those networks that their friends are using and, for some, where marketers offer them more promotions and deals

A Five Forces analysis, however, assumes a relatively stable industry structure, which the fast-paced world of social networking, especially mobile location-based social networking, is not. To that end, it’s more helpful to think about strategy in terms of Day’s Dynamic Advantage framework, which emphasizes speed to market and continually providing more value to users because competitive advantage is quickly eroded. This framework also provides more weight to the value of first-mover advantage, given powerful multi-sided network effects.

The Evolution of Mobile Location-Based Social Networks Dodgeball

Dennis Crowley and Alex Rainert founded the original mobile location-based social network, Dodgeball, in 2003. According to Rainert, “Dodgeball began as a Master's thesis project [at New York University's Interactive Telecommunications Program]18 exploring the changes in social dynamics when you can empower users to use their mobile devices for more than just point-to-point communication.”19 The SMS-based service, which was available in 22 cities, enabled users to “check-in” to venues by texting a central database, which would in turn text a user’s circle of friends with an update on their check-in. Users could also send a blast text with a message, called a “shout,” without checking in. The service would also alert the friends of a users’ friends – a secondary connection – if they were checked in within 10 blocks of one another, to encourage them to meet.20 Relating it to the major social network of the time, one journalist described Dodgeball as “Friendster, except in real time and in the real world.”21

Google acquired Dodgeball in May 2005,22 but Crowley and Rainert parted with the search giant acrimoniously in 2007, with Crowley saying his time at Google was “incredibly frustrating” because Google didn’t allocate resources to the unit, enabling competitors to pull ahead.23 While 18McCarthy, Caroline. “Dodgeball: A Eulogy.” CNET: Jan. 15, 2009. http://news.cnet.com/8301-13577_3-10143824-36.html 19 Rainert, Alex. LinkedIn profile. http://www.linkedin.com/in/arainert 20 Humphreys, L. (2007). Mobile social networks and social practice: A case study of Dodgeball. Journal of Computer-Mediated Communication, 13(1), article 17. http://jcmc.indiana.edu/vol13/issue1/humphreys.html 21 Sohn, Amy. “Network Rivalry.” New York: May 21, 2005. http://nymag.com/nymetro/nightlife/sex/columns/mating/11515/ 22 Gillmor, Steve. “Dodgeball.com Officially Google'd.” TechCrunch: Oct. 18, 2006. http://techcrunch.com/2006/10/18/dodgeballcom-officially-googled/ 23 Siegler, MG. “Perhaps Not Fondly, Google’s Schmidt Remembers Dodgeball ‘Quite Well.’” TechCrunch: Aug. 5, 2010. http://techcrunch.com/2010/08/05/eric-schmidt-google-dodgeball-foursquare/

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there’s little indication of the size of Dodgeball’s peak user base, it seems that it was a niche product. Google shuttered the service in early 2009, right before introducing its new Google Latitude service. Everybody Checks In

Following Google’s acquisition of Dodgeball, numerous location-based services began launching. Loopt, founded in 2005, was an earlier one, offering a hybrid of passively broadcasting a user’s real-time location and the check-in model pioneered by Dodgeball. Eventually Loopt allowed users to choose either option.24 Others included Brightkite, Whrrl, FireEagle, and Buzzd. A helpful overview of the many location-based services in the market as of late 2010 can be found in Exhibit 4, via eMarketer. Google Latitude

Google Latitude, built on top of the company’s Google Maps product, launched in February 2009 offering passive real-time location updates, without check-ins. Users had several options for building their social graph, including allowing others to see their exact location or just what city they were in. Latitude could be used from smartphones like the iPhone or BlackBerry, or from a dashboard on a PC.25 The service, which developed slowly, eventually added check-ins much later than others, and eventually coupons/deals as well.26 A separate application, Google Places, offers some of the tips/recommendations functions that other services provide as part of their bundle. As of February 2011 Latitude had 10 million active users, though many are passive and just sharing their location in the background.27 With active check-ins, Google looks to be asserting itself more forcefully in this space.28 foursquare

