VALUE FOR RESTAURANTS

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1 Underlying Value Vision OpenTable (NASDAQ: OPEN) is a provider of online restaurant reservations and restaurant management technology. The company was founded in 1998 and has grown to cover restaurants in cities around the world, having seated nearly 500 million diners in over 25 thousand restaurants since its inception. OpenTable provides services to restaurants and diners through its Electronic Reservation Book (ERB) hardware and software, website, and application programming interface (API). The core underlying value vision provides benefit to each of these parties: Restaurants and Staff Online reservation acceptance capability and web presence Restaurant management software (e.g., reservations, tables in use) Streamlining of customer experience Dining Patrons Ability to streamline restaurant reservation experience online Loyalty program VALUE FOR RESTAURANTS OpenTable offers restaurant operators a full-service reservation management solution that effectively automates host-stand operations. The benefits of automating this process are many and include a reduction in human error (e.g., double-bookings), improved guest administration (e.g., understanding and tracking repeat customer behaviors and preferences), robust reservation management (e.g., automated confirmations and reservation reminders for guests that reduce no-shows ) and simplified ability to analyze restaurant performance (e.g., automated reports that measure efficiency, peak demand, etc.). Historically, host-stand operations have created a headache for many restaurants as customers are calling, ing and leaving voic s to make, cancel or amend reservations. The reservation intake process became increasingly complex when the time required to document specific customer requests (e.g., booster seat for toddler or table by the window), manage varying timeframes (e.g., customers booking day of versus weeks in advance), and/or follow up to confirm customer reservations was added. Inevitably, human errors were prevalent in this process which negatively impacted customer satisfaction and loyalty, while simultaneously increasing the costs to restaurant owners. Additionally, there was an incremental, perhaps unexpected, benefit for restaurants in adopting the OpenTable solution that stretched beyond the realm of operations increased brand awareness. OpenTable enables guests to search restaurants in their area based on availability, location, menu, promotions, etc. which enabled restaurants to connect with diners who might otherwise never have visited.

2 Still, adoption of OpenTable has been relatively slow in many restaurants because it is a service that needs to be sold door-to-door. 1 The hoteling and transportation (airplanes, trains, buses) industries have centralized and large corporate providers taking reservations whereas the restaurant industry remains largely fragmented and privately owned. VALUE FOR CUSTOMERS Customers should be considered in two segments the reservation-makers and the diners. While these two groups typically overlap, it is important to acknowledge that they need not. OpenTable provides a tangible benefit for both groups by making the reservation request and confirmation process seamless. Reservation-makers simply need an awareness of the OpenTable product and access to a computer (or tablet, smartphone, etc.) to get started. Reservation-makers benefit from the convenience of being able to see all of the available reservation times at the restaurants of their choice, never being put on hold by a host after calling and having the freedom to book outside of the hours of operation for a restaurant. Moreover, the process is exceptionally efficient for reservation-makers as they need not provide (or reenter) their contact information after creating an account. Additionally, a simple confirmation (and, if desired, calendar invitation) replaces the need to trade phone calls to ensure that the restaurant has a record of your reservation. For diners, the benefit of OpenTable is perhaps less obvious. OpenTable provides diners with an improved piece-of-mind that their reservation was recorded correctly and includes any of the special requests that the reservation-maker entered at the time of booking. For instance, there is now a written record that can be referenced by restaurant staff to ensure that diners get their table by the window. OpenTable Ecosystem Map RESTAURANTS Management: Includes restaurateurs and general managers who own and/or oversee the day-to-day operations of their restaurants. This group would be the one responsible for making the decision around whether to adopt OpenTable and, ultimately, be the group that signs the invoice. This group likely understands the inefficiency associated with the traditional (manual) reservation intake process but also appreciates the need for human-to-human correspondence. Overall Assessment: GREEN LIGHT Staff: Hosts (or equivalent restaurant workers) who manage reservation intake process by corresponding with customers and ensuring that demand (i.e., number of reservations) does not exceed supply (i.e., number of available tables). This group is at the forefront of the traditional reservation process and understands the responsibilities (e.g., booking the initial reservation, accommodating specific customer requests, managing cancelations and/or confirming reservations), time commitment 1 It s time for OpenTable to think about diners (

