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Stephen Foley: Foursquare is in a better position to net profits from local commerce

US Outlook: Groupon says it is "better positioned than any company in history to reshape local commerce". No it's not. Foursquare is.

Things move so fast in the world of internet start-up hype that you might already have forgotten about Foursquare. This is the company, launched two years ago, that allows you to "check in" when you are at a bar/restaurant/party/museum/whatever, so that your friends can see where you are.

While Groupon and others have been snaffling the headlines, Foursquare has been growing like topsy. It had 6 million users in January, 8 million in March, and is now approaching 10 million. In its earliest days here in New York, where it was founded, bar managers and café owners spotted the potential of Foursquare, offering free beer or coffee to the person who became "mayor" by visiting their business and checking in most often.

"Geolocation" services like Foursquare open up the possibility that local merchants can target ads or offer special deals to potential customers as they pass by. This will be the revolution in local commerce. But geolocation has been hampered by privacy issues, and many of Foursquare's rivals have obstacles to overcome. Apple and Google have faced a backlash for tracking people through their phones without their knowing. Facebook and Twitter are desperately trying to persuade you to hand over details of your whereabouts, so far without much success. Groupon bases most of its "targeted" mailings just on your residential postcode.

Foursquare is the one major business whose foundation is users openly and enthusiastically sharing their location. With a new feature, Foursquare Explore, it now recommends nearby places you may want to visit, based on your check-in history and the recommendations of your friends. This is the opening for local businesses that want to reach Foursquare users, and one day it really could reshape local commerce.

Until now, Foursquare has been disappointingly passive in its work with local merchants, hanging back and letting business owners work out the opportunities for themselves. Little wonder, since it is expensive to build up a network of local business development or sales people (take a look at Groupon's flotation prospectus to calculate how expensive). It needs to hurry up, as Groupon is getting more heavily into geolocation.

But Foursquare has started to be much more proactive, creating tools for merchants to examine some of the data about check-ins at their business. The company is said to be close to tying up another round of funding which could be used to scale up some of this business outreach.

Foursquare doesn't yet have the critical mass of users, it hasn't found the scalable, repeatable business opportunity for local merchants, and its management is unproven, but this is all trumped, I think, by one important difference. Groupon and the other email coupon companies take a cut of up to 50 per cent of revenues on special offers by local merchants, which seems a bit steep for an experiment in marketing. With Foursquare, merchants pay nothing to set themselves up on the service and to highlight their special offers. While it will undoubtedly start charging for some services at some point, that won't be until it knows what works for both merchants and consumers.

As Groupon implies, we are entering a period of intense experimentation that will reshape local commerce. But while Groupon's model of daily deals could be a flash in the pan, Foursquare might be the real deal.