I started working on a location based game for smartphones this past august (www.tuzo.ca). At the time, competitors included Foursquare, Gowalla, and some smaller players but i felt like I could handle taking them on and was excited about making a killer product to execute better than they did.
Since that time, Facebook Places, Google Latitude, SCVNGR and many others have either entered this space or grown exponentially. All players seem to have the same model of focusing on location based marketing as their revenue model.
I released my product in Toronto as a market test in January, but have since felt deflated in competing with such large competitors, plus i have yet to acquire funding.
A general question people ask me (including angels/VCs) is how i'll be different from all the other players, and i want to focus not just on the social act of checking in, but more on competing against others around you, creating a social-gaming environment in the real world.
I've already read the other questions regarding competition and the "800lb gorilla", but i'd love to hear some advice on whether i should continue in such a challenging space?
Any advice would be great!
Keep trying, there is room for more than a few players in this area... trust me. About being unique or different from the competition, do not sweat it too much with this, is not the product that has to be different but everything else such as customer service, reliability, product quality, etc...
Remember, Zappos started selling shoes online well after there were hundreds of companies doing the same thing, selling the same exact product. They became popular and very successful because of their no questions asked return policy... find something that you can offer your customers that will make them use your product instead of the competitor's and be patient. Rome was not build in one day ;)
Honestly unless your idea does something radically different I'd give up on it. I myself have tried competing against well entrenched companies (Google) and unless people can tell the difference between your app and foursquare / facebook etc within 30 seconds it's going to be a very tough uphill battle for you and probably isn't worth it.
Don't give up - but - only stay the course IF and only IF you have something (feature or function) that makes your approach much better than other options.
Otherwise the old Kenny Rogers song comes to mind.... "know when to hold 'em, know when to fold 'em, know when to walk away...."
Normally I tell people that competition is good and don't give up etc. However you case is like Ebay (chicken/egg problem). You can't compete with Ebay unless you got a good difference (think Etsy ) + VC potential, if there is no customer, there won't be a seller and vice versa.
Social Networking-ish stuff is similar if there is no network then there is no user. FriendFeed is going to die not because its technology is worse than Twitter (possibly 4x times better UX and tech ) but because Twitter dominated the field and there is no more room for new comers or any other player until someone comes with something unique and disrupt it for good.
With limited knowledge, my humble opinion would be either pivot and find a big USP or radically pivot and use your existing technology for something else where you don't have to fight with such competitors.
IMHO if it's a game, then you aren't competing directly with any big competitors - unless they have a very similar game to yours. (Tetris doesn't compete directly with Angry Birds, for example).
However, you may have more difficulty attracting attention if you aren't the first (=unique) or have the smaller marketing budget. Whether this makes continuing desirable or not really depends upon how interesting and unique the game is, not on the existence of large companies also producing location aware games.
Ask yourself, what business pain are you solving? Are the big players addressing that pain? If not, that's the pain to tackle. If they are solving on the pains, then pivot and use your technology to address a different pain.
There are plenty of examples of smaller players either 1) identifying and serving a niche better than any of the big players or 2) identifying a new need outside the conceptual scope of the big players.
You are in a network effects business. It tends to be a winner take all market, but the markets themselves are fractal. So you need to find your point in the long tail and make yourself the winner in that niche.
If your game entertaining and helps people express a need (I'm in the top 5% of foodies in Toronto, or the top 100 Leafs fans) and its based on something the tribe sees as valuable (I tried the fried locusts rather than the pad thai), then you can build a good business. But you need to identify a niche where you can take the network over the general purpose big players. That doesn't require a lot of capital. In fact, being a bootstrap operation can provide you with flexibility, credibility and freedom to build those relationships.
So it may require a pivot or two, but you can make it a successful business.