When you hear about location-based services, Foursquare is probably the first brand that comes to your mind. They’ve arguably made the biggest mark on the space sofar, but while Foursquare faces growing competition from big brands like Google and Facebook, it also has a lot of younger peers looking to meld the digital andphysical worlds into one.

One of those peers that gets more media attention than most is SCVNGR (which is actually backed by Google Ventures). SCVNGR “Chief Ninja” (also founder and CEO) Seth Priebatsch spoke at SXSW Interactive today in a keynote that they needed nearly 20 extra ballrooms (across the convention center and various hotels) to simulcast the talk so all interested SXSW participants could see it.

Priebatsch thinks that we’re in the decade of games (with the last decade having been the decade of social). We’ve heard similar musings from Foursquare in the past.The fact of the matter is that mainstream adoption of location-based services has been slow, but we’re only still in the early stages of this phenomenon. Foursquaremade some big announcements over the past week that could very well go a long way in attracting some of that mainstream appeal – that’s up to the businesses who takeadvantage. Google and Facebook offerings won’t hurt either.

SXSW ought to go a long way too. After all, this is arguably the one event that draws more enthusiasts of this medium than any other. Some come to learn how to bettertake advantage. Some come to spark ideas or build relationships that can lead to partnerships, net funding, etc. The point is, a lot of people are here to help pushthe location-based service forward, and I have no doubt that it will penetrate the mainstream in many ways, and it won’t be that long until it does.

Is the gaming element the way? Maybe. I wonder how much Facebook has been helped by games like Farmville and Mafia Wars. Marketing campaigns (like that of Source Code Mission, for example) will continue to put mobile/social games in people’s faces. Priebatsch says it’s been interesting to watch location-based services eovlve over the last few years, “particularly at this conference.”

Priebatsch dissected Groupon as an effective example of turning customer acquistion into a game citing the following game mechanics of Groupon’s business strategy:Free lunch, communal gameplay, and the countdown.

On loyalty, he talked about fostering consumers that want to be the “Norm” from Cheers, if you will – the regular. It’s more than just places though. He talked about American Express as being a good example of a company that does loyalty well (think different levels of cards). “By using status, they’ve created loyalty not to a place, but to a larger brand.”

“Location based services are not mainstream right now,” Priebatsch said. “We’ve got huge partners that are pushing LBS into the mainstream….There’s also been a ton of money poured into the space. Big partners plus big money equals big results right?”

So far, not so much.

“What are we going to do?”

He says users have to be at a place to play, and that the idea behind LBS are to create engagement at places. Right now, everyone in the space have structured this in such a way that are very tightly location based. You have to catch people while they’re at a place right now, he says, adding that something that needs to be looked at is being able to engage with places from afar. He says he doesn’t know the answer here, but that it needs to be looked at.

“Rewards work really, really well,” he says. People will check in for rewards, but the question is will people keep checking in? Probably not.  ”We might be setting up early adopters for something we can’t deliver.”

Priebatch had some interesting things to say about school, which he says is a game and is broken, and that the game layer can help solve this. “Grades are failing as rewards,” he says, adding that they’re a simple game mechanic, and that school is a game where we don’t want anyone losing. He proposed a grading system that focuses only on positive – where students progress to different levels instead of getting negative grades.

The part of the presentation that won the biggest applause from the audience, was when Priebatsch used the “game layer” from within the room to raise $10,000 for the National Wildlife Foundation.

So the challenge, as Priebatsch presented is to get to the point where the game layer is able to solve all kinds of problems, which he thinks can be done this decade.

On an interesting sidenote, he has pretty much declared Facebook’s Open Graph as THE social protocol for good.

Gowalla CEO Josh Williams tweeted the following during the presentation: