Mahkato
11-23-2010, 11:26 AM
What do you all think about this?
My Reservations About the Market Economy (http://weeklysift.blogspot.com/2010/11/blessings-and-privileges.html#11222010third)
How restaurants take reservations may not seem like typical topic for the Sift, but bear with me on this. A recent article about this particular niche of the economy says something interesting about how the economy as a whole works.
OpenTable.com (http://www.opentable.com/info/aboutus.aspx) is a service that allows you to make restaurant reservations online. It claims to handle 15,000 restaurants, and though it seems concentrated on upscale restaurants in the major cities, its reach extends all the way up here to Nashua, NH. It provides reservation-tracking software to restaurants. Its web site lets prospective diners check which of their favorite restaurants have tables open, and helps travelers find restaurants in unfamiliar neighborhoods.
Diners pay nothing, and in fact get loyalty points (exchangeable for free meals) for booking with Open Table. They also get to rate restaurants and see the ratings and comments of other diners. Restaurants pay installation costs, monthly membership fees, and a fee for each reservation. The business model seems to work. Open Table went public in 2009 and (at Friday's closing price of $67.83 (http://money.cnn.com/quote/quote.html?symb=OPEN)) has a market capitalization of $1.6 billion. (That's a little over $100,000 per restaurant. Hmmm.)
Services like this benefit from what is called a "network effect". In other words, each user makes it more valuable for all the other users. (The standard example of a network effect is a phone system. If you're the only person on a phone network, there's nobody you can call. You want to be on the network that everybody else is on.) A small table-reservation service is quirky and has patchy coverage. But a big one has lots of restaurants, lots of ratings, lots of comments, and the resources to put all the latest bells and whistles on its web site. The more you use it, the better it gets at recommending restaurants you'll like and tailoring promotions to your tastes.
Left to their own devices, markets with a strong network effect tend toward monopoly -- one network to rule them all. As this happens, the power relationship changes: Rather than simply connecting diners to restaurants, Open Table is becoming a gatekeeper. It controls the relationship with the customer. It decides which restaurants succeed or fail.
Restauranteurs are starting to see the writing on the wall. In a post that gives a fascinating glimpse into the restaurants' side of this relationship, San Francisco restauranteur Mark Pastore asks (http://incanto.biz/2010/10/22/is-opentable-worth-it/):
Have the ascent of OpenTable and its astronomical market value resulted from delivering $1.5 [now $1.6] billion in value to its paying clients, or by cunningly diverting that value from them? What does the hegemony of OpenTable mean both for restaurants and for the dining public in the long run?
He asked a dozen of his fellow restauranteurs in SF and New York about Open Table, and found only one who was happy. The others report feeling "trapped" and one says that his payments to Open Table amount to more than he makes from his 80 hours a week spent running the restaurant.
You see, once a service approaches monopoly, the dark side of the network effect appears: When only a few restaurants had Open Table, they might imagine that it was delivering new customers to them. But if all the restaurants have it, it's just shuffling customers around. Checking Open Table might cause you to book with Amelio's rather than Antonio's, but you were going out to eat somewhere anyway, and you probably would have spent just as much money. At that point, Open Table's fees are just siphoned out of the restaurant system without providing any systemic value.
Pastore concludes:
by permitting a third party to own and control access to the customer database, restaurants have unwittingly paid while giving away one of the crown jewels of their business, their customers.And customers, by taking advantage of the short-term freebies Open Table provides, may ultimately wind up with fewer choices: If restaurants are less profitable, more will close. It's already a tough business, and anything that makes it tougher is bound to push marginally profitable restaurants over the edge.
When people defend our skewed distribution of wealth or argue that the rich should pay lower taxes, their rhetoric usually implies that the free market rewards the "productive" members of society. But when you look into markets more deeply, that's obviously false.
Think about the best restaurant meal you've ever eaten. Who should you thank for producing that experience? The master chef who perfected the recipe, the production chef who prepared your meal, the waiter/waitress who took care of you, the farmers who raised the ingredients, and even (though you probably never think about this) the cleaning staff. You might also thank the owner, who in a small restaurant was probably one or more of the people I've already listed.
