Location-based services worth $10B by 2016

Location-based services are expected to bring in $10 billion in revenue by 2016, according to research firm Strategy Analytics. The biggest chunk, just over 50 percent, will come from location-based search advertising.

The firm said the biggest obstacle is consumer privacy concerns about location data, something that has been stoked lately by recent questions about tracking from iPhones and Android devices. But if location services provide enough transparency about how they use and store this information, it should not derail the approaching money train.

It’s still early days but I agree there’s going to be a lot of money in location-based services, particularly advertising. That’s where things get interesting: We’re seeing that location-based ads can demand a premium because they’re more targeted and often more relevant to users. There’s a big opportunity in being able to use a very personal device like a smartphone to deliver tailored, very local ads. That’s still a ways off but that’s something Google, the recently acquired WHERE, and a host of other mobile advertising companies are banking on.

Search ads, however, are just one part of the mix. There’s a whole business brewing about pushing ads, offers and deals to consumers based on their preferences, location, shopping history and other signals. Groupon and Living Social are testing more real-time local offers to users. Increasingly ad and marketing offers won’t wait for someone to search for something. Companies are going to try and anticipate what a user wants and provide it for them. That’s the future that Google’s Eric Schmidt has talked a lot about.

But there are a lot of other opportunities in location. I recently talked with Location Labs about how they’re building toward an IPO by providing security and safety features for families. There will be other more “boring” utility plays that leverage location and can gather in revenue without being a sexy check-in app.

And to be sure, consumers are getting more comfortable with location-based services, especially when those services are dressed up with offers and discounts. That will be the key — to provide consumers with clear value and information that is relevant to them.

At this point, it’s hard to say what the revenue potential for location-based service is going to be. Mobile advertising overall generated $550 to $650 million in the U.S. last year, far behind online advertising. But as smartphone penetration rises (it’s expected to account for half of all phones this year) and people start to think of their phones as personal computers and real-world sensors unlocking valuable information around them, there could be a huge bonanza waiting. It’s up to location companies to come clean about the way they use location data, as Skyhook’s Ted Morgan recently told me. But if that happens, there could be a lot of winners.