Wow.  It’s easy to see that the Facebook app usage on the iPhone platform trumps all the others.  From what I’ve gathered talking to other cross-platform mobile developers, these results are generally in line (at least for free applications):  Blackberry generally has half the install base of iPhone, and Android and all the others continue to lag far behind. Let’s look at another free app: Foursquare, which shared their platform breakdown via a tweet.

Android has an impressive showing, which could make sense given the application’s early adoption by techie types. Unlike Facebook, it hasn’t (yet) gained mainstream adoption. The differences across platforms become even more stark when we focus on paid apps. Here’s what the breakdown looks like for Exit Strategy NYC:

So those you have it — a few potential reasons for the differences.  At the end of the day I believe small developers are best advised to put their energy into developing for the Apple platform. Building products for the other platforms probably doesn’t make sense at present time unless you have a game-changing mobile vision for a product that’ll take years to complete and needs the openness that Android provides.  Or if you’re a startup showing traction that relies on a strong network effect to take over the world (ie Foursquare). Or if you’re a big company with tons of cash to build out your branded app — like Facebook, which tries to have versions available for every phone possible!  But gosh, I’d hate to be that engineer locked in a basement building for all six users of the Sony q7d3m1p$9!&9b7u64gph model phone.

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To understand why naive first-time developers have this mindset, you only have to turn to the figures being tossed out by the major iPhone ad networks.  Last summer, Admob was talking about $30 CPM brand ads and calling that “low end.”  Similarly, Medialets talks about their Dockers ads which paid in the $20-30 CPM range.  Even in today’s tough advertising market, Admob company continues to cite rather high “$12 to $14 average CPM” figures.

Ready for the brutal truth?  Most iPhone ads networks today pay around $0.50 CPM. In case you don’t know how to digest that statement, I’ve rewritten here in plain english: 1000 people have to look at your application’s ad just to earn you a measly 50 cents.  What about those $30 CPM figures?  They’re just marketing fluff.

If you want the truth, ask the folks on the front line: actual developers.  Bo Wang’s Galaxy Impact, an ad supported app with over 160,000 downloads, showed an eCPM (effective CPM) of $0.23.  App developer John Kelsey says he sees about $0.50 CPM. Pinch Media CEO Greg Yardley’s “appstore secrets” presentation reports a typical CPM range of 50c – $2 CPM (slide 24) and then in the comments section, Greg quotes developers saying ad rates had dropped to $0.38 CPM. Another developer running CPC ads says he sees $0.01-$0.03c / click.  The truth is that “Most Ad-Funded iPhone Apps Don’t Earn Enough To Buy A Sandwich”

Why the discrepancy?  Fill rate is partially responsible.  Even if a $30 CPM premium ad does exist, it’s not going to run in your app 100% of the time.  In fact, most of the time apps displays remnant (ie NOT premium) ad inventory.  As one developer says “NO ONE can maintain the fill rate at decent cpm”.

Additionally, every ad network wants to attract app developers bad.  Really bad.  So they pitch journalists with juicy stories of high CPMs and ‘case studies’ on developers making sick amounts of money.  Greystripe gets a press piece penned about an “iPhone Beer Pong App Making $7,000 A Month From Ads.”  Adwhirl gets Techcrunch to write “Just How Much Money Can Free iPhone Apps Make? Quite A Bit” which claims apps can make $5000 a day.  And Medialets highlights their $20-30 CPM Dockers ad.  These are the exceptions rather than the rules.  It’s marketing as usual.

The purpose of this post isn’t to point fingers at the ad networks or accuse anyone of lying.  I love ads and I love free apps.  And I love the entrepreneurial spirit in these impressive iPhone ad network companies.  But there’s an important message here for first-time app developers: if you’re considering quitting your cushy job to make $5,000 a day with a fart app, don’t do it.  Always run your back of the envelope calculations first, and don’t assume your app will get anything higher than a $0.50 CPM. Basing your assumptions on $30 CPMs will leave you high and dry.

As usual, readers, I love hearing your comments and questions.  So don’t be shy!

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First, some background.  I became interested in the mobile coupon business space a few years back when I started thinking about how mobile coupons could effectively be applied to a college campus.  I approached Artia Moghbel, a friend who had started an on-campus discount card (The Pirate Card) and together we wrote up a business plan for Morningside Mobile [PDF] which won second place in Columbia University’s B-plan competition.  Essentially Morningside Mobile (MoSiMob) was Dodgeball crossed with a mobile couponing service and applied to the microcosm of a college campus.

