Should Facebook Or Amazon Disrupt The Restaurant Reservations Industry?

Reservations are expensive for restaurants. Can something be done about this? If so, who’s up for the challenge?

Photo credit: Eater

• Jamie Mah @grahammah

About a year back, I remember reading a column on Eater stating that Danny Meyer’s Union Square Hospitality Group** was leaving OpenTable for Resy. At the time, I didn’t think much of this development. I assumed — as I’m sure you are now as well— what difference does it make which reservation platform a company uses?

OpenTable?

Resy?

How different can they be?

That was until recently when I noticed a growing trend of local and global restaurant groups jumping ship to alternate reservation platforms, Tock being a new upstart in this field. This got me thinking about that Eater article, which I subsequently re-read. I was dumbfounded I hadn’t clued into the costs of reservation platforms, even though the numbers had been spelled out rather clearly before my eyes. For some reason they just didn’t stick at the time.

**Danny Meyer is one of the biggest restaurateurs in America. He wrote Setting the Table in 2006.

Nevertheless, after my re-read, I sat in my seat for a long while, wondering why such a high cost never bothered me before. After a few minutes, I concluded that part of me just assumed that the costs paid out by restaurants for services such as OpenTable or Resy were just par for the course, much in the way glassware or rent are just part of doing business. Here are some numbers for you to help clarify the issue.

• OpenTable was founded in 1998. It has a two-tier plan for restaurants in Canada. Their basic model is called Connect. It has no monthly fee, but you pay $2.50 per network cover. Then there’s Guest Center, their premium model, which has a $279 monthly fee + $1.25 per network cover. In Vancouver, there are 233 restaurants using their service. Notables are Osteria Savio Volpe, Botanist, Wildebeest, Glowbal Group, Earls and The Keg.

• Resy was founded in 2014 by entrepreneurs Gary Vaynerchuk and Eater co-founder, Ben Leventhal. Resy offers a three tier package for restaurants, ranging from $249 per month to $899 per month. No charge per seated cover. In Vancouver, there are just 12 restaurants using their service. Notables are St. Lawrence, Como Taperia, Royal Dinette, Annalena and Burdock co.

• Tock was founded in 2015 and is co-owned by Chicago restaurateur Nick Kokonas (Alinea, Next). Tock offers two different plans for restaurants: The first is $199 per month plus a three percent fee for prepaid reservations, or a flat $699 per month. In Vancouver, there are nine restaurants using their service. Notables are: The Mackenzie Room, Say Mercy, Vij’s Rangoli, Bauhaus, Cuchillo, and Ancora.

It became clear. The field of restaurant reservation platforms was changing. OpenTable’s grip was weakening. New players were emerging. Capitalism at its finest. Not much more to ponder here. However, a week later I was still coming back to one number in that Eater article. I couldn’t get it out of my head. $30,000.

Thirty freaking thousand!!

“For Anderson, the technology behind the various platforms isn’t a concern: “Anybody that uses a smartphone is going to be able to use [the OpenTable terminal] just fine. Their customer service has been certainly passable if not good,” he says. Rather, it’s about cost. “It’s just incredibly expensive. Our restaurants are small, and we’re spending $30,000 a year at Boulevardier and Rapscallion on OpenTable. When people ask ‘Why is your burger $16?’ I want to show them my monthly bill from OpenTable.”

Anderson believes the reigning reservations king will at some point have to reconsider its pricing: “I’m no economics forecaster, but it seems like eventually OpenTable will have to change their business model or they’re going to lose a significant amount of market share to Resy and other similar platforms,” he says. “At some point, $1,500 a month for a tiny restaurant to get reservations is just outrageous.”

Reservations are the foundation for many restaurants. They’re a needed service. However, the platforms they use to implement this service are replaceable. With that, I have two suitors whom I believe could easily start snatching away market share: Amazon and Facebook.

Okay, so before you roll your eyes, I want you to hear me out. These two behemoths, as big as they are, could easily help fix the reservation industry. By fix, I mean get rid of those outrageous costs.

First, they are two of the most powerful and profitable companies in the world and their use and reach in our daily lives has become as ubiquitous as drinking coffee in the morning. It’s come to a point where we almost need them more than they need us.

Secondly, they both have the platforms needed to facilitate what reservation platforms already offer. Facebook, or more specifically, Instagram, could easily integrate a reservation service into their existing model. Restaurants already use both Facebook and Instagram as landing pads for their press releases and photos. Adding an option for users to book a table shouldn’t be that difficult. The way I see it, it’s like going to a grocery store that offers food and alcohol. If I’m planning on making dinner tonight, chances are I’ll want to have a bottle of wine as well. Having both options in the same space makes sense, not only from a convenience standpoint, but also from a business perspective. Why send me someplace else?

