Are location-based services finally ready for prime time?

November 30, 2011, 7:04 PM UTC

By Michal Lev-Ram

Real estate’s always been about location, location, location. But lately the hackneyed phrase has become the mantra of the mobile industry as well.

Location-based mobile services – the kind that use a phone’s built-in GPS to serve up reviews of nearby restaurants or allow people to see where their friends are on a map – have long been heralded as the next “killer app” in wireless. But they’re only now starting to take off, partly due to an increasing number of phones with built-in GPS (not to mention better interfaces) on the market, faster networks and an uptake of data plans. Last July’s launch of Apple’s (AAPL) App Store – a user-friendly mobile storefront that lets people easily find and download applications – has also contributed to the rising trend and helped pave the way for a slew of startups bringing a range of innovative location-based services to cell phones.

“At first sight you probably think we’ve seen this [trend] before, but I think this time around might be different,” says Dominique Bonte, an analyst with ABI Research. “These [location-based services] companies are emerging on an almost daily basis now.” Bonte predicts that revenues from location-based services will top $3.3 billion in five years.

Apple’s iPhone already has hundredsCK of navigation applications available for download, including a service that pulls up Wikipedia entries relevant to your location to real-time traffic reports that automatically update based on where you are to an interactive map of New York City’s Central Park that suggests walking routes to various landmarks. But the iPhone isn’t the only phone hawking GPS-based services. Google’s (GOOG) Android, expected in phones later this year, will be heavy on location as well. Many of the winners in the company’s recent Android Developer Challenge – which awarded cash prizes to innovative application developers – use GPS to deliver all kinds of information. Winers include Locale, which changes your phones settings (like volume and call forwarding) based on where you are, and Wertago, which finds and gives directions to nearby parties.

Even mobile operators are finally taking notice of location-based services. For a few years now, most carriers have offered the most basic GPS function – turn-by-turn directions – on select handsets. Now, they’re starting to buy into the idea that wireless users are ready to do more with the built-in GPS already found in many devices. Last month, Sprint (S) announced it would offer a range of location-based services on Wi-Max (its upcoming high-speed network), including an application called Eventful that provides users with a map-view of nearby events, and Topix, which serves up local news based on a user’s location.

But how will location-based applications – many of which are available for free – make money?

While some Silicon Valley startups have struck revenue share agreements with carriers, most say they plan to turn a profit by dishing up highly-targeted ads on the small screen. Like the service these ads will run on, they’ll also be clued in to where you are.

“We’re seeing extremely high returns on this new way of being able to target audiences based on where people are,” says Anne Bezancon, founder and CEO of 1020, a San Francisco-based geotargeting ad network that. 1020 is already working with brands like Chanel and FedEx Kinko’s to place location-sensitive ads on cell phones.

Sprint, meanwhile, is partnering with Google to integrate ads into various location-based services. While some consumers may not embrace the concept of ads – especially those that know where they are – on their cell phone, the carrier is convinced that if those ads are relevant, people won’t find them intrusive.

“People want to be given info in line with what they’re looking for, without any effort,” says Rick Robinson, VP of Sprint’s Wi-MAX service.

Ads are also being counted on to generate revenue for many of the free, location-based applications on the iPhone. Unlike most other devices, iPhone developers get to keep 100% of their ad revenue. If they charge users per download, though, they’ll have to fork over TK% of any money they make from those fees to Apple. That’s partly why many are opting to go the free route.

Loopt, a popular mobile application that lets users share their location, costs up to $TK a month on most other GPS phones (the company has a revenue share deal with all four major U.S. carriers). But the company is offering its service for free on the iPhone, where startups don’t have to share ad revenue with Apple or its carrier, AT&T (T).

“Ads will enable Loopt to be free across the board,” says Brian Knapp, the company’s VP of corporate affairs. “We’ll start with the iPhone but are working with wireless carriers to roll out ads on other phones.” According to Knapp, ads will start appearing on Loopt later this year and will be “highly targeted and relevant.”

“People don’t like dumb ads,” says Knapp. “If you’re surfing the web in the [San Francisco] Bay Area you don’t want to see an ad for a car dealership in Wisconsin.”

Pete Flint, founder and CEO of a home listing site called Trulia, says creating a free iPhone application was a no-brainer.

“Open houses are both time- and location-sensitive,” says Flint, who decided to create a mobile application after noticing a peak in Trulia’s online traffic on Sunday afternoons – prime house hunting time. Trulia’s iPhone application, available for free, lets users find open houses on a map and call up brokers and already runs location-targeted ads (most advertisers are real estate agents). Since its launch on the App Store last month, Trulia has been downloaded TK times. Flint says the company is working on versions for the BlackBerry and Nokia devices.

Of course, as fun and convenient as some of these new applications sound, some mobile users are uncomfortable with the idea of sharing their location with other people – let alone advertisers.

While wireless organizations like CTIA have “best practices” guildelines for location-based services, some argue that there should be more goverment regulations in such services and geotargeted ads.

“This is the part of everyone’s life — increasingly, we will be tied together through these mobile social networks,” says Jeff Chester, executive director of the Center for Digital Democracy, an Internet watchdog group. “But users should have control over what information is collected and how it’s used.”