I spent that summer teaching myself the basics of Ruby on Rails and preparing a variant of Morningside Mobile called FreeFoodFone.  But our calculations had relied on using Email <-> SMS gateways to get around high SMS gateway costs.  It turns out this workaround isn’t technically feasible and the service never got off the ground.  Over the next year, I watched Social Monkey, a similar idea to Morningside Mobile (launched by some Tufts University students), which shutdown about a year after launch.

Here’s the big issue:  SMS text messages cost 3 cents to send.  Each. That doesn’t sound like much compared to, say, the 20 cents you would pay the US Postal Service for a direct mail campaign.  But it adds up quickly: sending 1000 text message advertisements costs $30.  Therefore any type of mobile SMS advertising has a cost basis of $30 CPM (truly COST per thousand). If you get a 1% response rate to your mobile advertisement, that works out to a $3 cost of reaching that one responsive customer — and that’s not including the actual cost of the coupon discount.

Now let’s look at some figures provided by Mobile Spinach.  Although they declined to share specific rates, Mobile Spinach says they can routinely get double digit CPMs.  Let’s assume the best case and round it up to a $100 CPM.  Most of the company’s campaigns are between 500 and 1000 text messages.  This means that at best, the average campaign runs between $50 and $100 dollars.  That’s tiny.

What’s the Achilles heel of any hyperlocal business based on advertising?  Small deal sizes and high overhead. The large overhead cost of closing deals makes a local ad business tough to scale effectively.  Let’s look at this on a micro-level by considering the cost of a salary.  Let’s say an entry level salesperson earning $50,000 a year.  They work 50 weeks/year, which means a salary of $1000 a week, $200 a day, or $25 an hour. As shown earlier, Mobile Spinach’s ad campaigns are $100 each on the upper end.  Even if this sales person could close an advertising deal every two hours (a herculean task), the sales people would be burning up half of the company’s incoming revenue.  Add to that the $30 of cost from sending the SMS messages, and there’s not much leftover.  Sure, some of the business is repeat business (there’s longer term value once the relationship is formed) — but it’s still tough to make the numbers work.

Let’s look at this from a macro perspective: At full scale, Mobile Spinach envisions 500,000-750,000 users of the service across 30 cities. They also say that at the absolute max, they’ll send 10 messages/month to users — any more, and the service becomes overwhelming and annoying. Let’s assume every ad is sold at a $100 CPM, which works out to 10 cents per text message. 3 cents of that goes to pay for the SMS message, and 2 cents goes to pay a commission for the Tastemaker (20%). That leaves 5 cents per message. They’re sending at maximum 10 messages per month to each user.  Essentially, after we’re accounted for the cost of goods sold, this works out to a per-user income of $0.50 each month or $6 each year.

Assuming a reasonable $8 customer acquisition cost for the company, it will take more than a year of usage to start earning a profit (and even longer if a reasonable churn rate is factored in). If they succeed in their upper goal of getting 750k users on the service, at $6 annual income per customer, the company will have $4.5 million to pay the salaries of all their staff plus overhead costs. Mobile Spinach plans to have 60-70 sales people at full scale.  At a low figure of $50k/year, a sales force of 70 people would cost $3.5 million in salary alone, not to mention benefits, insurance and overhead.  It’s tough to see the numbers working.

In the end, there’s really only two business models based around coupons. You can be in the business of selling coupons to consumers like The Entertainment Guide. Alternatively, you can be in the business of coupon delivery: Newspapers and companies like Valpak (owned by a newspaper company) have done this successfully for years. There are many companies working on the delivery of mobile coupons: Cellfire, 8coupons, CouponAlbum.com, CouponChief.com and CouponMountain.com just to name a few.  But none have taken off.

Why not?  It’s hard to say.  The truth is that SMS messaging has existed for years.  Mobile Spinach could have been built six years ago.  There’s no recent technological change or evolution that opened up the market opportunity  But the company thinks they’ve figured out the issues that have plagued typical SMS coupon services.

