OpenTable's (NASDAQ:OPEN) business model is flawed because their revenue stream is a combination of subscription and reservation revenue. Subscription revenue is hindering market share gains. Given OpenTable's difficulty increasing share, it should drop the subscription fee, or institute a minimal number of seated diners to waive the subscription fee.
If OpenTable reduced or eliminated the subscription fee, its restaurants will undoubtedly increase. By focusing on reservation fees, OpenTable's revenue model would be inline with booking.com where a transaction fee is paid with no subscription cost. Hotels don't pay to be on booking.com, so along that line of thinking, restaurants should not pay to be on OpenTable.
OpenTable has already been moving toward higher reservation fees and lower subscription fees. OpenTable offers a lower subscription fee to international restaurants than domestic, averaging $91 and $203 respectively in Q1. Subscription revenue is currently 30.9% of total revenue. The percentage of subscription revenue to total revenue has been decreasing steadily from 35.8% in Q3 2012. The growth in revenue has been in reservation fees. The reservation revenue stream has been growing faster than overall revenue and currently represents 63.5% of total revenue, up from 55.2% in Q3 2012. The total amount of subscription revenue in Q1 was $16.6 million. This was 1% of the $1.7 billion total Q1 revenue of the combined Priceline ($PCLN) and OpenTable.
OpenTable's expansion has stalled in both the domestic and international markets. The number of international installed-restaurants decreased -1.4% y-o-y in Q1 to 7,721. OpenTable reported 23,862 domestic restaurants up 18.9% over Q1 2013, but the number of subscribing domestic restaurants has barely increased from 23,287 in Q3 of 2013. There appears to be increased competition and push back from restaurants not seeing OpenTable's value.
OpenTable share of restaurants is 3.9% in the U.S. and 0.8% globally. The U.S has 616,008 (npd.com) restaurants and OpenTable has 23,862 subscribing. The EU has 1.7 million (hotrec.eu) restaurants. Assuming all of OpenTable's international restaurants (7,721) are located in the EU, then OpenTable has just 50 bps, 0.5%, of all EU restaurants. Japan has 474,048 restaurants according to kirainet.com. For this analysis, assume Asia has 1.7 million restaurants making the total number of restaurants globally 4 million. This means OpenTable has just 80 bps or 0.8% of all restaurants (31,583 of 4 million).
Finally, assume the U.S. has 1 billion seated diners per quarter. OpenTable reported seated diners at 42.473 million in Q1. Furthermore, assume there are an additional 1 billion seated diners in Europe and 1 billion in Asia. So assume OpenTable's total addressable market is 3 billion seated diners per quarter. OpenTable charged 68 cents per seated diner in Q1 in the U.S. and $1.31 per seated diner internationally. OpenTable's revenue would be market share of seated diners multiplied by the revenue per seated diner.
OpenTable's average revenue per seated diner is currently 73 cents. If the average revenue per seated diner were to stay constant, OpenTable would need to increase share by 80 bps or 0.8% to offset the loss in $16.6 million of subscription revenue. If OpenTable's subscription cost was reduced/eliminated and its value proposition enhanced by Priceline (NASDAQ:PCLN), one has to believe market share would increase by substantially more than 80 bps. If OpenTable were to increase market share to 5% and increase revenue per seated diner to $1, quarterly revenue would increase 3-fold to $150 million.
To meaningfully impact Priceline's quarterly revenue, OpenTable revenue has to be in the $100-$200 million ball park. The upside to this purchase is attractive for Priceline, and the risk of failure appears relatively low. Since Priceline is unlevered and had the entire $2.6 billion in cash to pay for the purchase of OpenTable, I prefer this aggressive approach to increase share both domestically and internationally. This move to higher reservation fees and higher share has the potential to meaningfully increase Priceline's total revenue within 1 to 2 years.
Disclosure: The author is long PCLN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.