Last year, I reviewed location-based networks, concluding: “Facebook, if it decides to turn on location-based capabilities, can be a formidable player because of its huge scale and user base.” My expectation was that Facebook could easily trump over any smaller competitors if it chose to do so.

Reality has thus far proven differently: location-based networks such as Foursquare and GoWalla have not just survived, but have continued to grow despite Facebook’s decision to turn on location a couple of months ago. Will these relatively small players continue to thrive, even in the face of recent enhancements to Facebook Places?

Before I give you my personal verdict on Foursquare, GoWalla, and the likes, let’s look at how Facebook is positioned in the social networking market, and how it compares against other strong social networks.

Facebook prides itself on being a platform — which third parties can develop applications for — rather than an application. Its traffic has increased several-fold since it opened up the platform in 2007. Facebook’s platform strategy has been so successful that it took off certain home grown applications and features from its photos application to “level” the playing field.

It’s no secret that Facebook wants to maintain a tight ownership of its “social graph”, the network of relationships between its users. While Facebook does allow third parties to access certain information via Facebook Connect API’s, the company has a heavy-handed control over what information is accessible and how it can be used. In fact, Google has already started a backlash against Facebook’s policies by protecting its contacts’ information from Facebook.

The combination of a successful platform and a social graph of more than 500 million users makes Facebook tremendously powerful. Personal social networking as we know it has already tipped in favor of Facebook. Just look at Google, whose valiant efforts to make its services social have met with little success. Though several analysts claim that Google doesn’t have the “DNA” to be a “social” company, the main problem is simply that a dominant social network — Facebook — already exists.

When analysts asked Google’s CEO Erich Schmidt to comment on the rumors that Google is launching yet another (Buzz, Wave, and OpenSocial, to name a few failed attempts) social network to compete against Facebook, he stated: “The world does not need another social network”. Ironically, his statement rings true: Unless Facebook does something drastically wrong, the prospect of any company unseating Facebook is extremely low. That is, until someone comes up with a very different notion of “network”.

Twitter and LinkedIn offer good examples of networks that are distinct from Facebook, yet still successful. Both have substantive “social graphs” of their own. However, the nature of these connections is quite different.

Twitter connections are much more loosely connected than Facebook’s: Twitter allows one-way connections, i.e., I can follow Angelina Jolie without having her to accept my “friend request”. While it is true that Facebook also offers “one-way relationships” via Facebook Pages, by which businesses and celebrities can have the approximate equivalent of people “following” them, Facebook’s offering came after several celebrities and businesses had joined Twitter and had already gained a sizeable following. Besides, compared to Facebook, Twitter has a much simpler and low-key interface that only allows for users to update their “status”.

LinkedIn, on the other hand, is a professional and resume-oriented network. Its users are unlikely to log in everyday to see what’s going on in their friends’ lives, and few users are interested in sharing their pajama party photos with their business connections. Because of its specific focus, LinkedIn continues to grow even if its users are not addicted to it.

So what does this all bode for Foursquare and GoWalla, the two leading location-based networks? Do they have a uniquely positioned purpose or theme that justifies a separate social graph?

While niche location-based networks do offer certain features such as game mechanics (for example, Foursquare awards “mayorship” to someone who checks in at a location the most), these features can add on to an existing social graph and do not necessarily require a new graph.

Connections on these networks are usually two-way just like they are on Facebook. One might argue that location-based networks require more intimacy between friends, and therefore justify a new social graph, which is a subset of the bigger social graph of Facebook. But then again, Facebook allows third party developers to use Places API’s in ways that can make sharing location visible to only a certain subset of users. For example, Mappr can be used to share location with a specifically chosen group.

Foursquare may be besting Facebook Places at the moment, but is the lead sustainable?

Unfortunately for Foursquare, there are already several businesses that have a portfolio of Facebook products, including Facebook Pages. Facebook Places will allow businesses to extend their existing portfolio and even link their Pages with Places. Put yourself in a business manager’s shoes: would you rather leverage deals with Facebook, where you can reach many more users and have richer information at hand to target more effectively, or Foursquare, which has comparatively much fewer users with limited usage and with scarce profile information? Who has more data and usage patterns to make customized recommendations?

It’s true that Foursquare has collected substantially more data on users check-in patterns, but because Facebook has a huge number of users, the majority of which have already developed their own large network of Facebook friends, it’s only a matter of a few months before Facebook catches up. What’s worse is that Facebook is not charging anything for deals, at least not yet! This will put downward pressure on Foursquare and the likes whose only hope of making money may be charging a commission on deals

Moreover, Facebook has almost all the ingredients essential to being a premier location-based network. Let’s take a look at them.

Basic features of a location-based app. Logically, Facebook Places is positioned more as a platform than an application. But, in practice, Facebook Places offers most of the features that Foursquare and GoWalla offer — checking in, local deals, and reviews. This is exactly why I think Foursquare and GoWalla need to give up their dreams of becoming a platform or a network on their own, and think of adding substantial value on top of Facebook Places.

Virality and game mechanics. Foursquare certainly has introduced interesting game mechanics — such as ability to claim mayorship of a cafe — but will these game mechanics alone be enough to give it an edge over Facebook Places or help differentiate it from its closer competitors such as GoWalla? I don’t think so. In fact, Whrrl, a lesser known location-based network, offers more interesting features such as ability for users to share their lives in the form of “stories” around places and people through pictures and text.

Facebook on the other hand, with its 500 million users, is in a strong position to be the crux that propels “viral” media. The ability to tag friends makes it even more powerful. Location-based networks will have to think really hard to offer more value than just providing game mechanics.

Availability of several platforms and devices. Facebook is available on more mobile platforms than most if not all location-based networks.

Incentives for partnering businesses. Though a lot still needs to be done to incentivize businesses (one that comes to mind is empowering timely offers, in which nearby businesses could sell excess inventory at limited-time discount prices), Facebook is in a much stronger position to convince businesses to participate in Facebook Places and Deals.

It is highly unlikely that Foursquare and the likes will be able to build their own niche network of users. Thus, while I’m not keen on advocating Facebook’s monopolization of the social networking market, I believe companies must embrace Facebook and offer compelling utilities on top of the platform in order to be successful in location-based networking in the long term.