Most coupon services are bothersome and overwhelming.  Mobile Spinach tries to solve this problem by offering ‘exclusive’ offers and also by letting users pick exactly the type of deal they’re looking for:  For example,  within the ‘restaurants’ category are the following sub-options:  ‘$$$$’ or ‘$$$’ or ‘$$’ or ‘$’ and fast food, vegan, seafood, grill, deli/bakery, italian, asian, american, organic and health food.  This level of specificity sounds great to the end user, but specificity and exclusivity are the opposites of scalability — and scalability is key to a technology startup. By breaking down their deals into tons of small categories, the company has created a thousand different chicken and egg problems for themselves: creating a critical mass of merchant in each niche AND creating a critical mass of users interested in that niche.  In my humble opinion, the company should sharpen their focus: pick a single niche, dominate it, and then expand horizontally from there.

Additionally, the company is trying to build their user base from scratch.  But companies with large existing mobile user bases would seem to make a perfect fit for Mobile Spinach’s mobile couponing product.  Why not partner with a company like loopt?

Basically, the mobile couponing business is an extremely tough business to scale well.  I like mobile spinach’s gusto and ‘dial-down’ approach, but at the end of the day I’m still vexed by these three issues:

1)  the high cost of sending SMS text messages.
2) the difficulty of convincing consumers to share their mobile phone numbers.
3) the high overhead costs of closing numerous small local deals.

This last issue concerns all types of hyperlocal companies:  Yelp, Outside.in, Patch.com, GoMobo, Grubhub, and Yodle just to name a few.

Local is a tough business.

As usual, readers, I’d love to hear your comments and questions.  So let’s have ‘em!

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(This is the first in a two part post. Part one contains a profile of a startup.  Part two contains numbers and analysis related to that startup.)

Mobile Spinach is a small and ambitious Bay Area startup focused on the mobile coupon space.  The company is still at a very early stage — seed funded and looking for funding.  Earlier this month I had the pleasure of talking with co-founder Anthony Vitti.  We had a great discussion about the difficulties of effective marketing for local businesses, and Anthony laid out his vision for Mobile Spinach and the opportunity he sees.

Mobile Spinach’s offering for consumers is a compelling one: “Get exclusive deals and mobile phone alerts from our Tastemakers who hit the streets to find you the best deals when, where, and how you want them.” Think local trend-blog meets social-shopping meets mobile-couponing: Thrillist meets ThisNext meets Cellfire.  Whereas existing coupon services like Cellfire and 8Coupons focus on product discounts (Save 25c on toilet paper!!), Mobile Spinach focuses on deals from local lifestyle businesses: Shopping, Night life, Events, Travel, Dining and Food, Arts and Music, Gyms and Spas.  One of their co-founders runs a contemporary San Francisco lifestyle brand called Artificial Flavor, so they’ve got experience with fashion trends.

With Mobile Spinach, you receive deals only from the Tastemakers you’ve chosen to follow.  These folks are the site’s power users — aggressive well-connected individuals who introduce their favorite local businesses to Mobile Spinach’s service and get special deals for their followers.

Mobile SMS couponing requires a light touch.  Consumers don’t want to be interrupted with advertising that’s not relevant to them.  Mobile Spinach understands this very well: “Less is more” says Anthony.  Relevancy and customization are crucial to Mobile Spinach’s vision of an empowered consumer who is able to “dial down” the service as needed.  Besides using Tastemakers as filters (so consumers only receive deals that match their taste), Anthony suggested that consumers will be able to make further customizations like electing to receive coupons ‘only on Tuesday nights’ and ‘only from nearby restaurants.’

For these local businesses, Mobile Spinach helps them engage local consumers and market themselves effectively.  According to Mobile Spinach, there are very few ways for small to medium business owners to get noticed — traditional media, SEO, and SEM all have high costs and questionable efficacy.  With Mobile Spinach, 500-1000 SMS messages are typically sent for a campaign and the company reports double-digit response rates.  The company also reports getting double digit CPM rates for their mobile advertisements.

For Mobile Spinach, tastemakers act as sort of a crowdsourced marketing effort as they spread the word about the service to their friends.  More importantly, they bring local businesses onboard to advertise with Mobile Spinach — and receive a 20-30% commission.  These tastemakers, combined with a traditional in house salesforce, are designed to make the service scalable.  Anthony envisions having 20 tastemakers in each of 30 cities across the country once the service expands to full size.

Mobile Spinach has a nice vision for a social-recommendation local couponing business.  Furthermore, Mobile Spinach shows sensitivity and insight into the typical issues plaguing SMS advertising.  But can they make the numbers work?

