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Dough Boys: “I love OpenTable,” says David Steele (center) of the restaurant Flour + Water, flanked here by his partners David White and chef Thomas McNaughton. | Photograph by Toby Burditt

As OpenTable Booms, Who Gets The Dough?

The inevitable push-pull between a platform and its customers.

ONE SATURDAY evening last summer, Steve Jobs and a friend showed up for dinner at Flour + Water, a booked-to-the-rafters pizza-and-pasta place in San Francisco's Mission District. They didn't have a reservation. But it's Steve Jobs, right? There's always a table for a billionaire walk-in. To the delight of a few passersby with cameras, the Apple CEO was turned away. Next time, Steve, use OpenTable.

The online reservations service is a classic network-effect business: Like eBay, PayPal, Facebook, or, of course, Apple's App Store, OpenTable gets better as more people use it. It now accounts for just under 10% of the 700 million dining sessions that occur in North American restaurants every year. In some tech-obsessed regions, such as San Francisco, a quarter of diners use the site. The service is free; OpenTable makes its money by charging restaurants for access to its cadre of savvy foodies. Since the company's IPO two years ago, OpenTable's steeply rising stock price -- its market cap exceeds $2 billion while 2010 revenue was just under $100 million -- has helped it extend its market penetration to more than 20,000 restaurants.

The dark side of networks, though, is the bigger they get, the harder it becomes for everyone in the industry to avoid. OpenTable's growing centrality has begun to stir the pot across the restaurant business. One question wafts far beyond the world of fine dining: What's the ultimate value of a network to the nodes that try to build a business on top of it?

The crux of the debate is that neither OpenTable nor its restaurant clients knows for sure whether the service is actually bringing more people to dinner. OpenTable CEO Jeffrey Jordan concedes as much when I meet him one afternoon in the company's utilitarian San Francisco headquarters. "It's extraordinarily difficult to measure how many incremental diners we're sending to restaurants," he says, "but the majority of restaurants believe we're bringing them more diners."

There are only a dozen tables at Baumé, chef Bruno Chemel's Palo Alto shrine to molecular gastronomy; my wife and I grab one of those coveted Saturday-evening spots with a couple clicks on OpenTable. Chemel says that on a typical night, 65% of his patrons book through OpenTable. Instead of being over the moon about this stream of customers, he says, in his heavy French accent, "When it comes to pay the check every month, I always think, Why do we need these guys?" Restaurants are charged $199 a month for each OpenTable terminal they use for table management and customer tracking, as well as $1 for every diner who books a seat through its site and 25¢ for diners who come through the OpenTable widget on the restaurant's home page. "If we don't have OpenTable, we worry maybe we're not busy. But I'm thinking that if we don't have it, maybe we'll still be busy anyway." If OpenTable wasn't around, wouldn't my wife and I have just called Baumé?

OpenTable's high fees in the restaurant industry's world of slim margins only raise the stakes in the debate. "When I look at other IT systems in my restaurant -- my point-of-sale system, my telephone system -- those take up about 0.1% of my annual revenue," says Mark Pastore. His blog post explaining why he doesn't use OpenTable at Incanto, his San Francisco Italian spot famous for its offal-heavy menu, kicked off an industrywide debate late last year. "OpenTable is going to cost me at least 2% to 3% of revenue." Many restaurants make less than 2% in pretax profits. OpenTable, Pastore says, is eating away at many restaurants' only income. That's quite a feat: Networks, after all, are supposed to shave costs out of a system.

This is the wrong argument, say OpenTable's Jordan and the many restaurants that are fans. As with so much productivity software, OpenTable's value is better judged by considering the savings it creates. "OpenTable has allowed us to streamline our operations in all kinds of ways," says David Steele, the co-owner of Flour + Water, which opened two years ago and only further cemented its hipness after the Jobs episode. With OpenTable, a restaurant needs fewer people to answer phones and keep track of rescheduled reservations. (OpenTable data indicate that one-third of its reservations are booked when restaurants are closed.) "My sense is it saves us $20,000 a year," Steele says.

There are other benefits, too, according to Steele. Flour + Water has gathered extensive profiles on diner preferences and email addresses of 5,000 diners. He and his partners are planning to open a new restaurant, and they see the list as one of their main ways to market their new effort.

Flour + Water is extracting as much value out of OpenTable as anyone, but OpenTable, as with all network-effect businesses, will inevitably be the big winner. By aggregating the world's restaurant goers -- cataloguing their tastes and winning their loyalty through frequent-diner points -- the service has changed the nature of the relationship between eateries and their best customers by inserting itself in the middle. Restaurants that go it alone, or use a rival such as Urbanspoon's RezBook, have to overcome the powerful pull OpenTable has on diners.

OpenTable's next frontier, then, isn't merely extending its service to more restaurants in more locations (though it's doing that too): Its biggest opportunities lie in further exploring its relationship with fans. "If you have a sizable footprint of diners and restaurants, what else can you do with it?" is how Jordan puts it.

Though Jordan won't reveal any future products, OpenTable clearly spends a lot of time thinking about how to create new offerings from the wealth of data it has on all of its diners. Through the reservations and reviews that many diners choose to post, OpenTable knows where people like to eat, how much they like to spend, when they're traveling, and when they're having a special event.

Personal knowledge, of course, is the soul of hospitality, and it's not far-fetched to envision OpenTable prebooking reservations, reminding you to get your act together before your wedding anniversary, and all sorts of other fantastical feats of service that will make even the world's best maître d's seem like fast-food-restaurant managers. You'll love it.

As for the restaurateur who will eat into his margins -- again -- for each one of these services? He's got a touch of indigestion.

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1 Comments

  • Steve Bast

    This was a nice balanced article showing both sides of the OpenTable dilemma.

    As to where this is all going, the last part of the article brings up some key issues. Dining is a social activity and restaurant reservations will be further integrated into the social experience. Companies that are targeting social media hope to help coordinate social experiences so they need to monitor ‘social-inventory’. In restaurants, that means monitoring table inventory.

    So who will be coordinating all this? Someone like Google and/or Facebook….or OpenTable?

    Let’s see, what would it cost Google or FB to replicate OT's reservation function?

    Let's see, construct simple database for holding table inventories, host on cloud server, publish interface specs, send invites to all restaurants to join new system for free. (After all, companies like Google want traffic for selling AdWords, so why wouldn’t they commoditize the reservation to increase access – that is their modus operandi.)

    OpenTable network effect...meet Google's network effect.

    Dilemma solved.