How much pie do you get on OpenTable?

After initial success, OpenTable now confronts competition in multiple segments of the dining information business, and sees diminishing future for growth.

OpenTable started in 1999 in San Francisco and Chicago, to facilitate the reservation process of restaurants using Internet. While competition did not exist, few restaurants at that time had internet connectivity, and paper books and phone calls were the main booking tools. Rather than a product company, OpenTable was envisioned to be a platform from the start. In order to drive adoption at the restaurant side, OpenTable developed and installed their Electronic Reservation Book (ERB) at $200-$700 per restaurant, while the cost could be many times higher. It then charges $1 per customer visit booked on its platform. On the customer side, OpenTable initially receives reservations through a website, and later developed a mobile app as user behaviors changed.

 

To the restaurants, OpenTable offered the restaurant the ability to better utilize their capacity, save labor while receiving bookings during busy hours, gather customer information, and handle some marketing and loyalty programs. Diners get the convenience of reserving tables on a 24-7 website and loyalty vouchers. Cross-sided network effects exist as more diners make the platform more attractive to restaurants, and vice versa. OpenTable only charges restaurants for its service, possibly because restaurants have fewer alternatives once they adopted the platform, while customers could always switch to phone call if OpenTable started charging them fees for bookings.

 

OpenTable’s market enjoyed a period of no competition, and expanded to the UK through the acquisition of a local, similar company called TopTable. This strategy avoided fragmenting the market and allowing multi-homing of users. However, it is not really sustainable over time as new entrant can enter the market. There is also limited network effect generated by putting restaurant and diners in distant cities on the same platform.

 

Zagat, acquired by Google in 2012, as well as Yelp, which acquired SeatMe in 2013 while still in partnership with OpenTable, introduced competition for customer traffic. Both services competed for restaurant participation by offering lower fees. Groupon, a “daily deal” discounts platform, also draws diners to restaurants through conditional promotions. It is worth noting that these competitors had business scopes different from that of OpenTable, as Zagat and Yelp focused on reviews and marketing, and Groupon focused on short-term deals, they could potentially generate revenues in different parts of their service, while undercut OpenTable in the price for the booking service.

 

To counter the challenges, OpenTable expanded its service range to include customer reviews, and more importantly, mobile bill payment. However, customer reviews are services that Zagat and Yelp were already strong at. While payment significantly differentiated OpenTable from these competitors, it leads the company into another platform war fought among payment companies, including PayPal, MyCheck etc. Among payment platforms, the competition centers on POS system compatibility, breadth of usage beyond restaurants (including e-Commerce), and security. Meanwhile, as multi-homing is relatively easy on mobile phones, it is hard to foresee when a competitor will turn profitable as time goes on.

After posting its first quarterly loss in five years for the period ended March 31, 2014, OpenTable was acquired by Priceline for $2.6 billion. Through this largest acquisition in its history, Priceline hopes to expand OpenTable globally and improve the browsing experience, and add to the portfolio of experiences offered by Priceline services. However, since then Priceline has repeatedly posted impairment charges to this acquisition, reflecting a decreased prospect for growing the OpenTable platform.

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3 thoughts on “How much pie do you get on OpenTable?

  1. Thank you Hao. Do you think there is another space for OpenTable to monetize its platform? For example, one could see a world in which very popular restaurants could auction their available tables to the highest bidders and create a new revenue line for those time sensitive diners.

  2. Great post, Hao. I agree with your assessment that multi-homing is likely common among users, since it’s easy to navigate between apps on a phone, but I wonder if multi-homing is common on the restaurant side of the platform. My intuition is that it is common, since most restaurants are interested in reaching as many potential customers as possible, but for certain sections of the market, perhaps multi-homing erodes the “exclusivity” factor. If you’re a high-end local eatery, it might make sense to use one app (like Reserve, which touts a “curated list” of restaurant partners) to prevent the throngs of OpenTable users from harming your brand. I suppose the insight is that there may be room for multiple winners in such a massive and diverse market.

    1. You make a really interesting point on multi-homing from the restaurant side. From what I’ve seen (pure anecdotal evidence), it seems like many higher end restaurants are choosing to use one app, such as Reserve or Resy, for online bookings. I do think that there may be some potential negative impacts of being associated with OpenTable for these restaurants, as OpenTable points offers or seeing many available tables at popular reservation times on Fridays and Saturdays affect customers’ perceptions of the quality and popularity of the restaurant.

      I think one aspect of OpenTable that really hurt them was that many restaurants only chose to make certain reservations (such as really early or late slots) available through the platform. They held back a sizeable percentage of tables for call-ins. Once I discovered this, I oftentimes would call the restaurant directly, as they were typically more flexible and had much better availability.

      I wonder if there are ways for OpenTable to improve on the customer experience / product side to differentiate more from competitors. For example, one of the features that I’ve really liked about Resy is the ability to put yourself on a waitlist and be notified in case tough to get reservations become available. And for Reserve, the back and forth interaction with an online “concierge” makes reservation changes and requests easier to make. OpenTable doesn’t have anything like these features as far as I know. It seems like there is a great potential opportunity for OpenTable to leverage its platform to work more closely with restaurants to gather data about customers’ preferences—their dietary restrictions, likes/dislikes, table preferences, etc.—to make their dining experiences more enjoyable and seamless.

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