Well, let’s do some back of the envelope calculations…

(continue to part two)

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No, this isn’t some kind of bestiality confession.  I’m talking about Aardvark — a 15-person San Francisco startup made up largely of ex-Googlers and backed by $6 million from top investors.  Like many relationships, this one started with a friend’s introduction.  In February, Omar Christidis had been waxing poetic about Aardvark — ‘vark for short — and soon I was begging to be set up.  A friend of Aardvark’s founder Max Ventilla, Omar was an early member of the service and gladly passed on an invite.

Unlike most online services, Aardvark’s focus isn’t on their website.  Instead, Aardvark lives on your buddy list. Like a good friend desperately in need of a social life, its green ‘available’ dot glows brightly 24/7.  When you IM a question to Aardvark, it goes digging for the answer.  First the service analyzes and categorizes the question, then — and this is the real magic — it routes the question to an ‘expert’ who responds, usually in a matter of minutes.

Does it work?  Hell yeah.  My first challenge posed to the service was to ask it something local.  After all, how many early aardvark users could possible live in my neighborhood?
me:
What’s the best bar in boerum hill, brooklyn?

aardvark:
Got it. I’m sending your question to someone who knows about *going out*
[6 minutes later]

aardvark:
(From Naomi/F/Brooklyn,NY, Re: *going out* )
I like the Brooklyn Inn on Bergen and Hoyt maybe. no food. just booze. local.

Wow, I was impressed. Not only was there another Aardvark user in my neighborhood, but she was online at that moment.  And helpful!  A day or two later, Aardvark posed its first question to me from a user in State College, PA asking “How much is your iPhone monthly bill?”  Aardvark sent me the perfect question and I was able to give an answer accurate to the penny…being helpful felt really good!

I continued to use aardvark over the next few weeks, asking progressively harder questions.  And each time, it stepped up its game.  One time I sent Aardvark a chunk of Objective C programming code — a bug had stumped my friend and I and also stumped the readers of a popular programming site.  Sending it to Aardvark was a last resort and pretty much a joke. But less than five minutes later, Aardvark sent back a one-line response that solved the bug. My question had been routed to Colin Barrett, creator of Adium (a popular aim/icq/msn messaging client) and master of all things Mac programming related.  We had a back-and-forth conversation through aardvark, and exchanged contact information which came in handy later.

At precisely this moment I realized Aardvark was much more than a simple ‘question answering service’.  It was an expert network.

Have you ever heard of the Gerson Lehrman Group (GLG)?  I hadn’t either until a friend started working there.  Essentially GLG connects corporations/investors to experts on very specific subject matters.

Perhaps a corporation is considering launching a new product that’s outside their core expertise.  They have questions and concerns about the launch which require an expert opinion.  They pay GLG gobs of money to play matchmaker.  GLG sorts through its database of 200,000 experts and sets up an interview/consultation between the the expert and the corporation. It’s big business. GLG’s 2008 revenues were $284 million.

Essentially, Aardvark is GLG for the little guy.  Or it’s GLG for the ‘long tail’ of questions.  Over the past few months, I’ve used Aardvark to consult with experts on all sorts of topics, not just to ask simple questions but to have entire discussions!  In addition to getting coding help, I’ve had hour long conversations about mobile micropayments with the Senior Mobile Product Manager at a major social networking site.  I also found a very helpful PR expert who discussed in detail with me how best to do press outreach for an upcoming project.  I’ve even used aardvark to have questions answered by lawyers and doctors.

Categories of Questions Asked (source: vark.com blog)

The key to Aardvark’s success is threefold:
1)  Intelligent routing. When aardvark asks me to answer a question, I’m happy to help.  I know aardvark isn’t wasting my time with irrelevant queries.

2)  A great network of ‘experts.’ The quality of Aardvark’s answers is only as good as the quality of its users.  Aardvark was started by a group of ex-googlers and as an invite-only service it has spread through real-world networks attracting a very impressively credentialed userbase.  Aardvark’s ‘refer’ feature is also brilliant.  I don’t know the answer to every question Aardvark poses to me.  But I probably know someone who knows the answer. Using the referral feature, I can pass the question to the right person.

3)  A gift economy and a feedback system.  Like Wikipedia or Yelp, users contribute to Aardvark because they have benefited from the service and want to give back.  Also, Aardvark encourages it’s users to type “thanks” in response to a useful answer and being helpful and getting thanked feels good.  (“thanks” also works as a feedback mechanism to help Aardvark identify its most helpful users and route questions better.)

