INTRODUCTION:
For a few months I’ve been writing about Location Based Services business models and how to monetize LBS applications, particularly in the newest area of Location Based Social Networks.
I invited a few companies to share their vision and show how they approach this market. I would say it takes leadership and real confidence in your business to open your company strategy for others to learn. It is not surprising that the first company to accept this challenge was GyPSii. They were recently awarded a core patent in mobile social networking, but GyPSii goes beyond the mobile social networking platform, it is a mobile digital lifestyle application.
I had the privilege to share some time with Shane Lennon, GyPSii’s SVP Market Development (Thank you again!). The result of our conversation is summarized in the following text. In my next post I’ll evaluate the interview, add the full interview on podcast, and comment about their market / business approach. In the mean time please leave YOUR comments

Q: Can you please give me a few words about GyPSii, how it started and your perspective of the company?

GyPSii is a global company, unusual for a start-up. The founders are based in Amsterdam. They had a mobile lifestyle vision that’s more than an LBS vision: “I want to capture my world; I want to be able to share with others”. On the technical level, it translates to creating a searchable mobile index of user-generated content based on the actual world. This is different from what you see on Internet today, which is built by companies, indexed on search engines, and driven more from their perspective and less from that of the user.

We wanted to make it easy to capture what we do in the real world, therefore most of that is text or image based with added contextual information, such as location. That creates context around the user experience. That was the main vision for GyPSii.

During the last year and a half, we focused on a broad strategy: “let’s build a good application that can run on several different devices, but let’s work very closely with people in the ecosystem, particularly with the device manufacturers.” We felt that the adoption and conversion of mobile, location-based applications really needed to be embedded in phones. Then we focused during the last six months on aligning our products while manufacturing bring their devices to market.

“…Some kind of location technology will be standard in every phone whether it is built-in or via a back-end server-based…”

One of the things that is happening to accelerate the market is that the low-end cell phones seem to be disappearing; the mid-end has become the new low-end, and smartphone capabilities are pretty much available in every phone. Some kind of location technology will be standard in every phone whether it is built-in or via a back-end server-based. System Maps will be there, coming free from Nokia and Google. The mobile interfaces are improving, although they still have a long way to go.

We are new starting a promotional phase on building a user base. We see social networking as a tool. If you need to grab location to tie to content, for whatever use in the consumer market, you can get it through the cell ID databases. Traditionally, LBS infrastructure has become commoditized from the consumer market point of view and it is not a necessity to be targeted to GPS chip resolution. Navigation and business-based applications need higher accuracy and there is still a huge market for LBS in that area.

We provide a platform that allows us to build other clients through an API. We provide a “platform as a service” (GyPSii OEx product). The user manages all the content and leveraging the social networking and LBS-based services, integrating their experiences through a single application in their cell phones.

Q: I had the opportunity to list almost 100 location-based services that are social networks. From the customer perspective, what makes GyPSii difference? How does GyPSii stand out from the other social networks with LBS?

Most of what I’ve seen, which are so-called social networks, have evolved in most cases from “friend finders”. The concept was “where’s my friend?”, “Here I am”, “Where I’m going”. To me that’s a very point-based application, it’s not something that’s going to encourage people to contribute, comment and use the application on a nearly daily basis.

We are focused on what users want and in providing user content generation capabilities; the ability to make it easier to create content whether it has to do with video, pictures, putting text or changing your status, actually creating a continuous conversation. We’re integrating user generated content tools with social networking tools – including the capability to add a location context. And yes, if I do want to locate a friend that’s great, I can see them. But that’s a small feature with us.

Q: It would be fair to say that GyPSii is a mobile social network where location is another feature between all the features you offer.

“…making it easy to create and share content…there is a location context to the content… We index that information in a searchable database…That has a much greater value than a traditional search…”

Yes. We actually call it a mobile lifestyle application focused on making it easy to create and share content; facilitating to connect with others in order to share that data or basically to send messages to each other. Of course there is a location context to the content. We also index that information in a searchable database. That’s a user generated searchable index, so depending on your privacy settings people can grab and see what you recommend, the restaurants that you suggest, etc. That has a much greater value than a traditional search, which is always paid for by a third-party. The ability to explore and discover that content is critical as well.

