Executive Insight: Acquisitions and mergers in the location-based and geo-location services industry

TheWhereBusiness speaks to Nicolas Pechet, Managing Director of the Shanghai Office for Global Intelligence Alliance on significant mergers and acquisitions in the location industry and gives his opinions on how he sees the market developing.

1. What do you consider to be the most significant mergers and acquisitions within the location-based and geo-location services market at the moment?

eBay’s purchase of Where (acquired by EBay’s PayPal division) in late April 2011 is probably the most significant acquisition within the geo-location service industry in recent months. Also, though the deal is still pending US government approval, the proposed purchase of T-Mobile by AT&T stands to have a very large impact on the LBS industry as well.

2. Why are they significant in your view?

eBay’s purchase of Where is particularly significant because it joins one of the largest facilitators of e-commerce (in PayPal) with North America’s largest location-based media company. As Americans shop more and more online, services like Where are blurring the lines between online shopping and in-store shopping meaning customers can make more informed buying decisions from anywhere and through any channel. Their service allows users to access information about local merchants to learn about local deals, prices, promotions, etc.—by adding that hyper-local element to PayPal, the already vast number of PayPal subscribers can have access to more and better information regarding local merchants, benefitting both retailers (through greater exposure) and customers (who will benefit from greater competition between larger, more online-established merchants and local, store-based merchants).

While the proposed AT&T – T-Mobile deal does not involve an LBS-focused firm, it stands to have a huge impact on the LBS/geolocation industry. Notably, a combined AT&T/T-Mobile means more customers on a single platform (130 million subscribers). With all these customers needing LBS, the industry can evolve faster and become more ubiquitous under a single platform with access to so many users. In addition to more customers, the merger means greater network reliability, which means fewer dropped calls, and more reliable access to customers and their location—very important to LBS developers looking to extend the scope of their apps. Finally, with only 29% of the US market owning smartphones, the combination of AT&T and T-Mobile’s device portfolios will make LBS easier for LBS app developers looking to crack the other 71% of the market.

3. What are the core drivers behind these mergers and acquisitions and how do you think they are going to change the market?

One of the primary drivers behind these mergers is the increasing number of mobile device users and, concurrently, a greater usage of social media to engage in communication, entertainment, work-related activities, etc. With the range of users going beyond the younger generation (who defined and popularized the market first with LBS-involved social media like Facebook, Twitter, and Foursquare) to older users, the potential of LBS will go beyond social applications to work-related fields and mobile commerce. As long as people continue buying mobile devices, LBS providers will likely continue finding new ways to take advantage of this technology that gives instant access to information about users’ physical and constantly-changing surroundings.

4. Microsoft and Nokia are partnering each other, and location-based services and search will be part of their plans. Is this is a more viable alternative to either merging and acquiring another location-based or geo-location services company at the present time?

Since 2007, LBS technology mergers & acquisitions have peaked at around 40-45 deals a year (compared to 21 in 2006, 14 in 2004, and just 6 in 2000). Nokia and Microsoft are responsible for 12 of those acquisitions combined since 2002 (with Nokia most recently acquiring Metacarta in 2010). This suggests that while the LBS industry appears to be plateauing and consolidating under larger tech and telecom providers, these larger companies like Microsoft and Nokia already have a solid grasp of LBS through their acquisitions and are in a good position to develop their own LBS plans without further M&A. In this regard, it is more viable. That said, as long as innovative private LBS companies like Where and Foursquare emerge, there will always be interest among larger companies in acquiring LBS firms—though at present time, the slowed rate of LBS M&A growth appears to be a good indicator of the improved LBS capabilities of established companies like Microsoft and Nokia who will undoubtedly share their resources to improve their LBS standing.

5. Are there any mergers and acquisitions of company’s the offers these kinds of services to the business-to-business market? Please explain your answer, and discuss what is required to develop this sector.

Figuring out a way to take advantage of geolocation technology for applications unrelated to the social, entertainment, or B2C sectors remains the challenge. While there does not appear to be any upcoming mergers of LBS firms engaged in the B2B market, there is certainly potential for B2B applications. LBS data allows marketers to see what their contacts are doing beyond just the interaction with their brand. Once LBS becomes more universally used, mining this data will allow brands to see how consumers interact with their brand, as well as their competition and other local businesses. Therefore, based on LBS-derived information, there is a lot of potential for marketing in the way of businesses forming partnerships with non-competitive local businesses, collaborative sponsorship and advertising opportunities, and identify event opportunities with other businesses in your industry. In short, in the same way LBS puts merchants and consumers in touch, LBS can put businesses in contact with one another that may share similar marketing aspirations, while also keeping businesses informed on their competitors’ doings. Convincing businesses of the advantages of LBS though for promotional purposes though will require extensive use of LBS amongst potential customers and their competitors. Without ubiquity of use, this B2B sector will struggle to develop further.