As a former sociology major interested in social networks and information flow, I find Aardvark absolutely fascinating.  As an enterpreneurial person working on several projects and needing answers to dozens of questions, I’ve found the service to be priceless.  To monetize the service, Aardvark plans to fold in targeted advertising.  Should that not pan out, I have a feeling they could do just fine by creating a premium paid expert advice service.

As always, I would love to hear your thoughts about Aardvark and the emerging social search space.  And if you want to sign up or add me as a ‘friend,’ do so here.

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To say that Apple’s App Store is thriving would be an understatement.  There have been 800 million downloads across Apple’s 30 million iPhones and iPod Touches — meaning on average each device has downloaded 27 apps.  The App Store now has over 25,000 apps and 250+ are added every day.

In such a crowded marketplace, how can an app possibly get noticed?

As developers know all too well, the key to being noticed is getting the app into the top-selling lists. Pinch Media’s data shows that “appearing on a top 100 list increases daily new users by an average of 2.3x” and appearing in the top 10 or top 25 list can mean an order of magnitude gain.

App developers have told me they’d do anything short of cutting their toes off to get into the top 10, top 50, whatever. That often includes lowering the price of their app.
-Dan Frommer, Silicon Alley Insider

So let’s say you have an app that’s selling for $1.99.  Sales are ok, but you want to make more money.  So you cut your price to 99c in an attempt to get on the best-selling list.  It’s perfectly logical after all:  the variable cost per unit is zero.  If you can increase sales 2.3x but earn half as much on each sale, you’ll come out a winner.

So obviously there’s a strong incentive for developers to cut their prices and concentrate on doing whatever it takes to get into that top 100 list.  And therein lies developers’ biggest complaint: the app store calculates popularity by unit downloads — without taking price into consideration. This structure has created immense competition and downward pricing pressure.  In February, the average top-50 app sold for $2.39 which is down 34% from $3.63 only two months prior.

Many have called on Apple to sort the list by total revenue rather than unit downloads. For example consider one purchase of a $10 app equivalent to ten purchases of a $1 app for ranking purposes.  This would highlight the apps creating the most value rather than the most downloads and it would help app developers sustain higher pricing.

But let’s talk about Apple’s dirty little secret: they want apps to be cheap.  The cheaper the apps, the more downloads — and the more value the user gets from the device.  This helps sell more devices, and although lower app prices does mean less app store revenue (Apple takes a 30% cut of app sales), that money is peanuts compared to Apple’s $425 profit/phone. In fact, Apple has said publicly that the app store is being run as a break-even service:

We’re thinking about the App Store in the same way that we think about the iTunes store. While it will generate some revenues, it will be a small profit generator, and just as with the iTunes store making iPods more attractive, we think the App Store will make the iPhone and iPod Touch more attractive to customers. We’ll hopefully see an indirect return by selling more iPhones and iPod Touches.
-Peter Oppenheimer, Apple’s CFO and SVP

The download pricing pressure caused by the per-unit ranking method is seriously hurting developers.  Is this a sustainable model?  No.  Developers will get fed up and leave eventually.  But right now it’s a one horse race: no other mobile platform has achieved much traction.  The most money for developers still lies in writing software for the iPhone.  And until Apple’s hand is forced by competition making significant inroads, a la Amazon forcing Apple to make iTunes DRM free, Apple won’t change a thing.  Everything is perfectly aligned in their favor.

One last point:  The upcoming iPhone 3.0 software supports a subscription pricing model for apps.  To be 100% clear, the new software will support in-app purchasing which asks the user to pay each month to continue using the application (rather than an automatic recurring subscription payment system like many people envisioned — the difference is subtle but important).  Some have reacted negatively to the subscription pricing announcement, fearing that apps will suddenly turn into crippleware and try to charge for every feature that was previously free.  This may be true at first, but ultimately it’s a free market and the problems will sort themselves out.  The simple truth is that the lack of a subscription pricing model was leaving money on the table.  It’s nice to see that being remedied.

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Online restaurant reservations company OpenTable filed for an IPO on Friday, revealing their finances for the world to see.  The SEC filing contains all the financial figures you would expect: revenue, expenses breakdown, details of the public offering, and also operational data. 

