By Shepherd Laughlin

How far will location-based social networks go in China?

Location-based services (LBS), which deliver information or entertainment to mobile device users based on their geographic location, are only just gaining popularity in China. The country has 300 million mobile internet users, but only about 18 million, or 6%, currently use LBS programs. Some industry analysts, however, say that figure is about to grow significantly. According to iResearch, LBS market volume in China will increase from US$154 million in 2010 to US$1.54 billion by 2014.

LBS has seen significant growth overseas: Foursquare, the US-based social network, said it grew 3,400% in 2010, reaching 6 million worldwide users at the beginning of January. Like many up-and-coming Chinese LBS companies, Foursquare users gain points and discounts by using their smartphones to "check in" when they visit different locations like shops, bars and restaurants. The service has proven popular with trendy urbanites – so-called "key influencers" whose attention is coveted by marketers.

Crack the market

High growth potential and access to elite markets may explain why LBS drew more than its share of attention at the Global Mobile Internet Conference (GMIC) in Beijing in April. LBS is still in early stages of development in China, but the field is already crowded with established players and hungry start-ups – each with a slightly different strategy to crack the market.

"Our target market customers are  25- to 35-year-old white-collar Chinese," said Adam Guli, CEO of the LBS company Let's Powwow. The firm – which works with mid- to high-end Beijing venues like sushi restaurant Hatsune, the Fairmont Hotel, Jamaica Blue and nightclub the House – helps venues identify regular customers and encourages them to share deals with friends.

"Establishing value with the venues is more important to us than getting a million users," said Guli. "We're more of a Taobao-based model, where we work with our suppliers and venues to create [deals], and then the users will come because of that value."

The LBS space is also proving attractive for larger, established Chinese internet companies. On GMIC's first day, Sina – which has more than 100 million Weibo microblog users – launched its own LBS called Wei Lingdi, or "micro kingdom."

Rayne Shen, vice president of strategic partnerships at GyPSii, which developed the service for Sina, said that Wei Lingdi differentiates itself with a feature called "real check-in." Shen said that other LBS providers' check-in information is based on imprecise GPS data, with which users up to 3 kilometers away can check into a location. This can create uncertainty for venues about who their customers actually are.

With "real check-in" services, however, Wei Lingdi distributes scanning machines to partner venues like Costa Coffee. Employees can then verify customer visits by scanning picture codes on smartphones.

Other players like Jiepang – founded in February 2010 – are also looking to step up LBS technology. It uses near field communication (NFC), which allows users to check into venues by waving their smartphones within about 4 centimeters of a sensor.

But some analysts are skeptical that LBS in China can gain the same traction as that overseas. According to Ivan Lee, vice president of Analysys International, an internet consulting business based in Beijing, the three ingredients required for growth in the LBS sector include strong smartphone penetration, market creativity and a wide availability of flat-fee data plans.

Obstacles ahead

While there seems to be no shortage of creativity in the market – with Chinese LBS programs for mobile mapping, office applications and more – the use of smartphones is also increasingly prevalent in China. Guli added that as such phones begin to cost less than RMB1,000 (US$154), more middle-class individuals who don't use smartphones yet "are going to start to migrate to it, because they're spending about the same amount of money as they would on a normal phone."

China's lack of affordable unlimited data rate plans may be the biggest bottleneck to continued growth of LBS services in the country. Consumers are still warming to the idea of paying for goods and services on their mobile phones – and this is a crucial step if the LBS sector is to move beyond an ad-based revenue model and take a percentage of sales at partner venues.

Meanwhile, privacy concerns have hindered the growth of LBS providers in North America, where even tech-savvy users of Facebook, Twitter and other social networks often balk at sharing their physical location on the internet. In China, however, younger LBS users aren't as reluctant, said 25-year-old Zhong Sheng, who lives in Guangzhou and frequently uses Jiepang.

"People say that the post-'90s generation is the 'show generation,'" she said. "They are not private, and they love making new friends."

Guli of Let's Powwow agreed that expectations of privacy are more flexible in China compared with many developed countries. "In China you're just not going to see that kind of backlash right now," he said.