Dennis Crowley’s second act in location-based services, foursquare, which Crowley developed with engineer Naveen Selvadurai, launched at South by Southwest in Austin, TX in March 2009. Foursquare is positioned as a multi-sided network comprised principally of users, merchants, who I am defining as entities that own physical locations, from the proprietor of a local bar to a multi-national retail chain like Radio Shack, and “marketers,” a group that offers special coupons or promotions; foursquare refers to marketers as “Brands.” Oftentimes those who are merchants are also marketers, under my definition. foursquare has always had a fourth side of the

24 Janowski, Davis. “Loopt.” PC Magazine: May, 15, 2007. 25 Vindu, Goel. “Where Are You? Show ‘Em With Google Latitude.” New York Times: Bits Blog: Feb. 4, 2009. http://bits.blogs.nytimes.com/2009/02/04/where-are-you-show-em-with-google-latitude/ 26 Parr, Ben. “Google Rolls Out Checkin Deals for Latitude Nationwide.” Mashable: April 8, 2011. http://mashable.com/2011/04/07/google-latitude-checkin-deals/ 27 Siegler, MG. “2 Years And 10 Million Users Later, Google Latitude Locates The Check-In.” TechCrunch: Feb 1, 2011. http://techcrunch.com/2011/02/01/google-latitude-check-in/ 28 Siegler, MG. “Check-In Wars Reborn?” TechCrunch: March 21, 2011. http://techcrunch.com/2011/03/21/google-facebook-check-in/

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network as well, application developers, and has been courting this side more aggressively recently by enhancing its API and hosting “hackathons” to celebrate and drive innovative use of the API. Thousands of applications have been built on top of the foursquare platform and are showcased on the company’s website.29 See Exhibit six for a graphical view of foursquare’s four-sided network.

The mutli-sided network works as follows: initially, users derive value from some combination of their check-ins, sharing with friends, keeping a record of their whereabouts and gaming aspects. As more people use the service, there are direct network effects – users are more likely to join the network that their friends are already on – and cross-sided effects as merchants and marketers are more willing to invest time and money in a network with many engaged users. Similarly, application developers are more inclined to use APIs that offer more and higher quality data, and have more users that will access programs built with the API as a complement to the main service. In turn, the availability of more promotions (which foursquare calls “Specials”) and complementary programs built on the API will further drive an increase in users. On the whole, all the network effects are quite positive. There is the potential for negative direct effects if “bad” users like spammers join the network, for instance, or if a glut of specials make individual merchants’ offers less attractive because they get lost in the commotion. foursquare has the opportunity to make money on partnerships with marketers, advertisements, or potentially by taking a portion of deals redeemed via the service (though I have not been able to find a clear articulation of the company’s monetization strategy).

Initially, the foursquare team was focused on users and driven by the idea of “making cities easier to use.” The first versions of the application focused on the check in: a user built a new social graph using the “handshake” model pioneered by Facebook: both users have to consent to a connection. Users could then check in to tell the others where they were, with added commentary if they wished. foursquare also had functionality for Tips – “get the meatballs” – and To Dos – “I want to try the meatballs.” Perhaps most interestingly for consumers, foursquare has an addictive gaming element, whereby users who check into a venue more frequently than any other become the “mayor” of that venue. Badges, or achievements earned for checking in certain places or over certain time frames, can also be earned, and range from “Brooklyn 4 Life” to “Gym Rat.” They are prominently displayed for all users to see.

foursquare also offers merchants the ability to “claim” their venues, and thereby get data about the users who check in, in addition to the opportunity to launch specials, such as a free cookie with check in. As the company developed this functionality, it also began signing numerous deals with major brands, enabling brand-backed badges and giving users the ability to “follow” brands on the service. Brands could then tag certain venues that users could visit to get badges. Currently, the top three brands on foursquare are MTV, Bravo and The History Channel; MTV boasts nearly 180,000 followers.30 The service became more dynamic with the enabling of

29 See: http://foursquare.com/apps/ 30 http://www.foursquarebrands.com/brands

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comments and pictures that could be added to check-ins, implemented in December 2010, and the rollout of foursquare in French, Italian, German, Spanish, and Japanese in February 2011.

