This is the trouble with instant analysis. On Thursday, Google (NASDAQ:GOOG) announced that it would buy Zagat, the “quote happy” publisher of thumbnail “restaurant reviews” with a rating system prone to “grade inflation.” Although Zagat had “struggled” in the smartphone era, an instantaneous consensus emerged that the deal would “crush” the prospects of online-reservation pioneer, OpenTable (NASDAQ:OPEN).
Investors responded by giving OpenTable the kind of bleak rating normally reserved for greasy spoons. By noon, the stock was down 12% from Wednesday’s close, but by day’s end investors seemed to think that was a little overdone. The stock still closed down 8% at $57.50 on six times its average daily volume, and there’s reason to think OpenTable will recover further in the short term.
That’s because, as the day wore on, clearer minds began to look at the deal and see it might not be all it was cracked up to be. Reuters’ Felix Salmon, noting that “Zagat is mainly useful as a source of phone numbers and opening hours” also owns “a massive global print-publishing business; I can’t for the life of me imagine why that’s something that Google wants to get into.”
Google is probably interested in building out a platform where people rate and review restaurants. It’s tried to build its own platform and seed it with users of Gmail and its other services, but that didn’t work. Yelp also rebuffed Google’s attempt at a buyout.
But Zagat offers a global brand and an audience of diners who have been crowd-sourcing Zagat reviews for decades. Google is clearly hoping to plug those readers into the online platform it’s been building.
The trouble is, most Zagat reviewers seem to be loyal to the printed guides. When it comes to online reviews, people are increasingly heading over to Yelp. A story on marketing-news site ClickZ quoted comScore data showing Yelp’s unique users rose 42% to 33.3 million this July from the same month in 2010, while Zagat’s unique visitors dropped 20% to 238,000. So Zagat’s online audience is not only 1/138th as big as Yelp’s, it’s also shrinking.
Shrinking so fast, in fact, that Google appears to have paid less than a third of what Zagat thought it was worth three years ago. In 2008, the Zagat family tried to sell the publisher for $200 million. But TechCrunch’s Erick Schonfeld did some clever math to deduce that Google probably paid less than $66 million for the company.
And even if Google succeeds in turning the Zagat deal into a viable Yelp rival, it won’t necessarily hurt OpenTable. Citigroup’s Mark Mahaney said in a note Thursday he “didn’t believe” Google would openly compete with OpenTable.
“Although Google has thrown a few surprises by us recently, we see it as highly unlikely that Google would want to enter the salesforce-intensive/truck-roll/hardware & software-install Restaurant Reservation business. And even if Google wanted to, OpenTable has built up a pretty powerful network effects business – accounting for approximately 30% of all reservation-taking restaurants and 10% of seated diners in N. America.”
So it’s far too early to say whether Google’s purchase of Zagat will deal a crippling blow to OpenTable. In fact, it’s not inconceivable that OpenTable could benefit in the longer run from this transaction. The OpenTable partnership is a valuable aspect of the Zagat deal: Google can tap into an established restaurant service without having to build one itself.
That’s not to say that the future is sunny for OpenTable. Even before Thursday’s decline, the stock was down 46% from its record high set in June. Revenue growth is slowing. Throughout 2010, OpenTable’s revenue growth rate grew to 61% in the December quarter from 32% a year earlier. But since then, it’s been declining: 59% in the March 2011 quarter and 53% in the most recent quarter.
Between February 2010 and April 2011, OpenTable’s stock rose more than fourfold on expectations that it would continue its torrid growth for some time. OpenTable, after all, managed to get small restaurants online – one of the last e-commerce holdouts. Its IPO was the first after the recession to show that tech startups could find a warm welcome in the public markets.
But the bullish sentiment eventually got ahead of itself, and as OpenTable’s revenue growth slowed, its prospects went from stellar to very good. The decline in the stock in recent months – and on Thursday in particular – has more to do with that adjustment in sentiment than any supposed threat that a Google-Zagat deal seems, for now, to present to OpenTable.