3 and downside risks (e.g., double-bookings, mistakes in recording a reservation and/or failure to document special requests) associated with the traditional, manual intake process. That said, while OpenTable solves for many of these challenges, the OpenTable solution effectively relieves hosts of a large responsibility in their current role by effectively replacing them in the reservation management process. In the process, the host relinquishes a degree of control over accepted reservations which ultimately creates a disconnect between the reservation intake process and the person that greets/seats customers, which can decrease value within a small business transaction. Overall Assessment: YELLOW LIGHT CUSTOMERS Reservation-makers: The customers or parties responsible for contacting the restaurant to make a reservation. This group can be the diners, but does not need to be. This group is familiar with the constraints of the traditional reservation process which involve time-consuming, back-and-forth correspondences with restaurant staff and repeatedly supplying personal contact information. Still, some reservation-makers prefer interacting with a human when booking a reservation because, while inefficient, it offers an increased peace of mind that their reservation was recorded correctly. In general, the OpenTable solution significantly increases the efficiency and accuracy of the reservation management process for reservation-makers while simultaneously allowing them to search/compare a pool of restaurants in their neighborhood of interest. Overall Assessment: GREEN LIGHT Diners: The customers for whom the reservation was made. Typically, an accurately recorded reservation represents the start of the diners customer experience and is typically taken for granted. Said differently, if the restaurant makes a mistake with a reservation, this can send the diners entire experience at a restaurant into a tailspin. As such, an accurately recorded reservation is paramount (albeit table stakes ) in ensuring a positive customer experience for diners. The OpenTable solution certainly increases the accuracy of reservations thereby benefitting diners. Overall Assessment: GREEN LIGHT SOFTWARE DEVELOPERS This is the group responsible for creating the OpenTable ERB software and ensuring that it is a scalable, usable solution for restaurants everywhere. Additionally, these developers must ensure that their software and systems are supported by existing (external) hardware. Given that the OpenTable product is a software solution which streamlines a job traditionally performed by restaurant staff, OpenTable s prevalence and success clearly benefit this group. Overall Assessment: GREEN LIGHT OPENTABLE SALES / MARKETING This group is responsible for communicating the value proposition of the OpenTable software to restaurants and generating demand for the product. Representatives must be intimately aware of the pain points in the traditional reservation management process for restaurants and able to

4 communicate how seamlessly OpenTable can be integrated. While this group is customer-facing and critical in the sales and restaurant adoption process, their role is relatively straight forward so long as they can articulate the key selling points of their software to restaurateurs by addressing their key concerns. Overall Assessment: GREEN LIGHT HARDWARE SUPPLIERS This constituency is comprised primarily of 3 rd party suppliers who supply restaurants with their computer technology. The OpenTable software creates a solution that changes (and potentially complicates) the technology requirements for restaurants. Prior to OpenTable, many smaller restaurants did not even need a computer staff simply fielded customer phone calls and recorded reservations in a notebook. The more tech. savvy restaurants had computer systems that supported basic scheduling programs and, perhaps, internet to receive online reservation requests. A move to accommodate the OpenTable software potentially added significantly more complexity to the demands on a restaurant s technology hardware. Overall Assessment: YELLOW LIGHT SERVICE / OPS SUPPORT As restaurants become more reliant on computer-based systems in order to manage their reservation systems, they have to become acquainted with possible failings of their newly acquired information technology. A new actor is therefore necessary within the ecosystem that is called upon to fix problems that arise with the hardware and software. This new member of the ecosystem provides a complication for the adopters of the new technology as their previous dealings with technology was limited to mechanical issues arising from the kitchen. As the business becomes reliant on the technology, OpenTable becomes the provider or contractor for technical issues arising from the new complication. Overall Assessment: YELLOW LIGHT RESTAURANT SALES / MARKETING Participation in OpenTable provides new marketing opportunities for restaurants. These small businesses now become members of a network of other restaurants and party to OpenTable s loyalty program. Furthermore, OpenTable offers marketing opportunities in the form of targeted messaging, the aforementioned points system, the Treatful gift website, and the promotion of special events. Furthermore, OpenTable allows diners to make reservations at any time that is convenient rather than restaurant business hours. While many of these seem like enhancements, the usage of the tools provided by OpenTable to its network of restaurants does add a complication to the operations of the business. Restaurateurs relied primarily on reviews, word of mouth, and other small scale promotions. They now have an entirely new network to manage in order to compete within a local marketplace. This provides new opportunities but also added complications to the calculus of the restaurateurs business. Overall Assessment: YELLOW LIGHT STRATEGIC PARTNERS