Brett Emerson wrote a fantastic blog post a few months ago (Behind the Curtain: Open Table) which gives a thorough evaluation of OpenTable from a restaurateur’s point of view.  Emerson is in the process of opening Contigo, a new restaurant in San Francisco and he lays out the pros and cons of OpenTable and shares his cost and volume expectations from the service.  Viewed from a restaurant’s pespective, the operational data in OpenTable’s finances gives an amazing amount of insight into the OpenTable system, especially when some analysis and number crunching is applied.

OpenTable Web Traffic and User Behavior

OpenTable makes their money from restaurants that pay a one-time installation fee for reservation software/hardware, a monthly subscription fee, and a fee for each restaurant guest seated through the service.

It’s public knowledge that OpenTable charges $0.25/diner booked via the restaurant’s website and $1/diner booked directly through opentable.com (the higher charge reflects opentable.com’s value as a customer referral tool).  The SEC filing tells us that these fees resulted in $17M of reservation revenue from 25M diners.  Pulling out my trusty TI-83 and solving this linear equation  ( 1*a+ .25*b = $17M  and  a + b = 25M diners) leads to the conclusion that 57% of diners book via opentable.com, and the remaining 43% book via the restaurant website. This tells us about the value of OpenTable as a marketing tool: being part of the OpenTable network yields roughly twice as many online reservations as a stand-alone solution.

Per-Restaurant Data

Excluding one-time installation revenues, total North American revenues for the first nine months of ’08 were $37.5M across 8,090 member restaurants, so the average restaurant pays OpenTable $515 each month (N.B. 8,090 restaurants is the midpoint figure across the reporting period: OpenTable began 2008 with 7,391 restaurants and grew to 8,788 restaurants.  I assume linear growth).  Broken down, this $515 consists of $281 in monthly subscriptions charges and $234 in monthly reservation booking fees.

For the reporting period, one-time installation revenues were $1.7M and there were 1,397 new restaurants.  Each new restaurant therefore pays an average of $1,240 in installation fees (this assumes no churn, that all growth is from new customers).

Does OpenTable deliver?

OpenTable seated 25M diners across 8,090 restaurants in the reporting period which means for the average restaurant, OpenTable fills 345 seats monthly or 14 daily (assuming the restaurant is open six days a week).

One of Emerson’s main concerns is the high cost of reservation fees:

Let’s assume most of the other two thirds of the restaurant’s guests book through Open Table. If successful, a 60-seat restaurant like Contigo could easily pay $1,000-1,500 a month to Open Table in cover charges.

Let’s examine this concern in detail.  Contigo has 60 seats.  Assuming tables can be flipped twice, 120 diners can be served each night.  We know OpenTable on average fills 14 seats a day, so OpenTable would be filling about 12% of the restaurant.  Earlier it was calculated that the average restaurant pays $234 in reservation fees.  Emerson’s figures (66% fill rate, $1000+ monthly fee) therefore probably overestimates OpenTable’s ability to fill tables.

International Figures

OpenTable has mainly concentrated their international efforts in Germany, Japan and the United Kingdom and so far international business represents a mere 5% of total revenues.  For the reporting period, an average of 696 restaurants were signed up, producing $1.7M in subscription revenue, $282K in reservation revenue, and a mere $76K in installation revenue.

Dividing the installation revenues across the 451 added restaurants shows an average installation fee of $155 which is significantly lower than the $1,240 that domestic restaurants pay.  This likely signifies that OpenTable heavily subsidizes equipment and installation costs in an attempt to gain traction overseas.

The monthly subscription charge that each restaurant pays is comparable ($270 internationally versus $281 domestically), but as you might expect given the early stage of international adoption, monthly reservation charges are significantly lower ($45 versus $234) and fewer diners are seated through the service (60 diners per month versus 345 diners.)

When both subscription and reservation charges are factored in, it’s revealed that although the average international restaurant spends less with OpenTable per month ($315 versus $515), they pay substantially more for each customer ($5.29 versus $1.49).

OpenTable has emerged as the leader in the US market, surviving the first dot-com bubble, gaining traction with restaurants, and beating out the competition (DinnerBroker.com, Foodline.com, Ireserve.com, iSeatz.com, and RestaurantRow.com and others).  It should be noted that OpenTable operates very profitably within the US — $6.7M profit on $39M revenue, a 17% margin.

