What media companies could learn from OpenTable.com

UPDATE: OpenTable successfully sold 3 million shares in its initial offering Thursday at $20 a share–well above its target range of $16 – $18. The shares closed up nearly 60% in their first day of trading, to $31.89.

We’re a long way from the heady days of a decade ago when justaboutanything.com could go public almost before it launched and in spite of having no profits, few assets and no idea how to make money.

Good times.

But there is a dot-com IPO set go off today–the first for an American company this year on the NASDAQ. It’s calleld OpenTable.com and it lets people book tables online across a network of 8,000 member restaurants. Unlike its ancestors, however, OpenTable actually makes money: $6.7 million in the U.S. last year on $39 million in revenue, a 17% bottom line.

Normally, thopentable_logoe restaurant business would not fall within the majesterium of The Media Wonk. But in this particular case I think there’s a lesson to be taken by those seeking to monetize content on the Web.

The default business model for a company such as OpenTable would be to make it free to restaurants and customers and then sell ads (probably to restaurants) against the number of users it attracts–essentially the Hulu model. But OpenTable doesn’t do that. Instead, it charges restaurants a one-time installation fee for its reservation software and hardware and a monthly subscription fee to remain in the network.

It also collects 25 cents per diner who books a reservation through the restaurants own site and $1.00 per diner if they book directly through OpenTable. The average restaurant pays OpenTable $515 per month in subscription and booking fees.

The average restaurant in the OpenTable network handles 345 reservations per month. Of those, 43% come through the restaurant’s own site. But 57%, or 197 per month, come through the OpenTable site. In effect, the restaurant is paying OpenTable $515 per month for 197 new customers, or $2.61 per new customer.

I don’t know much about the restaurant business but that would to be a pretty fair deal all the way around.

How is this relevant to media companies? Because it demonstrates that giving your content or service away for free and selling ads against it is not the only viable business model online. In fact, I’m not sure that even is a viable model in most cases.

OpenTable, though targeting consumers, is essentially a B2B play. It charges restaurants for the ongoing use of a utility the restaurants can leverage to generate new business for themselves. It’s critical metric is not CPM but ARPU, Average Revenue Per User. And the critical transaction is entirely transparent to the consumer.

Unlike advertising revenue, moreover, which can wax and wane according to the fortunes of your advertisers, revenue from subscriptions, specially B2B subscription, tends to be fairly stable and highly predictable.

I’ve argued before that media companies need to think much harder than they have about the application layer in publishing on the Web. The Web has not been particularly kind to publishers. CPMs are low compared with broadcast or even print. And to maintain even those low CPMs publishers must fight a constant battle to maintain a measure of exclusively, against copyright pirates, aggregators, search engines and other utility providers.

What’s more, its those utilities that are actually providing value to the user, and they usually end up capturing the lion’s portion of that value (whether by appropriating it for their own purposes or selling their own ads against it).

But what if a media company acted more like OpenTable.com? What if, instead of trying to monetizing their content directly through advertising, they built a utility that others could use to develop their own businesses around that content (search, aggregate, mash up , share, embed, wiki, etc.) and charged those developers for the ongoing use of the utility, plus a piece of the action from the business they generate.

For traditional media companies that would be a very different way of thinking about monetizing content. But show me an example where the traditional methods have produced the same sort of win-win-win seen among restaurants, diners and OpenTable.com.

2 Comments

  1. While I’ve used Open Table before, on a business/pleasure trip to NYC, I’m not sure I can wrap my head around the concept of applying this model to media consumption.

    It’s one thing to plan ahead and lock up a table for three at Gild Hall or Tavern on the Green, but where’s the bottleneck to getting a hold of “Mad Men” season 2 episodes or “Benjamin Button”?

  2. Geezer–It’s not a question of bottlenecks so much as the value chain. When you use OpenTable, you’re creating value that is ultimately captured by the restaurant when you dine there. Instead of letting the restaurant capture all of it, however, OpenTable is able to claim a fair share of the value it helped create by charging the restaurant to be part of the service.

    If I ran a record company, I’d put my entire catalog behind an API. Then I’d say to device makers, social networks, applications developers and anyone else who wanted to offer my music to their customers: Here’s the API that will let you access my catalog and here’s how my meta-data are organized. Go build any device, application or service you want (within reason) around my API and monetize it however you want. I’ll charge you an ongoing fee for the continued use of the API, and probably a piece of any new business my music helps you create for yourself.

    That way, instead of complaining about other people “building a business on the back of my content,” I’m helping them build their business and taking a cut of the new value that gets created. — TMW

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