OpenTable, A Web 3.0 Case Study

One of the decade’s major trends in vertical and local Web that I identified earlier was the growing importance and popularity of high-quality, specialized, niche content. OpenTable (NASDAQ:OPEN), the online restaurant reservation solution provider, seems to have fully understood this trend and how to take advantage of it.

OpenTable’s Business Model
OpenTable was founded in 1998 by Chuck Templeton to link restaurants’ software systems to a central reservation website for diners. Today, the organization has done a lot more than that by serving both restaurateurs and diners effectively. Recently, the company seated its 200 millionth diner, making it one of the leading providers of free, real-time online restaurant reservations, with operations in the United States, Canada, Germany, Japan, Mexico, and the United Kingdom.

OpenTable helps diners to make reservations either through its own website or through a restaurant’s website. Additionally, its Electronic Reservation Book solution helps to replace the pen-and-paper system at the host stand, manage tables and reservations for client restaurants, and keep track of guest demographics for targeted marketing campaigns. Further, the OpenTable website helps diners search for available tables that meet criteria such as choice of cuisine, meal desired, location, or price. Diners can make reservations through OpenTable’s website and through its popular smartphone application.

OpenTable earns revenues primarily through a monthly subscription fee and diner reservation charges. A restaurant can sign up for OpenTable’s services at a listed rate of $199 per month. Further add-on licenses and modules are priced from $25 to $89 per month. For reservations made through the OpenTable system, the company levies a per-diner charge of $1. It charges $0.25 per diner for reservations made through a restaurant’s website.

Recently, OpenTable diversified to other revenue sources. Its Groupon-like service, Spotlight, offers localized discount deals for restaurants. OpenTable keeps a 50% share in the deal value as its revenue. The service is estimated to be operating at an annual run rate of $6 million in revenues.

Other new sources of revenues include Open Connect, a Web-based service that accepts reservations for restaurants that do not have their own reservation system; Private Dining, which lets restaurants book private rooms and helps diners find event venues; and advertising. Citigroup pegs the global online restaurant advertising business at $2.8 billion and estimates that OpenTable will own 2% of this market by 2015.

OpenTable’s Financials
In the recently announced results, OpenTable’s Q4 revenues increased 61% over the year to $30.8 million, exceeding the market’s expected target of $30.2 million. EPS of $0.33 was also higher than the Street’s targeted $0.11.

By service segment, subscription revenues grew 21% over the year to $11.6 million, driven by the increase in installed restaurants using the Electronic Reservation Book solution. Reservation revenues grew 80% over the year to $15.4 million. Revenues from installation and other services grew 274% over the year to $3.8 million. The company ended the year with an installed base of nearly 20,050 restaurants worldwide, representing 62% growth over the year.

For the full year, revenues increased 44% to $99.0 million with EPS growing from $0.33 a year ago to $0.87.

OpenTable’s Expansion
Last year, OpenTable acquired toptable.com, a UK-based reservation website, for an estimated $55 million. The company is counting on toptable’s presence in the UK to help expand its international operations. Toptable.com’s network included 3,000 restaurants in the UK and 2,000 in Europe.

OpenTable has also focused on expansion through smartphone apps. The OpenTable app is available for the iPhone, Palm, BlackBerry, and Android phones. It has also tied up with multiple partners to help direct traffic to its site. Zagat, the online restaurant rating guide, was the first mobile website to link to OpenTable’s mobile service and let Zagat users book instantly through OpenTable’s app. Other partners include Google, Yelp, and Yahoo!, to name a few. Recently, TheStreet.com rated OpenTable’s app among the Top 5 apps for Valentine’s Day for its simple and neat user interface. Last quarter, 10% of OpenTable’s reservations were made through its mobile application, representing 189% growth over the previous year.

The stock is trading at a record high of $102.93 , close to its record high of $104.40, reached March 29, with a market capitalization of $2.4 billion. A year ago, the stock was trading at a 52-week low of $35.58.

Despite this strong performance, analysts have been worried about OpenTable’s long-term success. According to the National Restaurant Association’s 2011 Restaurant Industry Forecast, the U.S. has more than 960,000 restaurants. OpenTable claims to have an installed base of fewer than 14,000 restaurants, or about 1.45% of the country’s total. To me, however, this says that they have a strong total addressable market in front of them, and if less than 1.5% market penetration can build a $100 million company, imagine what 10% penetration would do. Also, I believe that OpenTable knows how to leverage niche content, commerce, vertical search, and personalization (my definition of Web 3.0) to build a valuable business model. It is also successfully diversifying into other countries and business streams to ensure that revenues continue to increase. Finally, the Groupon-like marketing services add yet another dimension to its business model. The stock is quite bloated, but the company is good, solid, and will continue to grow.