Q: I’ve seen many applications that build their business model based on the premise that they will deliver mobile ads. I don’t see many people willing to receive ads on their cellular phone. Can you comment about GyPSii’s business model?

We have moved beyond the early stage to a market evolving fast (with estimates at $2BN/$3BN in 08) rapidly growing to $10BN plus in the next couple of years. There is a challenge in the industry based on today’s SMS or WAP experiences. Usually the ad is not relevant, has no context to you, is probably an intrusion, and cost you money. On the WAP one it’s just a banner. Even for the marketing person spending money, it’s not accurate, it’s not a captivate read and call for action, and it’s hard to track. If you look at applications like us, when you sign in into our application we actually start to build a profile. We use that algorithm to help serve relevant content, user generated content – to our user base. We also use that algorithm to deliver relevant advertising. We have found that consumers using this kind of application are open to receive advertising if it’s relevant and has context. I think that’s the challenge.

“…We are monetising this via advertising models… We have found that consumers using this kind of application are open to receive advertising if it’s relevant and has context. I think that’s the challenge…”

Companies like us differentiate because of that profiling. For example, we can deliver an aggregated profile of 20,000 students in Shanghai between 21-24 years old that are usually outdoors. 10,000 of them are going out at night, and 10,000 are female doing lot of shopping fashion style. This has real value for marketing people and they are really interested in that.

On the other hand, you have to be careful to serve the advertising in such a way that is not intrusive. We are very careful to serve advertising coming back in a search result that is always related to your search content or refers to other things that are nearby and that are commercial. That is the critic differentiation for both the consumer and the advertiser.

We are in the very early stages of this market.

Q: From the business model perspective, does GyPSii have any contingency plan in case mobile ads don’t work?

Because we have a platform approach, we also have a licensing revenue stream coming from major device manufactures and major brands as they integrate our capabilities into their portals. It’s a combination of software as service revenue.

“..Advertising is going to be a big part of interactive, and lots of mistakes will be made… We’re trying this carefully…”

Advertising is going to be a big part of interactive, and lots of mistakes will be made. We are different. From our testing with marketing people, what we have done with consumers has a minimum negative impact if at all. We’re trying this carefully.

Q: What are the reasons that are stalling consumers to sign up to this type of service?

In China it’s actually the counter of that. They are signing up at a ferocious rate and we’ve just starting a promotion campaign. We have seen multiple spikes on a daily basis. There are networks in China going from 1 to 10,000,000 users in the space of 12 months. One factor to mention is that 80% of these consumers gets to the Internet through their mobile device. They don’t have a PC access or laptops.

“…What is still holding back consumers in the West is a clunky user experience…It all comes down to providing phones that allow application providers to build good simple apps, and apps that can be used on a daily basis…”

What is still holding back consumers in the West is a clunky user experience. Social networking is three times more active on iPhone than any other device. It all comes down to providing phones that allow application providers to build good simple apps, and apps that can be used on a daily basis. I think that’s what the Western market needs in order to catch up.

We are seeing a rapid growth in social networking on the mobile. I think people need to remember that it took Facebook four years to get to the 20-30 million.

Q: What do you think is the barrier entry to this market? Let’s say Facebook is going mobile, how is a company like yours building high barriers to avoid those companies from coming to your market?

Companies like ours are providing an added value service that allow the operators and device manufacturers to share revenue. Currently I’m not aware about any ad revenue share in place to use with FaceBook or Google. On the consumer side, Facebook is pushing a web experience down to the mobile device, but in this case for the consumer every device looks different. So yes, it’s great to check twice a day on your Facebook and see what happened through the day. But if you want to turn it to something that is more real-time I don’t think Facebook has got it there. We watch them closely because they are future competition.