A major step forward came at SxSW in 2011 with version 3.0, which had enhancements for all four parts of foursquare’s multi-sided network. Crowley described foursquare’s evolution:

… we knew that while check-ins were interesting in the present tense … they were most interesting when viewed in aggregate, as a history of the places you’ve been and people you’ve overlapped with. The world becomes so much more fun, social, and interesting when you have that context. We’ve long wanted to build those things that can augment your experience of the real world – software that introduces you to new places and new experiences – and with the launch of foursquare 3.0 we’re getting a little closer to that vision.31

For users, the new version added a recommendation engine called Explore, which gives them the option of searching for anything from a particular dish to a type of venue, based on the recommendations of all foursquare users, just their friends, or just their own check in data. For merchants and advertisers, foursquare unveiled a suite of refined options for offering specials, including “newbie” specials reserved for users who have not previously checked in at a venue, “swarm” specials for certain thresholds of people checked in, and “friends” specials that could be unlocked if a user and a certain number of their friends checked in.32 These specials also moved foursquare closer to competing with group buying companies like Groupon and LivingSocial. Exhibit 6 shows examples of these new features. foursquare also took its merchant/marketer partnerships to a new level by partnering with American Express: foursquare users who checked in at a venue and paid with their Amex card got a $5 discount.33

Finally, for developers and for the industry as a whole, foursquare announced the Venue Project on March 14: this opened up foursquare’s database of venues, which had been put together organically by the company and by users, to other companies, with the idea of standardizing the venue listings across services and improving the quality of location-based social networking across the industry. This move makes sense as foursquare looks to continue to be the partner or API provider of choice for all non-user parts of its multisided network, and also serves as a recognition by foursquare that in a market that is not winner-take-all but one where it is a leader, it must push to increase the size of the pie, including working with Facebook Places. Overall, foursquare is pushing to build itself, as Crowley describes it, into a robust platform for “Discovery, Encouragement and Loyalty … The future is about building out foursquare as a platform for everyone to use. Places APIs shouldn't just be defined by distance, they should be defined by distance, context, the social graph, the history of venue checkins,

31 Foursquare blog. “It all started with a check-in: the vision for #4sq3 and beyond.” March 8, 2011. http://blog.foursquare.com/2011/03/08/foursquare-3/ 32 Foursquare blog. “A whole new world of specials.” March 9, 2011. http://blog.foursquare.com/2011/03/09/a-whole-new-world-of-specials/ 33 Foursquare blog. “SXSW Bananatown! Announcing American Express-powered Specials on foursquare!” March 10, 2011. http://blog.foursquare.com/2011/03/10/amex-sxsw/

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popularity, trending, etc.”34 foursquare passed the 8 million user mark on March 30, 2011.35 Gowalla

Gowalla was founded 2007 but launched in October 2009.36 Similar to foursquare, it offered the ability for users to check-in to certain locations, share with friends, and accumulate items in a digital passport. It won the mobile category award at South by Southwest in March 2010, but always lagged foursquare in terms of users and growth.37 Some users attributed this to the fact that Gowalla received less positive media coverage than its rival, in addition to product weaknesses ranging from an inability to reliably check-in at venues and confusing game mechanics.38 The Envelopers: Yelp and Facebook

One of the first major non-mobile location-based social network to launch check-ins was Yelp, the customer-review centric social network that has a wide database of locations from bars and restaurants to tourist attractions and dentists. Yelp check-ins debuted January 15, 2010, and also included game-aspects that crowned certain users “Dukes” of various neighborhoods for most check-ins in the area, with titles going up to “King” of a given city.39 Yelp also began offering coupons and deals shortly thereafter. Facebook launched its Places feature on its mobile application on August 18, 2010. In addition to sharing one’s own location, a user could also tag other friends that were present with them, if their friends allowed it. All sharing was governed by Facebook’s existing privacy settings.40 In the fall, Facebook launched Deals associated with check-ins as part of Facebook Places, enabling merchants the opportunity to offer promotions, similar to foursquare. Merchants with deals available at launch included Chipotle, Gap and Macy’s.41 On April 26, 2011, Facebook launched Deals on Facebook in Atlanta, Austin, Dallas, San Diego, and San Francisco, with plans to expand to other cities. These deals (distinct from the earlier Check-In Deals) are similar to those offered by Groupon, enabling Facebook users to buy tickets to group events like concerts and movies with friends, in addition to enabling users to use its proprietary currency, Facebook

