Why OpenTable Might Get Diced and Burned

Restaurateurs hate OpenTable (OPEN). Complaining of high fees, restaurant owners have yearned for an alternative to the popular reservation platform. Lucky for them, they've found a viable, new partner in Scripps Interactive (SNI) over the past few months. Is it too late for OpenTable? Not yet. OpenTable's network and technological strides may help it stay at the head of the table.

Why OpenTable reigns
OpenTable is far and away the market leader in the online reservation space. Since its launch in 1998, the company has built a network of approximately 25,000 restaurants across the world, with 17,000 located in North America alone.

OpenTable helps restaurants streamline operations. David Steele, owner of Flour + Water in San Francisco, says that OpenTable has reduced the time needed to schedule reservations, but it has also helped him gather diner preferences and email addresses of over 5,000 diners. Recognizing the increasing trend toward mobile, OpenTable has just announced that it will offer restaurants mobile-friendly websites for free until Jan. 31, 2013. After that period, sites will cost only $108 a year.

OpenTable has further strengthened its market position by creating an incredible ecosystem for consumers. Since September, the company's iPhone app is the only reservation app that interfaces with Apple's Siri to function by voice. Moreover, the company teamed up with mobile-app start-up Foursquare to provide easy in-app reservations -- no phone call necessary. Finally, OpenTable restaurants have garnered 15 million reviews in about four years; for comparison, Yelp (YELP -1.04%) has 30 million reviews in eight years. As OpenTable continues to grow its reviews, users will have even more reason to use its service.

In all, OpenTable seems to provide the full course of options for both businesses and consumers. The company continues to get stronger financially as well.

Source: 10-Ks for 2009-2011.

Although net margin increases have slowed a bit, the company is still in its growth stages. OpenTable's revenue and free cash flow show that the company has found plenty of dining rooms to serv, while continuing to eke out operating efficiencies.

Why restaurants are switching to competitors
Surprisingly, OpenTable -- the company that made the online reservation industry -- has captured only 30% of the market. That may owe to the four fees OpenTable charges its restaurants:

Sources: MonkeyDish, Quora, and The Motley Fool. Reported prices are general and subject to discounts.

Make no mistake, these fees add up. Just ask Dean Gold, a chef and owner of a Washington, D.C. restaurant. The Washington Post reports that he pays OpenTable $2,000-plus a month during his busiest seasons. For years, restaurant owners like Gold were unable to find an alternative booking system. Not until Rezbook and CityEats entered the market did restaurateurs take notice.

Rezbook entered with a significant competitive advantage -- it's part of Urbanspoon, which is, in turn, owned by IAC/Interactive Corp (IAC). With these internal partnerships, Rezbook can claim its stake as a legitimate competitor. Moreover, Urbanspoon boasts that it is more diner-focused. By drawing users to its aggregated 20 million reviews -- which includes blog posts from around the web -- Rezbook helps restaurants find curious foodies unsure of where to dine. Combined with its own smartphone app, Urbanspoon's slight differentiation has helped Rezbook seat 1 million diners per month.

Under the umbrella of Scripps Networks Interactive's (SNI) The Food Network, CityEats may be the best dish. Though the company hopes to build a multimedia site that seems just as focused on diners as it is on restaurants, CityEats wants to take on OpenTable directly. In less than a year, the company moved beyond its two-city test to operating in five.

Of course, there may be more options soon. Recently, Groupon (GRPN 8.21%) acquired reservation site Savored. And LivingSocial, which received a $150 million investment from Amazon, has moved into the food space as well. Although Dean Gold ultimately stuck with OpenTable, he nonetheless tried out and found CityEats' capped his monthly fees enticing (he'd pay at most $750 a month)."

Can OpenTable take the heat?
OpenTable is about to get served if it doesn't put its best plate forward. IAC/Interactive's Rezbook and the Scripps Network's CityEats have done a great job stealing OpenTable's customers by leveraging their brands and dictating cheaper pricing terms. Still, OpenTable has a bit of wiggle room. Unlike its competitors, OpenTable is a pure online reservation company. The result is a more focused organization that can better anticipate changes like mobile and make the strategic decisions needed to help drive more customers to its restaurants.

Together, the company's top-dog status and ecosystem should help OpenTable remain seated at the helm. If OpenTable's margins begin to slip, then it may be time to unseat this investment from your portfolio.