Is Yelp’s Acquisition of SeatMe Really A Threat To OpenTable?

Late last week, OpenTable’s (NASDAQ:OPEN) shares took a beating over trading when the popular rating and review website Yelp (NYSE:YELP) announced its decision to enter into the restaurant reservation industry with the acquisition of SeatMe. ^[1] The perceived threat to OpenTable’s position as the leader in the online restaurant reservation space triggered a sell-off among investors leading to a decline in share price from almost $67 before Yelp’s announcement to the current price of just above $62 – a 7% fall.

While OpenTable has its fair share of competitors providing similar online reservation and seating management services including Urbanspoon, Livebookings, UReserve and CityEats to name a few, Yelp’s acquisition is believed to hurt OpenTable on two fronts: not only will Yelp’s strong online presence elevate SeatMe to the position of a formidable competitor in the industry but OpenTable will also lose the diners who book tables at restaurants after reading reviews on Yelp using OpenTable’s integrated reservation service.

We agree that with Yelp in the picture, OpenTable will have to work harder to add new restaurant to its customer base as well as to retain its existing customers. But when it comes to the impact of this acquisition on the number of diners seated by the company, we don’t see much of an issue for OpenTable in the future simply because diners booking through Yelp form a really small part of the total number of diners seated by the company over any period.

We stick to our $56 price estimate for OpenTable’s stock for the time being, as SeatMe’s acquisition doesn’t seem to pose a real threat to the company at least in the near future.

See our complete analysis for OpenTable

Founded just two years ago, SeatMe has gained a notable presence in the online restaurant reservation industry by capitalizing the one factor that has been a common complaint among many of OpenTable’s existing and former restaurant customers – high usage costs. Nearly all of OpenTable’s competitors have focused on growing their restaurant base by advertising themselves as cheaper alternatives to OpenTable – something which we have written about on several occasions (see Competitors Look to Topple OpenTable With Low Fees).

That said, OpenTable still remains the undisputed leader in the industry with the company enlisting nearly 50% of all full-service reservation-taking restaurants in North America as its customers. And all these restaurants use OpenTable’s core Electronic Reservation Book (ERB) system which is the company’s main subscription revenue driver.

But as can be seen from the chart above, reservations (and not subscriptions) add the most value to OpenTable’s business. Now OpenTable seated more than 20 million diners in restaurants across North America in Q1 2013. And going by what the company revealed as a part of a presentation this May, partner sites brought in between 5% to 10% of this figure. ^[2] Yelp may be one of OpenTable’s most important partners in terms of diners brought in, but then the company has no less than 600 partners including the likes of Zagat, TripAdvisor, Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO).

So to understand the worst case scenario impact of Yelp’s decision to acquire SeatMe, lets just say Yelp brought in 5% of all of OpenTable’s diners. While clearly an exaggeration, this assumption will help us identify the potential loss in value for OpenTable better. On adjusting the number of North American diners per restaurant to a figure 5% lower over coming years in the chart below, you will see that OpenTable’s estimated share price reduces from $56 to $55 – a mere 2% decline in the worst case scenarios.

Clearly, the market exaggerated the impact of the news on OpenTable by shaving 7% off the company’s value in response. Yelp and SeatMe joining forces is definitely not good news for OpenTable, but it is far from being the end of the world for the restaurant reservation giant.

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1. Yelp To Acquire SeatMe, Yelp News Release, Jul 18 2013 [↩]
2. OpenTable Corporate Presentation, OpenTable Website, May 2 2013 [↩]