34 Quora. “How was Foursquare first described by its founders, and how do they describe it now?” http://www.quora.com/How-was-Foursquare-first-described-by-its-founders-and-how-do-they-describe-it-now 35 About foursquare. “Foursquare hits 8 million users.” http://aboutfoursquare.com/foursquare-hits-8-million-users/ 36 McCarthy, Caroline. “Geolocation wars heat up: Gowalla raises $8.4 million.” CNET: December 9, 2009. http://news.cnet.com/8301-13577_3-10412262-36.html 37 Wikipedia. “Gowalla.” http://en.wikipedia.org/wiki/Gowalla 38 Quora. “Why did Foursquare take off but Gowalla did not?” http://www.quora.com/Why-did-Foursquare-take-off-but-Gowalla-did-not 39 Yelp blog. “You're Gonna Want to ‘Check-Out’ Yelp for iPhone v.4.” January 15, 2010. http://officialblog.yelp.com/2010/01/youre-gonna-want-to-checkout-yelp-for-iphone-v4.html 40 Facebook blog. “Who, What, When, and Now...Where.” August 18, 2010. http://blog.facebook.com/blog.php?post=418175202130 41 Facebook blog. “Introducing Deals.” November 2, 2010. http://blog.facebook.com/blog.php?post=446183422130

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Credits, to purchase Deals.42 Separately, Facebook has also launched an API with deals that enabled sharing of check-ins from other platforms onto Facebook.

Facebook’s moves represent an aggregation attack, wherein Facebook is attempting to enhance the value of its bundle and potentially enhance its eventual pricing power, in addition to finding some marketing and production cost savings by targeting weak complements in pure-play mobile location-based social networking. Indeed, Facebook is already the biggest player in mobile location social networking, so it seems a natural extension – which is exactly how the company positioned it. Facebook described its entry into location and deals as an extension of the value of its bundled platform: users connect with each other on its platform, and, increasingly, users were connecting with merchants via Facebook Pages. According to Emily White, Facebook’s Senior Director of Local, “We found that many local businesses started to use Pages as their main communication mechanism, so what we really wanted to do was enable an even deeper relationship between those businesses and their customers.” Facebook made Check-In Deals free to use (though Deals on Facebook are not) in an effort to speed adoption and gather feedback to improve the experience. However, it’s unclear to what extent Facebook wants to really throw its weight around in this business. On one hand, White’s comments indicate that Facebook is aware of its ability to leverage its 200 million active mobile users:

There is certainly a scenario where one of the players is going to successfully and elegantly aggregate this data to make it much easier for the users to figure out exactly what deal they should be looking at on any given day, or where, based on their location … From a merchant perspective, it’s helpful to aggregate the check-in data, and from a user perspective it’s helpful to aggregate the deals data.

At the same time, White agreed with my assessment that location-based is not winner-take-all, and noted there is room for Facebook to peacefully coexist with foursquare and Groupon, depending on what users want: “There are a lot of companies that overlap in this space, but I’m not sure I would say they're all really competition. I’m also not sure this is a winner-take all market.”43

Yishan Wong, a former Facebook employee who worked on Places before leaving Facebook prior to its launch, echoed White’s sentiment that Facebook was out to try to become an aggregator of venue information and an enabler of third parties to the benefit of merchants and users, but did not seek to dominate the space.44 That said, Facebook could easily move more aggressively in the area if it so chose in an effort to consolidate more local advertising, denying it to rivals, and adding more value to its existing user base. With Deals on Facebook, the company is moving more aggressively in the group-buying industry, likely because it seems that as a more immediate opportunity: Groupon will IPO later this year and LivingSocial received major funding

42 White, Emily. Deals: Better with Friends.” Facebook blog. http://blog.facebook.com/blog.php?post=10150159110592131 43 eMarketer. “A Look at Facebook’s Foray.” 44 Quora. “Are Foursquare and Gowalla going to survive now that Facebook Places has launched? http://www.quora.com/Facebook-Places/Are-Foursquare-and-Gowalla-going-to-survive-now-that-Facebook-Places-has-launched?”

