Open but not Free – OpenTable’s Monopoly of Reservations
OpenTable has grown to a near-monopoly in online reservations thanks to direct and indirect network effects, and by designing a historically high barrier to entry for competitors.
When was the last time you called a restaurant to make a dinner reservation?
If you’re having a hard time remembering, OpenTable is probably to blame (or to thank, depending on your perspective). In the last several years, OpenTable has felt ubiquitous and inescapable – because it is: OpenTable contracts with 32,000 restaurants across 6 countries, and as over 2014 had seated over 665 million diners. OpenTable’s 29,000 U.S. restaurents represent 50% of all reservation-taking restaurants in the country, and the 12 million people who make reservations monthly on the site represent 99% of all online reservations in North America.
Not too shabby.
OpenTable is a classic network-effect success story: a virtuous cycle of consumer use causing restaurants to sign up, causing more consumer use causing restaurants to sign up… By streamlining a previously clunky and decentralized process, OpenTable has positioned itself perfectly as the platform between restaurants and diners, and has managed to capture handsome profit as a result.
But why were restaurants (which work on razor-thin margins) willing to give up any profit to begin with?
Starting OpenTable
OpenTable was founded in 1998 by Chuck Templeton after watching his wife spend 3 hours trying to get a dinner reservation in San Francisco. Building the platform was not easy, and it was definitely not cheap. Most restaurants at the time didn’t have Internet or even electricity at their host stands – OpenTable would offer to run cables through walls and basements to install their Electronic Reservation Book (ERB) for a fee of $500 (often at a cost of $5,000 to OpenTable). Confident in the company’s value proposition, OpenTable was burning through $1.5 million per month in order to attract restaurants to its platform. Luckily the gamble paid off in diners…
Value to Consumers
With an increasing number of reservations made online, OpenTable’s value to consumers became obvious very quickly: a convenient, easily accessible, aggregated list of restaurants displaying available reservation times. The direct network effects were self-reinforcing – diners could leave comments and reviews, attracting new users to the platform. In 2003, 1,600 restaurants attracted only 2 million diners; by 2007, 7,400 restaurants brought in 25 million diners.
Value to Restaurants
A mushrooming diner base created strong indirect network effects in appealing to more restaurants. The $500 fee for the ERB felt like a low cost to play, but allowed OpenTable to capture value by locking restaurants into a monthly fee ($199), and created strong barrier to entry for competitors. OpenTable also captured value by charging restaurants $1 for reservations made directly on OT, and $0.25 for reservations made through the restaurant’s site.
In addition to a large diner base creating value for restaurants, OpenTable also allows them to save and streamline operations (many restaurants estimate that up to 60% of reservations are made when the restaurant is closed – staffing someone to answer phones at those times could cost upward of $20,000 per year), as well as crowd-source reviews of new dishes and allow them to tweak their menus according to feedback.
But…how long can it last?
Many restaurant owners feel bullied into having to use OpenTable to be in the consideration set for diners, without any clear metrics on whether OpenTable is actually increasing the number of diners (especially for non-traditional meal times), or just cannibalizing reservations they would make anyway. So far, OpenTable has had a near-monopoly of online reservations, but there are signs that that might be starting to change…
New competitors such as Resy, Table8, FoodForAll are entering the scene on the pay-to-play dimension: allowing consumers to pay for a last-minute reservation that someone else has already made. These are essentially scalping sites where the restaurant sees none of the profit generated by the transaction made, but these apps are gaining traction, especially in cities such as New York.
OpenTable has been criticized for being slow to innovate, but is beginning to respond to these threats by adding a Premium Reservation feature – essentially the same concept, but giving the restaurants the profit on the fee for the tables.
OpenTable is in a very attractive position with the scale and network it has achieved. What remains to be seen is how they can best continue to monetize and grow the platform to capture even more value.
I really enjoyed this post and agree that there is absolutely an opportunity for premium, pay-to-play restaurant reservation services. That being said, I would still argue that the majority of restaurant-goers aren’t willing to pay for a reservation and that there remains great value to OpenTable. As you pointed out, one can spend hours calling restaurants to finally find an opening. The ability to search available reservations across all restaurants in a given area at a given time is hugely valuable. Restaurants can easily offer their own reservation services on their websites, but customers don’t have the time to visit each restaurant’s website individually. Additionally, this seems to be a high fixed cost business, which presents a huge barrier to entry. Unless a competitor could replicate OpenTable’s service without needing to install costly ERB’s, I think OpenTable could sustain its grip on restaurant reservations for some time to come.
Great post! My jaw dropped when I read “burning through $1.5 million per month”. Chuck Templeton was either really rich or had really faithful investors!
I question if OpenTable truly has a monopoly on restaurant reservation. Sure it has 99% of market share for ONLINE reservations, but I do wonder what that market share looks like if it’s compared to ALL reservations (including phone calls). From personal experience, there still a lot of restaurants not on OpenTable, and I presume the market share OpenTable has from the universe of all reservations is much smaller. That means in addition to the threat of new product and new profit-sharing pressure from competitors, there actually is potential for competitors to seize untapped market and build network effect that way, which can ultimately topple OpenTable.
This post definitely got me thinking about potential competition for OpenTable over time – even for non-premium reservations, the lock-in infrastructure advantage that OpenTable had for so long must have essentially disappeared by now.
If there were to be a cross platform API that would automatically book on different reservation systems, restaurants could more easily multi-home and become platform agnostic.
Also, given that OpenTable was started so early, I can’t help but think they missed out on a huge opportunity to integrate Yelp-like features into their service to help customers with restaurant discovery. They were sitting on a treasure trove of information and data early on that could have been turned into a much bigger company than a reservation system.
Thanks for the post Caribou.
It is interesting that one player has such a huge market share with little competition for almost two decades. However, there are a few points that could hamper its ability to continue to create and capture value in the future:
– Some diners cancel reservations last minute without any clear consequence. This hugely impacts the restaurant’s revenues and could affect the relationship between OT and the restaurant. What does OT do to minimize this and compensate restaurants?
– There are some restaurants that are not yet available on OT, which makes the platform less attractive if a diner faces that issue multiple times
– OT only allows you to make a reservation at one restaurant for a specific time slot. However, if diners are undecided about the location, they could use a second platform or call the second restaurant directly to book a table. Therefore, for diners that are booking large group dinners or will decide last minute, it becomes less of an attractive play
There are some of the issues that I believe other players could take advantage of to break the cycle of OT having such a huge market share
Also, I would imagine that Facebook can easily compete with OT through leveraging the huge user base from both diners and restaurants (they only need the infrastructure, and they have the money to invest in it). Which makes me think why they haven’t done so already..
Great post! I wonder what is stopping Yelp from building this feature in. My sense is that people use yelp far more frequently than opentable, so as far as direct network effects go Yelp should have the upper hand. Yelp has a better review system, as well. It seems like opentable gained its success in the early days of the digital transformation and won’t be able to last forever!