When I first went to a Whole Foods in Austin, Texas a few years back and saw their massive alcohol section, part of me was floored. I thought it was amazing. I was also peeved that this wasn’t more of a thing here in Canada. Not to go knee-deep into the politics of government-run monopolies and how poorly run they are, which will only get me more angry and frustrated, seeing this model (food and alcohol in the same space) only helps to highlight the obvious advantage Facebook has in their own sphere. They already have the user base (currently 2.45 billion) as well as a built-in network of data they could tap into and share with participating restaurants. But most importantly, what makes this idea such a great opportunity for them is that restaurants ARE ALREADY USING THEIR PLATFORM!!!!

Instead of charging restaurants for the use of their added “reservation service” they could sell the information they gather the same way they already do with their current advertising model. In doing this, Facebook gains another revenue stream while restaurants gain access to a new reservation platform — free of cost! One they were already using, anyway. Win-win for all involved, but especially for restaurants looking to cut costs and grow profitability.

Again, that number: $30,000. We need to get rid of it or at least drastically reduce it.

As for Amazon, well they have AWS (Amazon Web Services), the mammoth cloud computing service they offer to individuals and companies as a hub for business growth platforms. They also own Whole Foods. Jumping further into the food market with reservations wouldn’t be that far off brand. Amazon has the reach, the capital, and the scalability to make this happen. And they have Jeff Bezos, one of the smartest men ever in tech. (His shareholder letters are the stuff of legend.)

But to comprehend how they would do this, you first have to understand what made Amazon so successful in the first place: their superior user experience. They leveraged the sale of books through e-commerce then via e-books in a seamless way, which made their ability to integrate customer data and payment information a desired choice for consumers. From there they scaled up by eventually selling us everything. Here’s a reference from tech writer Ben Thompson discussed this idea a few years back on his blog, Stratechery:

The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. In the pre-Internet era, the latter depended on controlling distribution. (This was OpenTable’s initial advantage, they started at the dawn of the Internet. Other options outside of calling, didn’t exist just yet.)

For example, printed newspapers were the primary means of delivering content to consumers in a given geographic region, so newspapers integrated backwards into content creation (i.e. supplier) and earned outsized profits through the delivery of advertising. A similar dynamic existed in all kinds of industries, such as book publishers (distribution capabilities integrated with control of authors), video (broadcast availability integrated with purchasing content), taxis (dispatch capabilities integrated with medallions and car ownership), hotels (brand trust integrated with vacant rooms), and more. Note how the distributors in all of these industries integrated backwards into supply: there have always been far more users/consumers than suppliers, which means that in a world where transactions are costly owning the supplier relationship provides significantly more leverage.

The fundamental disruption of the Internet has been to turn this dynamic on its head. First, the Internet has made distribution (of digital goods) free, neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. (OpenTable) Secondly, the Internet has made transaction costs zero, making it viable for a distributor (Facebook) to integrate forward with end users/consumers at scale.

This has fundamentally changed the plane of competition: no longer do distributors compete based upon exclusive supplier relationships, with consumers/users an afterthought. Instead, suppliers can be commoditized leaving consumers/users as a first order priority. By extension, this means that the most important factor determining success is the user experience: the best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle. (Amazon)

The result is the shift in value predicted by the Conservation of Attractive Profits. Previous incumbents, such as newspapers, book publishers, networks, taxi companies, and hoteliers, all of whom integrated backwards, lose value in favor of aggregators who aggregate modularized suppliers — which they often don’t pay for — to consumers/users with whom they have an exclusive relationship at scale.

The last part is the key point I’d like you to remember. Both Amazon and Facebook have unique aggregate models. They also provide superior user experiences. It’s why they’re so valuable and why we can’t quit them. Amazon has flexed mightily in this regard over the last few years, even taking massive losses in the process so they can command the market by offering the best user experience. For them it’s simple: get us our packages as quickly as possible, with free shipping! Gone are the days of ordering something and waiting three weeks for it to arrive. You want that package today or tomorrow? You got it, and holy hell, has it changed the way we purchase pretty much everything.

You’re telling me they couldn’t integrate a reservation platform at scale within Prime that could hold and store any participating restaurants data in the cloud where it could be accessible anywhere? I have a feeling they could.

Finally, the aim here is to help small businesses with their bottom lines. The last thing I want to do is give more power to Jeff Bezos or Mark Zuckerfuck, but if doing so saves small restaurants such as St. Lawrence or Savio Volpe thousands of dollars per year, then I’m all for it. That’s money which could be better spent on R&D or employee benefits and wages. I’d rather that cash stay here, in Vancouver, where it can be better spent on our local economy, rather than filling the pockets of men and women who live thousands of miles away.

Will either of these two companies take on this challenge? I doubt it, but hey who saw Amazon buying Whole Foods? I certainly didn’t. Stranger things can happen. Disruptive innovation has changed so much of our world over the last decade. Uber and Airbnb are notable examples. Gone are the days where companies such as OpenTable have true monopolistic power over an entire industry (we’re coming for you Ticketmaster). Resy and Tock are excellent alternatives… for now. Facebook is still free. Instagram as well. Netflix is less than $20 per month. Cloud services are the future. Scale is much easier and cheaper. Restaurant reservations should be too. I’m hopeful $30,000 dollar bills for restaurateurs is a thing of the past. You should too.