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from Amazon on others. Tellingly, Deals on Facebook is, as of this writing, not available on Facebook’s mobile application.45

Other Social Networks with Location-Based Components

As the mobile location-based social networking space has developed, other social networking services have added location elements to their products, even if location is not the central value proposition. For instance, in June 2010 Twitter added a way for mobile and desktop users to add their location to their tweets.46 Instagram, a photography-focused social networking application that launched in September 2010, offers users the ability to share their photos on foursquare, Facebook, Tumblr and Twitter.47 Use of the foursquare API is key to services like Instagram.

In addition, the notion of the check-in has moved beyond physical location to any number of products: GetGlue allows users to “check-in” to a TV show or other activity they are undertaking, while Untappd, a web-based application, allows users to check-in to a beer they are drinking (and add their foursquare location to boot).

Strategy in Mobile Location-Based Social Networks: Who Wins? Survey Results It is easy to hypothesize that, given quality execution, Facebook could swoop in and dominate many businesses that involve social networking due to its massive user base. When approaching the question of what sets foursquare and Facebook Places apart, I hypothesized that a few nuanced factors make the difference:

1. foursquare serves the purpose of being a type of location-based diary – “Where was I, and with whom? What did I eat/drink, and was it good?” – that Facebook is not particularly conducive to given its focus on sharing all profile information/clunky privacy settings

2. foursquare users have created a social graph far more intimate than the one they may have on Facebook

3. While multi-homing costs (using two networks at once) is theoretically low, users do not generally multi-home with location-based social networks.

4. foursquare users value the game and competition mechanics that Facebook does not offer

45 Kirkpatrick, Marshall. Facebook Deals Launches Tonight & Groupon Doesn't Stand a Chance (Updated). ReadWriteWeb: April 25, 2011. http://www.readwriteweb.com/archives/facebook_deals_launches_tonight_groupon_doesnt_sta.php 46 Twitter blog. “Twitter Places: More Context For Your Tweets.” June 14, 2010. http://blog.twitter.com/2010/06/twitter-places-more-context-for-your.html 47 Siegler, MG. “Instagram Captures A Million Users.” TechCrunch: Dec. 21, 2010. http://techcrunch.com/2010/12/21/instagram-one-million/

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To further explore these theories I conducted my own survey. I acquired 72 responses, of which 63 respondents had used location-based social networks. My sample size is mostly MBA students, in addition to people I am connected to on social networks including foursquare, Facebook, and Twitter. To that end, this audience does likely represent early adopters who are familiar with mobile location-based social networks. In addition, I must acknowledge that reported social network usage is often quite different from actual usage. Of respondents who had used location-based social networking, foursquare was the most heavily used, with 86% share of responses, followed by Facebook Places (55.5%), Instagram (31.7%), Google Latitude (23.8%) and Yelp check-ins (19%). In addition, 93.6% used location-based networks at least once per week, with 74% using them 2-3 days per week or more. Highlighting the recent growth of these networks, 57% had been using location-based networks for a year or less, with 76.2% having joined within the past 18 months. Exhibit 6 contains numerous charts with survey results.48 As far as foursquare features used, the most important were “keeping track of where I’ve been and with who” and the game aspects of mayorships and badges, each with 69%. These are followed by finding and connecting with friends (65%), and “getting coupons and deals” and “tips and to dos,” each with 48%. When asked to rank the features by importance, however, it became clear that tracking personal history is most important, with 27.7% ranking it first, and 18.5% citing finding and connecting with friends as most important. From these numbers we can see that foursquare users report being primarily interested in the notion of the “quantified self,” as one respondent called it, or being able to track their own behavior, in addition to playing the game features with their friends. By contrast, Facebook Places users primarily use the platform to “share pictures and status updates,” (54%) which is Facebook’s core offering. This was followed by “keep track …” (34%) and “find and connect with friends” (29%). Here we get a sense that foursquare and Facebook Places currently have different value propositions from a features standpoint. Network size was also significantly different. No foursquare user reported having more than 150 foursquare connections, with nearly 80% reporting between 10 and 100 connections. Only one Facebook Places user reported having fewer than 250 Facebook connections, with the largest concentration of respondents (37%) having 750-1,000 connections. Clearly, foursquare users have created much more intimate social graphs along the lines of Dunbar’s Law, exhibiting high clustering. Furthermore, when asked to rank the location-based networks they used by “intimacy,” 56.2% chose foursquare first, while only 12.5% chose Facebook Places (the same number that chose Instagram). For respondents who indicated that they used more than one location-based network, I inquired if they used both at once (multi-homing): nearly 86% indicated that they did not multi-home, indicating that users are not likely to use more than one location-based network. To determine switching costs, I examined what would encourage or discourage users from joining a new location-based social network. Having more friends on a different network was the 48 Only a portion of the data I gathered is used in this paper; for more information please get in touch with me.