Moreover, Facebook is not picking up in many countries. For example, in Holland they have no penetration whatsoever. Their penetration in China is minimum, same as Google. I think it comes down to that these countries are mobile first.

There is room for several players out there, companies like us that fit into the mobile use case, and to some of the traditional social networks that are trying to push the web experience into cellular phones.

“…I think there will be room for different companies and consolidation is still some long way off…”

I think there will be room for different companies and consolidation is still some long way off.

Q: If we talk about consolidation, who do you think will prevail in this market, and I’m not speaking about names, but what characteristics will have that company?

The market is going to break in a couple of key areas. People need to differentiate between search, “frienders” and directory vendors. There is a crossover going on in Social Networking. There will be one or two dominant search players, and we can guess who the dominant come to be in search. There will be one or two very good directory players who are more likely to be the traditional companies like Yellow Pages that will catch up with companies like yahoo.

In the social networking side there will be two types. There will be regional players and there will be a combination of global players. We fit into the global players. I see that some major players like Facebook will be in there too.

“…The characteristic that is the key is, “Is it contextual to what I do on the move during the day?” Do I need to sit down to view what happen … in the past? … Or is it more interesting to see where I’m going?…”

The characteristic that is the key is, “Is it contextual to what I do on the move during the day?” Do I need to sit down to view what happen on my feeds on Facebook what actually happened in the past? Is this really interesting me? Or is it more interesting to see where I’m going?

Q: The consumers that buy the iPhone have particular characteristics, willing to use all kinds of apps. From your experience, is there any segmentation in the people using location based social networks? Do you identify certain vertical markets?

You have the tracking and navigation apps and the ones that are information-based, like directory/search companies.

A third category is the lifestyle applications with companies like GyPSii, other social networks and friend finders. We see some niche players like dating apps in certain groups.

We certainly see some trends in a very basic demographic breakout: there is probably a group under 20 years old, a group that is between 20 to 30-32 years of age, and the group that is between 30 and 40 now expanding to 45, that are actually the people active in social networks in web and are reaching out to mobile. I’ve just seen some trends that messaging – whether it’s via Facebook, GyPSii messaging or SMS and similar applications – is starting to surpass email. If people get comfortable with daily messaging in their mobile device that will be a major tipping point for applications in general in mobile.

Q: What are the opportunities in this market? What is the big opportunity? How is your company approaching this opportunity?

The opportunity is in creating a tool that is basically about you and your community with the capability of tunnelling the content that is created and is valuable to that community. The capacity to have like-minded people with interesting hobbies actually able to capture the world, and basic searching indexing is critical. Companies that can create an index of searchable content can be very successful applying it to the advertising model. If you can’t make that index, which is made of profiles and content, it will be very difficult to be successful in advertising.

“…The opportunity is in creating a tool that is basically about you and your community with the capability of tunnelling the content that is created and is valuable to that community…”

For “Friend-Finder” only, I don’t see how you can reach above a certain minimum. From what I understand, every friend finder has a tipping point of around 200,000 users in each region. From what I’ve seen early adopters only. Companies that can’t attract the early adopters will struggle in the long term to generate revenues and survive.

People need to listen to the consumer. I hear from many in the value chain “We own the customer”. First of all, the one thing that the Internet did is “The customer owns the customer, nobody else does”. In some meetings people tell me “We are the operator, we own the customer”. AT&T and APPLE – who do you, think own that customer? APPLE does.

I think the reasons why new brands, the digital brands on the web and mobile, are successful is because they continuously innovate based on customer feedback. The ones that don’t innovate, like Friendster for example (because the CEO didn’t like some of the feedback it wouldn’t make the changes), they are the ones running into trouble. We are proud of our application but we are also the first to say we need to improve it based on customer feedback. We can iterate fast. We add features to our web and iPhone version every other couple of weeks based on feedback. That is quite difficult for other traditional players and I do think that the market will change; as a first generation Internet person, it‘s starting to mimic the value chain a little like what happen in the Internet.

Q: Is there anything that I didn’t ask and you would like to add?

