OpenTable and the Threat of an Open-Standard Industry Database

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 |  About: OpenTable, Inc. (OPEN), Includes: GOOG
by: Steve Bass

OpenTable’s (NASDAQ:OPEN) high valuation in light of its addressable market has received a great deal of attention in Seeking Alpha and in other periodicals. What receives less attention is the threat of competition – not direct competition, but that caused by a paradigm shift in the market for online restaurant reservations.

OpenTable ("OT") has cornered this market. They have done so by building the largest ‘private club’ and then charging restaurants monopoly prices to be ‘seen’ on the Internet. The OT moat is their proprietary database of table inventories. Restaurants are resistant to putting their table inventories on smaller competitive systems because their portals attract fewer diners.

In the airline industry, online reservations involve data aggregators (Global Distributions Systems like Sabre and Travelport) that collect and manage the seating inventory; and retailers (like Expedia (NASDAQ:EXPE), Orbitz (NYSE:OWW), Kayak, etc.) that access this data, present it through portals to the public who then make reservations. In the restaurant sector, OpenTable controls all of this.

One of the simplest ways to break the OT monopoly, and bring competition into this market, would be to have an open-standard industry database of tables rather than a proprietary database controlled by one vendor. Restaurants are small businesses for the most part. It is a fragmented industry and therefore difficult to organize. The National Restaurant Association should be looking out for their best interest, but they have been missing in action on this issue. That means it is up to a group of vendors or a single vendor to champion an open-standard.

Google is the most likely candidate

Google (NASDAQ:GOOG) could work with some of their newly acquired resources from ITA Software, and develop another proprietary reservation system to compete with OpenTable, but that would take more time and effort. After all, Google is really about the traffic and data collection so they can sell more ads. Given Google’s modus operandi, they are more likely to be the ‘GDS’ of the restaurant industry in this model and they usually provide data aggregation services for free or almost-free. (Check out the current list of open-standard interfaces on Google Places).

The ‘retailers’ in the restaurant industry include anyone that provides online dining information to the public. All the dining portals where consumers go to learn about restaurants (UrbanSpoon, Yelp, Zagat, TripAdvisor, Facebook…) could connect to this system. All the companies that provide restaurant reservation software (Livebookings, MICROS, IAC, ReservationGenie….and even OpenTable begrudgingly) could connect.

Since everyone could connect to the table inventory to make a reservation, competition would lower prices and restaurants would have more exposure since there will be more ways for diners to make reservations. If restaurants move their tables to this new system en masse, there would no longer be the need to join OpenTable’s ‘private club’.

Reasons for Google to act sooner rather than later

OpenTable accounts for 9% of the 700 million dinning sessions that occur in North American restaurants every year. As OT gathers more restaurants, that leads to more diners, and more diners lead to more restaurants… That in itself is motivation to enter the market immediately. Some more business reasons -

It’s the food! Larry Page wants to increase social traffic. Google wants to be the portal for every thing you do, but even they have limited resources. As Google looks at the ‘social markets’ for travel and entertainment, what would be the most productive use of their assets? Which markets are already crowded with mature competition? Which has the most social activity and discussion: flights, hotels, rental cars, movies…or food?

Dining is one of the most social activities. If the cost of dining reservations go down, access would go up along with volume. Google Places traffic could increase dramatically, and it could change from a ‘me-too’ restaurant site to a ‘must-visit’ restaurant site. (Google Places has a dining table as its logo by the way.)

First mover gets all the attention…and compliance. Restaurants are under tremendous cost pressures and OpenTable’s “exorbitant” pricing does not help. Google is sending reps out into the field to help restaurants to fill out their Google Places’ sites and take photos. Restaurants owners have made it clear they would welcome competition and they do not view switching cost as high (Bradley Safalow, PAA Research, 3/3/11).

It’s simple…relatively speaking. Unlike the airline industry which involves up to 26 booking classes and fares that change up to 8 times per day (…and moving seats), the restaurant industry table database would be elegantly simple. Restaurant mangers would enter the number of tables, table size and approximate turn times. The reservation applications that access this information would gather party name, size, time, notes, and contact info. Google’s free Calendar is a much more complex program that this.

OpenTable collects about $600 per month from its average Electronic Reservation Book restaurant customer. There are restaurant reservation systems on the market that charge $50 per month. The OpenTable ERB system does more than reservations. Restaurants also sometimes use its table management features, email and guest preferences. There are applications on the market that do this for much less (mySeat is currently free). Let’s assume in a competitive market, these extra features also cost $50 per month bringing the total to $100 per month. That’s an 80% saving to restaurants!

Restaurants are facing a weak economy and rising costs they can do little about - but something can be done about the cost of online reservations. OT claims in their sales pitch that their system pays for itself with just 3 incremental reservations. But how does it create incremental diners? When a diner logs onto their system, they make a reservation at a place they were already going, or, they select one place instead of another. No new diner is created.

Analogous verticals like airlines and hotels have 50 - 70 percent of reservations made online. OT will take in about $100 million from the US restaurant industry this year with just 9 percent of reservations done online. How much will they make when 50 percent are done online if nothing changes? Most of that money would have been spent on the food, preparation, service and ambiance. These items must either decrease in quality or restaurants must raise prices to pass the cost of an OT reservation to the diner. Most of the dining public does not realize the total cost of an OT reservation is over $10 for a party of four (OT Value & Cost, GLG Research, 3/20/11).

The National Restaurant Association show is coming up next weekend. There is no bigger stage on which to make an announcement like this. Restaurants would like their customer relationships back and would welcome a solution to the OpenTable dilemma. The business reasons and industry support are ready – now we just need a volunteer.

Disclosure: Pro-restaurant industry, pro-diner and anti-monopoly. i.e. I am short OPEN.