Quick Thoughts: Zagat – Great for Google, Tough for Yelp, and No Problem for OpenTable

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Given the slight uptick in Google shares on an otherwise down day, the early reviews on the company’s acquisition of privately held Zagat are positive.  We agree – combining Zagat’s comprehensive user ratings and reviews of restaurants and other local businesses in more than 100 cities in 25 different countries with Google’s integrated maps/places application suite multiplies the value of both franchises.  By tying search, maps, navigation, and place information with detailed, trusted reviews, Google extends its advantage in location aware internet services, becoming a one-stop electronic concierge for mobile web users.  At the same time, Zagat’s relationships with local restaurateurs and merchants enhance Google’s play into local advertising in ways that could prove to be far broader than “daily deals”.

Zagat was a pioneer in user generated content, launching in the pre-internet era as a spreadsheet based compilation of New York City restaurant ratings.  However, the company’s insistence on maintaining high subscriber fees for its content proved a liability as free, advertising supported rivals like Yelp, Trip Advisor and Urban Spoon siphoned on-line traffic.  Google will almost certainly shift to an advertising supported model, leveraging the strong recognition, reach and reputation of the Zagat brand and its iconic burgundy colored guides to punish the upstart competition.  Interestingly, until recently Google had included reviews from Yelp, Trip Advisor and Urban Spoon in its “Places” listings, but eliminated them in response to pressure from these sites.  Now these companies face irrelevance as Zagat will fill their place as the default ratings and reviews on Google’s increasingly popular application.

Investors responded to the Google Zagat tie up by pounding the shares of on-line restaurant reservation leader Open Table.  We do not see this as justified, as OpenTable’s business is not easily replicated, even by a Zagat enriched Google.  OpenTable sells an entire reservation system to its restaurant clients, including on-site hardware and software installation.  With 37% penetration into US full service restaurants, we believe that OpenTable has established both critical mass and barriers to competition.  For this reason, we added OpenTable to our small cap model portfolio last night, before today’s announcement dropped a first day 8.3% decline on our plate.  We expect that OpenTable will collect a sharply growing stream of click-throughs from Google Places as this market matures, but will monitor the situation closely.

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