“…you need to keep the open APIs. You need to encourage more applications to be built for free, because it’s a commodity for the consumer market…”

I would say to the infrastructure people in the LBS industry – you need to keep the open APIs. You need to encourage more applications to be built for free, because it’s a commodity for the consumer market. I know it has been ten years that required a lot of investment. But for the people who make location available, revenues will come about only if you have more applications built for consumers and business people.

Have you read PART 1? I’ll strongly recommend reading part 1 first.

As mentioned in part 1 the main components in the LBS Value Chain are: the location based service provider or developer (LBS APP), the data carrier (a cellular provider like T-Mobile, AT&T, etc), and the customer.

As Part 3 will talk about Web 2.0 strategies for Location Based Services and particularly for Location Based Social Networking, we need to completely understand every piece of the puzzle. Otherwise your model will be leaking money (pouring in some cases). Moreover understanding the players and trends will allow you to craft long term solid strategies.

A more comprehensive value chain shall include:

Location Based Services complete Value Chain by Claudio Schapsis

MAPS: Most LBS applications utilize maps; therefore their cost shall be added to the equation. The map market can be considered a duopoly dominated by Navteq and Teleatlas.

Consider: those companies were acquired recently by Nokia and TomTom.

Ask: How can they affect your business by controlling the LBS market. Can your application change the map provider easily? Do they cover all the areas you plan to service? Can you grow to other markets (internationally)? Does your international strategy fit your provider’s existing maps? What are their plans of expansion? How are you getting charged? What layers of information are included in that charge? The list of questions doesn’t end here and is closely related on the type of service you are planning to offer.

MAP INTERFACES: If you want to use map providers like Navteq and TeleAtlas you will need to pay a premium price to companies that provide interfaces to those maps – such as Autodesk, Decarta, etc. Your applications can also be based on Google maps (TeleAtlas data) or Microsoft maps (Navteq data) API’s.

Consider: 1) This factor is almost unavoidable and in some cases the API selection will link you to a specific map provider. 2) While is true you can freely use Google and Microsoft interfaces, bear in mind you will need to pay them for the use of the maps when you start making money.

Ask: What is the price structure? Is the payment per map? Are you getting charged for each customer you serve? (oh yes, you do). Can your API support other map providers? Can you add your own maps? How much will cost to add specific regions? Do the charges include Points of Interest? Does the price include point to point routing capabilities? Can you provide PSAP information? What platforms do you support? How will you display information in different types of cellular phones?

Remember that once your development is committed to one of these platforms, it will be expensive to migrate to other. Again I strongly recommend checking their pricing structure. Most start for free but you will “pay the price” later.

M2M PROVIDER: In most cell phone based services, the communication costs are paid by the customer (SMS or IP-Data). If your service is based in a specific device (like a pet tracker) you will need to include a cellular operator or aggregator to fulfill the mobile communication. You will probably use a GSM provider and your device will include a SIM Card. Those carriers are known as Machine to Machine providers (M2M). Today the M is interpreted in many ways – Man-to-Machine, Machine-to-Man, Machine-to-Mobile, Mobile-to-Mobile, Mobile-to-Machine, etc. Usually M2M providers are small mobile operators with roaming agreements and/or mobile resellers/aggregators with services provided in the background by companies like AT&T, Telefonica, T-Mobile, Verizon, Vodafone, etc (Big Carriers).

Companies that fall in the M2M category are  Jasper Wireless, Kore Telematics, Wyless and many others. As these companies usually buy large quantity of network capacity, or have roaming agreements, the solution you will get is usually better, more focused and cheaper than approaching directly the Big Carriers. Moreover, many Big Carriers require particular certifications, and with these M2M providers, the process is usually transparent.

Consider: 1) Choosing a M2M provider is a long term commitment. Imagine you have thousands of devices in the market and you need to recall them to change their SIM card (I don’t think so…) 2) You can use SMS and/or Data transmissions (TCP / UDP). Each one has pros and cons. Just remember to use the * symbol in excel you will be amazed with the numbers. For example, if your model is based on SMS (let’s say $0.08 per SMS), and you have just 5000 units, reporting every 5 minutes half day; your annually bill will be more than $20,000,000 (yes, twenty million). Is your projected income covering that?