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main motivator to join a new network, illustrating strong, positive direct network effects, followed by the existence of a superior recommendation engine, more special offers, and better tips/review information for venues. The only factors that registered at all for discouraging a user to switch networks was that their friends were already on their existing network, followed by the notion that they already use too many location-based social networks. The bottom line: users will go where their friends are, and where the platform gives them the most value in terms of telling them where to go, and giving them things once they get there. In terms of special offers, most respondents agreed they had seen “more and better” offers on foursquare, while almost none said the same about Facebook Places. From these data I believe that foursquare has built a unique value proposition among a community of individuals interested in its “Discovery, Encouragement and Loyalty” mantra, and that users’ ability to carve out an intimate subset of connections to share with is critical to this advantage. Facebook is known for its status updates, primarily, and users of Facebook Places continue to extent that to location-based. Moreover, Facebook’s privacy controls (friend lists) do not allow for easy creation of the intimate social graphs evident on foursquare. Overall, I believe the four reasons I cited that set foursquare apart are largely validated by these data. Defending Against Envelopment: Push the Envelope Per Day’s theory of Dynamic Advantage, none of the advantages that foursquare has built will be sustainable for long – even if Facebook does not copy them, another player in the space will. As such, foursquare’s best defense is to continue to innovate (easier said than done, of course), but their track record is good, and there is myriad room for new features. The most critical thing the company must do is continue to feed all sides of its four-sided network, but particularly users: if users stop being highly engaged, the social graphs that their connections have built will become less useful, and thus the core direct network effects will diminish. From my survey it appears that foursquare is already on the right track: many respondents complained about the low quality of venue information, which the previously mentioned Venue Project should help correct, and more special offers were also on respondents’ wish list, which the company is surely working on. The next big leap may be cutting down the transaction cost of each individual check-in: some sort of prompt to ask users if they’d like to check in to where they are using geofencing tools, for example, was mentioned several times. To some extent, foursquare has also been deploying a “match bundle” strategy of emulating features found on Facebook and its other competitors, notably comments, photo-sharing, and potentially more inter-user communication in the future. It has also allowed users to interact with merchants and brands in a compelling way, though one that is different from Facebook’s. At this point foursquare does not need to find a “big brother” to help it maintain its position, but that may become necessary if Facebook or Google moves more aggressively against them and their key constituencies. Yelp could be a good partner if this strategy became necessary, but at this point it appears that is extremely unlikely and would be a last-ditch maneuver.

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Facebook, for its part, could move to make Places more powerful by improving the privacy tools to more easily allow users to create intimate friend graphs, and build out the tools necessary to bring more special offers in. Facebook has another challenge that foursquare does not, however: Places is not Facebook’s core feature (despite being placed precisely in the middle of its main iPhone application page). Most users default to the News Feed or to Photos, so it will have to move focus to Places with numerous carrots. Facebook does have a large, active base, but its ability to extend those users to Places is unclear. Meanwhile, if Facebook users are interested in location-based to begin with and their friends join foursquare (which is increasingly easy to do given the ability for a user to add friends on foursquare based on their foursquare friendships), it’s likely that foursquare’s self-reinforcing four-sided network will continue to grow and thrive. The Market Challenge

In light of this analysis, foursquare’s biggest challenge is perhaps not competition but the market itself: it must find ways to ensure that mobile location-based social networking moves beyond early adopters and into the mainstream. While the company reports adding 35,000 users per day,49 several recent studies of foursquare and Facebook check-in data have been interpreted as proving that mainstream users aren’t ready or interested in the area as of this writing. A fall 2010 look at check-ins at three popular restaurants in New York showed that foursquare check-ins far outpaced Facebook Places check-ins. However, as Jason Schwartz interpreted the results:

