New Competition for OpenTable

There's going to be a little more elbowing at the dinner table this summer.

IAC's (Nasdaq: IACI  ) Urbanspoon is testing a Web-based reservation book for restaurants through a handful of Seattle eateries. It plans to go national next month.

Until now, OpenTable (Nasdaq: OPEN  ) has pretty much owned this space. There are niche players, but the networking effect has helped OpenTable become the undisputed champ.

More than 13,000 restaurants worldwide, with most of them in the United States, are on the OpenTable system. They pay to have an electronic reservation book that blends real-world bookings with those delivered through the company's namesake website.

It works, even in the fickle dining world. OpenTable's installed based of eateries has surged by 23% over the past year, with a 43% spike in seated diners.

An upstart that has just five Seattle restaurants onboard in its test system may appear to be no match for OpenTable, but Urbanspoon is no lightweight. With one of the more popular smartphone applications for nearby restaurant recommendations, it has a firm grasp on the Web 2.0 interactivity that's lacking in OpenTable's arsenal.  

OpenTable went public at $20 a year ago, and it's doubled in value since then. But the future may get murky for OpenTable if Urbanspoon begins nibbling at its eatery base.

Urbanspoon's RezBook is cheaper, relying on a simple Apple (Nasdaq: AAPL  ) iPad to get going. Its monthly subscription fees are also cheaper, and it doesn't charge restaurants for online reservations that originated from the eatery websites.

Not that OpenTable's gravy days are over. It has a loyal user base and a solid rewards program to keep hungry patrons close by. However, a brand-name challenger with cutthroat pricing may very well force OpenTable into taking a carving knife to its fees. That may be good news for the 13,000 establishments on OpenTable's system, but it won't be so good for the company itself.

The networking effect isn't foolproof. eBay (Nasdaq: EBAY  ) is a prime example. It had no problem growing its audience because sellers flocked to where the buyers were -- and vice versa. Lower-priced sites never stood a chance. However, when Craigslist crashed the party with completely free classifieds, eBay's marketplace was never the same.

OpenTable also isn't cheap, and that's another problem. It currently fetches more than 50 times next year's projected profitability. It grew nicely during the recession, so it should rock during the recovery, but that's only if Urbanspoon doesn't force it into margin-slashing moves.

Things are about to get interesting here. Competition? Table for two.

Have you ever used OpenTable for a restaurant reservation? Share your thoughts in the comments box below.

OpenTable is a Motley Fool Rule Breakers pick. Apple and eBay are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on eBay. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz owns no shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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