Is another victory in the cards?  It’s certainly going to be a tough fight.  OpenTable lacks the first-mover advantage and faces intense competition.  There’s also a strong network effect working against them.  Already OpenTable has conceded Spain and France, closing their offices which had only recently opened in 2007.  OpenTable appears to be pouring every dollar they can into their international expansion and heavily subsidizing equipment costs which is the reason why the company as a whole appears to be unprofitable (and I suspect is the reason for filing for an IPO — to raise more money for their international push).  Looking at their international business, OpenTable posted losses of $6.5M on $2M revenue in the first nine months of 2008.  OpenTable, I wish you luck!

Market Sizing and Market Saturation

OpenTable includes some interesting estimates about the size of their market:

We believe based on our internal estimates that there are approximately 30,000 reservation-taking restaurants in North America that seat approximately 600 million diners through reservations annually.

Considering that OpenTable has signed up close to 10,000 restaurants, they have captured roughly 1/3 of the possible restaurant market — pretty impressive!

Extrapolating through the end of 2008, OpenTable seated 33.5M diners which means that 6% of all restaurant reservations are made through OpenTable — also really impressive!

Quantifying OpenTable’s Marketing Power

Advertising a restaurant in an effective manner is a difficult task.  Press, buzz, and word of mouth recommendations are great, but these aren’t something a restaurant can control.  Besides buying ads on Citysearch or Yelp, there’s not much to be done online (although Russ & Daughters did recently join Twitter!).  Unfortunately launching a search marketing campaign around the keyword “restaurant” doesn’t work too well.  OpenTable clearly realizes the tough position that restaurants are in:

Cost-effective marketing opportunities are limited. Typically, restaurants promote themselves through magazines and newspapers as well as online dining guides and directories. However, restaurants generally do not have the ability to track the number of people who ultimately dine in response to their advertisements, nor are the costs of these advertisements tied to the number of diners they attract. Therefore, restaurants usually are unable to measure or compare the effectiveness of these marketing channels.

Is OpenTable’s $1/diner fee fair?  Emerson suggests that it’s too high:

When a diner pays $40 to eat at Contigo, that dollar [fee per diner] equals about 2.5% of the cost of the meal. That’s significant in an industry where the average profit margin is less than 5%.

Interesting point.  But if you bought a $300 newspaper advertisement which caused 300 new customers to walk into your restaurant, wouldn’t you consider that a phenomenal return on your advertising spend?

The average restaurant spends $515 with OpenTable and gets 345 diners each month, so when all is said and done the true cost of the service is closer to $1.50/diner.  But keep in mind that 43% of the OpenTable bookings come through the website of the restaurant — these 148 diners have already decided to eat at the restaurant!  These customers exist regardless of whether the restaurant is subscribed to OpenTable.  The real value that OpenTable delivers, therefore, is the 197 NEW customers generated due to the marketing exposure on opentable.com.  Restaurants are really paying $515 to gain 197 new customers, which comes to $2.61 per customer.

Concluding his blog post, Emerson writes:

In my mind, the question of whether or not to sign up for Open Table boils down to whether or not I feel Contigo needs to take advantage of Open Table’s substantial marketing power.

The question restaurant owners should therefore ask themselves is this: Is acquiring customers at $2.61 per head a worthwhile investment?  And is there another method that can acquire customers for less?

Well there you have it!  A fascinating look at the business of online restaurant referrals and the insights derived from very basic operational data.

I’ll leave you now with this amusing quote from the SEC Filing about OpenTable’s competition: “Currently, our primary competitors in North America are the pen-and-paper reservation book used by most restaurants and the phone used by diners.”

As always, readers, I’d love to hear your comments and thoughts!

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The idea is simple — click the ‘start’ button and as soon as the background changes color, click ‘stop’.

Dumb little game, right?

A Sneaky iPhone Web App

But wait!  Look closely at the screenshot and you’ll notice a google advertisement placed adjacent to the stop button.  When the background color changes, the user panics and grabs for the stop button.  This panicked movement combines with the inexact finger navigation inherent on the iPhone to cause the user to click the advertisement by accident (I did this repeatedly in my attempts to play the game).

Furthermore, because the ads are contextually targeted to the ‘reflex’ theme, medical and legal ads appear which surely fetch the developer a pretty penny each time someone accidentally clicks the ads.  Brilliantly evil, no?

Check it out for yourself.

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