Though slightly detached from the LBS market, the recent purchase of network security company Astaro by Sophos could have a significant impact on the LBS industry. While Sophos already produced mobile security software for mobile devices, the acquisition of Astaro will further bolster their security capabilities in the mobile device realm. As more and more businesses become technologically equipped to conduct business remotely through the use of mobile devices, the need for secure mobile networks will be greater. With these enhanced security measures over mobile networks, geolocation services catered to B2B may become more prevalent as businesses become more confident in the security systems.

6. How important do you think eBay’s proposed acquisition of Where will be, and its integration with PayPal? In what areas of the market will this have the most impact, bringing the company the most lucrative opportunities?

As mentioned earlier, this is likely to be very important as the deal brings eBay further into the area of geolocation. With such a large and pervasive e-commerce site like eBay investing more in LBS, the implications and possibilities are abundant. What makes the deal with Where so unique is the marriage of big e-commerce with local merchants not previously “wired in”. Depending on the success of the merger and its reception by not just customers, but more importantly local merchants, the PayPal-Where merger could have a huge impact on the way local retailers operate, compete, and advertise. If PayPal can promote the Where service to markets where there are high concentrations of local merchants (like large cities with clusters of boutique shops) with limited online exposure, not only could the service be a huge boon to those local merchants, but it could help PayPal penetrate the hyper-local merchant market that would otherwise not utilize PayPal and its related services.

7. What kind of strategies should location-based and geo-location services companies be looking at deploying over the next 5 years, and how do you see the market developing?

The most obvious advice for LBS and geolocation services companies looking at deploying over the next 5 years would be to make their applications and services easy to use. Far and away the most restrictive force to the growth of LBS is the number of users it can attract. LBS’s value grows exponentially with user-growth. The more people involved, the greater the dissemination of information that can be mined and utilized by both consumers and businesses. The easier LBS applications are to use, the more people they will attract—especially in the older demographics that may be less tech-savvy than the younger folks that have popularized the service.

Second, but just as important, is the creating a valuable service. In the world of LBS, value is derived from optimal and abundant information (in the form of venue recommendations, promotional offerings, local event advertising, etc.) which requires a multitude of businesses and merchants accepting the technology. The more businesses that see “check-in” points and social media devices as a beneficial way to attract customers, the more valuable LBS will become. Therefore, any LBS provider looking to develop over the next five years must court businesses and convince them of the benefits of such a service.

8. Will there be many more mergers and acquisitions in this space over this period, and why do you think they will occur (or not)?

As mentioned earlier, the rate of M&A in the LBS sector appears to have peaked at around 40 per year for the last 3 years. With larger firms merging and a general trend of consolidation within the tech and telecom industry spreading, LBS start-ups will likely have a lesser impact on the industry as a whole. Telecom services that have already acquired LBS capabilities and have developed in-house LBS divisions will put pressure on smaller LBS firms to be especially innovative in order to incur greater rates of M&A at that level.

9. Considering the economy, what will be the key reasons why companies within this space will either want to merge or partner with another provider, or acquire one? What do you consider, given the current climate, the advantages and disadvantage of each strategy?

Companies partnering and merger inclinations will be entirely dependent on the value or potential value of services that LBS providers can provide. Given the growing importance of social media to disseminate news and establish and cultivate relationships, LBS and geolocation is the natural next step in digital communication—LBS brings a physical (location) element to the otherwise impersonal nature of digital communication. As businesses continue to navigate the tenuous economic environment, acceptance of LBS/geolocation technology will be an important part of their growth. Given the very specialized nature of most LBS applications however, it would be prudent to surmise that larger companies will be looking to merge with small boutique LBS firms that have already developed a highly-specialized application for their geolocation technology, rather than investing in in-house divisions looking to make such a service practical and marketable.

10. What are you top tips for deciding when to merge or partner with or acquire another location-based or geo-location service firm?

1. Find a firm that already has established a solid user base, even if the service does not seem to have much growth potential—access to users is paramount.

2. Can the merger bring added value to the LBS service from your end? If not, can you bring users to the service?

3. Identify firms that have a proactive user base—one where user-generated content and feedback are focal to the service. Following the Facebook/Twitter model, the most pervasive and popular services will be those that grow organically through user-to-user relationships.

4. If the LBS is not social or entertainment-focused, is its inherent value marketable/profitable? For example, services that provide alerts to traffic jams or when the next public bus will arrive all have significant practical applications, but must be creatively implemented in order to generate revenue beyond subscription-based services.

5. Privacy concerns: With hackers and identity thieves becoming more proficient at swiping information out of the air between mobile devices and public WiFi locations, any potential merger should seriously investigate the chance of users’ personal information being jeopardized.

6. Do you already have an existing online-platform that can be easily transferred to a mobile platform? Would your web-based platform enhanced by user-mobility? If yes, then merging with an LBS firm that is already mobile-ready may be more cost-efficient than establishing an in-house LBS division.

7. What does the competition look like? In the age of social media and news and fads disseminating faster than ever, the “early bird gets the worm” saying has never been truer. If there is an innovative LBS in your sites, the “when” to merge question may come down to competitive forces.

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