The chart was meant to illustrate how Foursquare still dominates the check-in market after the Facebook places launch. Foursquare has a vastly superior product to Facebook’s, but that’s not what’s interesting about this chart. Facebook Places was exposed to 500 Million people. 250 Million use the mobile app every month. Even if their product was terrible, the conversion rate on people trying it out should have blown Foursquare out of the water.50

His conclusion that Facebook Places’ low numbers indicate that mainstream consumers don’t have much interest in check-ins, though it the research was done soon after launch and Facebook Places is limited by some of the factors mentioned earlier. Exhibit 8 contains the chart from the blog Silicon Alley Insider.

A similar study by Aleem Mawani, a former Product Manager at Google and current Harvard Business School student, shows that while foursquare is the dominant platform in North America, it is less dominant in non-tech hubs (outside of New York, San Francisco, Toronto) where users are more likely to use mainstream services instead of those geared toward early adopters.51 Interestingly, both Schwartz and Mawani note that Facebook has less and worse quality venue information than foursquare, which relates directly back to foursquare’s Venue

49 Foursquare, “About.” 50 Schwartz, Jason. “Location Based Space: State Of The Union.” April 14, 2011. http://robberbaronblog.com/2011/04/location-based-space-state-of-the-union/ 51 Mawani, Aleem. “Facebook Places vs Foursquare Checkins.” Aleem's Blog: April 5, 2011. http://www.aleemmawani.com/2011/04/facebook-places-vs-foursquare-checkins.html

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Project initiative. Clearly, foursquare has identified “crossing the chasm” as a major issue and is taking steps to address it.

Mobile location-based social networking is fast moving and will be reshaped constantly, so this paper will be obsolete almost immediately. Indeed, in the course of researching and writing this, Facebook announced Deals on Facebook and an article entitled “2011: The Year the Check-in Died” made the rounds online.52 Both foursquare and Facebook are well positioned to succeed in this space, but the endgame is far from certain – as it is almost always is in the technology industry.

52 ReadWriteWeb. “2011: The Year the Check-in Died.” April 12, 2011. http://www.readwriteweb.com/archives/2011_the_year_the_check-in_died.php

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Appendix Exhibit 1: eMarketer & comScore Estimates of Mobile Social Networking Users

Exhibit 2: Pew Findings on Location-Based Social Network Users

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Exhibit 3: Forrester Data on US Location-Based Users

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Exhibit 4: Overview of Location-Based Players

Exhibit 5: Marketers’ Plans for Location-Based Platforms

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Exhibit 6: foursquare’s Multi-Sided Network Effects

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Exhibit 7: Selected Survey Results

0%  20%  40%  60%  80%  100%  

%  of  Respondents  

Networks  Used  by  Respondents  

0%  10%  20%  30%  40%  50%  

Daily   2-­‐3  Days/Week  

Once/Week   Monthly   Never  

%  of  Respondents  

Use  Frequency  

0%  5%  10%  15%  20%  25%  30%  

%  of  Respondents  

Historical  Use  

23

0%  

10%  

20%  

30%  

40%  

<10   10-­‐25   25-­‐50   50-­‐100   100-­‐150   150-­‐200   >200  

%  of  Respondents  

Connections  

Size  of  Respondents'    Foursquare  Networks  

0%  10%  20%  30%  40%  

%  of  Respondents  

Connections  

Size  of  Respondents'    Facebook  Networks  

Yes  14%  

No  86%  

Multi-­‐Homing  Prevalence  Among  Respondents  Who  Use  >1  Network    

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Preferred  Network  Among  Respondents  

Foursquare  

Facebook  Places  

Gowalla  

Brightkite  

Google  Latitude  

Loopt  

Networks  from  which  Respondents  Have  Received  a  Coupon/Deal  

Foursquare  

Facebook  Places  

Yelp  (for  check-­‐ins)  

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Exhibit 8: foursquare vs. Facebook Places

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Exhibit 9: Features of foursquare 3.0

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Exhibit 10: Features of Facebook Places