Ask: What is the price structure? Do you have a minimum volume commitment? Can data (or SMS) be pulled? If using data, what is the rounding per session? Do you provide VPN services? Will your device have a fixed IP address? Do you have an activation portal/API? Do you charge activation fees? If SMS, do you provide SMPP gateway services? Do Mobile Originated and Mobile Terminated messages have different prices? What type of certification do you require (FCC, PTCRB, EC, etc)? Does your service require non standard certifications (particular of a Big Carrier?) Do you provide roaming? How much will you pay for roaming? Where do you roam? Can you permanently roam?

GPS ENABLED DEVICE: Now you need to write the application. If your service is not installed in a cellular phone, you will need to provide your customers with a device with GPS and mobile communications capabilities i.e. most Personal Locator Devices (PLD). This is a topic by itself and I’ll devote a different post for it.

Bottom Line: The sum of all those expenses + YOUR PROFIT is what the customer usually will pay for some Value Service. This is your Average Revenue Per Unit (ARPU) or your Customer Acquisition Cost depending on the business model you choose (see part 1). If your customers are reluctant to pay your fees, or your investors consider the burning cost and risks associated too high, most probably you have done something wrong along the way.

Having almost all the components clear, I’ll elaborate on part 3 on Location Based Services business models based on Web 2.0 strategies particularly free Location Based Social Networking and their specific value chain.

TO THE READER: as my list of considerations and questions is limited for readability I’ll appreciate your comments, particularly on:

What else would you recommend to consider for each category?

What else would you recommend to ask to the providers in each category?

Thank you again!

In the first one the LBS APP provides an application to the carrier and the carrier provides the service to their customers for a fee – or free of charge to encourage the use of data services. For example companies like Loopt are offering their LBS social networking services through carriers like Verizon Wireless, applications like Autodesk family finder, and others.

Location Based Services Value Chain 1

The main challenge for the LBS APP is to find one of the mobile operators willing to buy and offer the application through their network. Once the service is running, all the promotion, billing and collection is performed by the mobile operator. The LBS APP revenues can be smaller but the risks are reduced as the investment in infrastructure and operations are minimal. On the other hand, the ownership of the customer usually remains with the mobile operator, minimizing the LBS APP possibility to up-sale other products.

On the second scenario the customer pays a fee directly to the LBS APP and they take care of the costs of the wireless service fees. For example companies like ID Conex, Zoombak, Laipac, and other Personal Locator Devices have the customer pay directly to the company.

Location Based Services Value Chain 2

In this case the LBS APP carries most of the obligations, liabilities and risks. They need to develop, promote and market their products, maintain the logistics (delivery, billing, collection, customer support, etc), and create a communication infrastructure that allows them provide the service. If the LBS APP succeeds to establish a large and stable customer base, the business receives a recursive cash flow for the life of the product or the subscription and the company keeps the customers’ ownership.

The third scenario is based on web 2.0 paradigms. The customer pays the cellular carriers for the internet access. The LBS APP offers a free product/service with the vision of creating some collective user value. Most LBS social networks work under this business model.

Location Based Services Value Chain 3

The LBS APP enables a service through internet connection (fixed and or mobile) assuming the customers already have a data plan with their mobile operator. The service is usually mobile operator agnostic, and the LBS APP needs to invest in basic infrastructure and development/maintenance of the application. As the service is free of charge, the LBS APP is investing towards the future value of the network and the information generated by the users such as people’s locations, movement habits, etc. – just figure out what are they going to do with the information collected about your location.

The story doesn’t end here as there are many other factors to consider in the costs. These include among others M2M communication providers, maps providers, and interface to maps developers, who do care about their profits.

In part 2 and 3, I’ll elaborate on the extended Value Chain and Location Based Services models based on Web 2.0 strategies and their specific value chain.

As usual YOUR COMMENTS ARE WELCOMED.