5 OpenTable works with the major search engines (Google, Yahoo, Bing, etc.) as well as other travel service providers and social media platforms (Zagat, tripadvisor, Yelp, etc.) in order to complete the ecosystem with other points of contact with potential customers. These sites are encouraged to adopt the OpenTable application programming interface (API) on the site. A sample transaction in a partner s ecosystem would a customer s desire to find a well-recommended restaurant through a search engine query or targeted search on a specialized website. The adoption of OpenTable provides a more integrated approach and allows the customer to seamlessly close the transaction with little to no additional complication. Overall Assessment: GREEN LIGHT Assessment of the Strategy to Align the Actors OpenTable has used a number of levers to reorganize the ecosystem in which it operates, extracting extraordinary value while encouraging all of the important players to remain a part of the ecosystem. RESTAURANTS Restaurant management software OpenTable identified broken links in the adoption chain, giving away some of its total value opportunity in order to allow for adoption of its restaurant management solution. Specifically, OpenTable opted to allow restaurants to input reservations manually (e.g., those received over the phone) at no incremental cost. On the one hand, OpenTable has foregone the opportunity to charge anything for inputting reservations that come through other channels; on the other hand, by allowing manual entry of reservations rather than simply providing restaurants with a list of reservations made online, OpenTable has more deeply integrated itself into restaurants operations. In its early days, OpenTable was able to position its competition as phone/pen/paper reservations systems, and the split fixed-variable cost model made sense to restaurant customers. Network effect As OpenTable has grown its network city-by-city, country-by-country, restaurants have found themselves at an increasing disadvantage if they avoid joining OpenTable. OpenTable is everywhere that restaurant patrons are across platforms on the web, tablet, and mobile phone. In cities ranging from San Francisco to Manchester, NH, the OpenTable network is sufficiently large that a diner could begin and end her restaurant search directly with OpenTable, never even considering a restaurant that has not bought in. The high mobility of OpenTable s target customer base also helps tie local networks together, much as Bell connected its short-distance networks over time, as San Francisco-based OpenTable users travel to Boston, for example, and use the OpenTable app to find a restaurant there. Anecdotal internet searches indicate some restaurant owners feeling trapped by the OpenTable ecosystem, resenting the cost of participation but fearing the revenue decline of abandoning the system.

6 Targeted demand control Restaurants may use OpenTable to emphasize hours of increased availability, receiving a web presence that provides real-time availability information whenever customers want it, including after hours. Moreover, restaurants may pay OpenTable extra ($7.50 vs. $1) to provide additional loyalty points during periods of low demand a better value proposition than daily deal sites such as Groupon, which do not allow restaurants to adjust offers to demand once they are issued. DINING PATRONS Loyalty program OpenTable uses a customer loyalty program to encourage diners to participate in its system. For most completed reservations, OpenTable offers diners a $1 rebate, in the form of a gift check redeemable after 20 dines. Specifically, this encourages diners to: Reserve through OpenTable (as opposed to directly with the restaurant) even when they know exactly which restaurant they plan to patronize Reserve through OpenTable (as oppose to arriving without a reservation) even when they are confident the restaurant will not have a wait Prefer OpenTable over other online sources of restaurant information when OpenTable s offering exceeds diners minimum requirements Furthermore, the program shifts customers loyalty from individual restaurants to OpenTable and its broader network. Conclusion OpenTable is a perfect example of how the internet has been allowing local services to flourish. This is akin to the growth of businesses such as Craigslist, Uber, and Angie s List that allow local and traditional businesses to use the internet as marketing tool in similar fashion to larger corporations. Furthermore, the company successfully leveraged the service of providing ease for its end customer (the diner and reservation-maker) to encourage a small fractured market to adopt a new technology that is currently seen as indispensable by many restaurateurs. The inclusion of the hardware in its services enabled OpenTable to circumvent the original technological hurdle (the lack of a computer terminal in the restaurant) and enabled it to increase its subscription base. This strategy harkens back to Bloomberg s first strategy of selling the individual terminals to financial institutions. As banks and trading companies continued to pay the high subscription fee, the physical terminals became redundant to the users due to the proliferation of the PC at these companies. Yet, they had become so reliant on the interface that Bloomberg provided and the ecosystem that the company created that the high subscription fee remained in place. OpenTable seems to be using a similar strategy in the formation of its ecosystem. As technology becomes more present in these small businesses, restaurants have become reliant on the reservation ecosystem provided by OpenTable through its own site, partnerships with the restaurant

7 site, and the strategic partners that the subscription fee is likely to remain, even when the physical terminals eventually go away. Interestingly there have been many testimonials of restaurants that they are trapped by the OpenTable system because the businesses are now highly reliant on the new ecosystem in order to operate. OpenTable has created a successful ecosystem through the permeation of technological advancement in a highly disconnected environment, using the promise of a network to encourage these usually private businesses to embrace a much more public medium to attract and retain customers. OpenTable Ecosystem Map Hardware Providers External providers of computers, etc. where OpenTable software operates Reservationmakers Restaurant Staff Software Developers Create OpenTable Software and ensure compatibility w/ hardware Service Support / Ops Platform / Service OpenTable solution for customers on OpenTable.com as well as restaurant websites OpenTable Sales / MKT Ensure restaurant and end-customer adoption of OpenTable solution Customers who make the reservation (may be different from diners) Restaurants (Ownership) Own restaurants, sign up for OpenTable service Hosts or equivalent that answer calls / s and manage reservations Restaurant Sales / MKT Staff responsible for attracting new customers to restaurants Diners End-customers for whom the reservation is made Handle installations and maintenance of OpenTable Software OpenTable Partners Advertisers, restaurant review companies, menu aggregators, etc.