But none of those people -- probably not even the owner, the "small businessman" that conservative rhetoric idolizes -- is making much money. None of them approach the wealth of Open Table's founders, or even of the investment banker who managed Open Table's IPO, or the speculators who have run up its stock price.
You see, our market economy doesn't reward producers, it rewards gatekeepers. You don't make money by building roads. You make money by finding (or creating) bottlenecks and setting up toll booths.More comments on this on Reddit. (http://www.reddit.com/r/Economics/comments/eajrd/the_open_table_service_a_simple_example/)
My Reservations About the Market Economy (http://weeklysift.blogspot.com/2010/11/blessings-and-privileges.html#11222010third)
How restaurants take reservations may not seem like typical topic for the Sift, but bear with me on this. A recent article about this particular niche of the economy says something interesting about how the economy as a whole works.
OpenTable.com (http://www.opentable.com/info/aboutus.aspx) is a service that allows you to make restaurant reservations online. It claims to handle 15,000 restaurants, and though it seems concentrated on upscale restaurants in the major cities, its reach extends all the way up here to Nashua, NH. It provides reservation-tracking software to restaurants. Its web site lets prospective diners check which of their favorite restaurants have tables open, and helps travelers find restaurants in unfamiliar neighborhoods.
Diners pay nothing, and in fact get loyalty points (exchangeable for free meals) for booking with Open Table. They also get to rate restaurants and see the ratings and comments of other diners. Restaurants pay installation costs, monthly membership fees, and a fee for each reservation. The business model seems to work. Open Table went public in 2009 and (at Friday's closing price of $67.83 (http://money.cnn.com/quote/quote.html?symb=OPEN)) has a market capitalization of $1.6 billion. (That's a little over $100,000 per restaurant. Hmmm.)
Services like this benefit from what is called a "network effect". In other words, each user makes it more valuable for all the other users. (The standard example of a network effect is a phone system. If you're the only person on a phone network, there's nobody you can call. You want to be on the network that everybody else is on.) A small table-reservation service is quirky and has patchy coverage. But a big one has lots of restaurants, lots of ratings, lots of comments, and the resources to put all the latest bells and whistles on its web site. The more you use it, the better it gets at recommending restaurants you'll like and tailoring promotions to your tastes.
Left to their own devices, markets with a strong network effect tend toward monopoly -- one network to rule them all. As this happens, the power relationship changes: Rather than simply connecting diners to restaurants, Open Table is becoming a gatekeeper. It controls the relationship with the customer. It decides which restaurants succeed or fail.
Restauranteurs are starting to see the writing on the wall. In a post that gives a fascinating glimpse into the restaurants' side of this relationship, San Francisco restauranteur Mark Pastore asks (http://incanto.biz/2010/10/22/is-opentable-worth-it/):
Have the ascent of OpenTable and its astronomical market value resulted from delivering $1.5 [now $1.6] billion in value to its paying clients, or by cunningly diverting that value from them? What does the hegemony of OpenTable mean both for restaurants and for the dining public in the long run?
He asked a dozen of his fellow restauranteurs in SF and New York about Open Table, and found only one who was happy. The others report feeling "trapped" and one says that his payments to Open Table amount to more than he makes from his 80 hours a week spent running the restaurant.
You see, once a service approaches monopoly, the dark side of the network effect appears: When only a few restaurants had Open Table, they might imagine that it was delivering new customers to them. But if all the restaurants have it, it's just shuffling customers around. Checking Open Table might cause you to book with Amelio's rather than Antonio's, but you were going out to eat somewhere anyway, and you probably would have spent just as much money. At that point, Open Table's fees are just siphoned out of the restaurant system without providing any systemic value.
Pastore concludes:
by permitting a third party to own and control access to the customer database, restaurants have unwittingly paid while giving away one of the crown jewels of their business, their customers.And customers, by taking advantage of the short-term freebies Open Table provides, may ultimately wind up with fewer choices: If restaurants are less profitable, more will close. It's already a tough business, and anything that makes it tougher is bound to push marginally profitable restaurants over the edge.
When people defend our skewed distribution of wealth or argue that the rich should pay lower taxes, their rhetoric usually implies that the free market rewards the "productive" members of society. But when you look into markets more deeply, that's obviously false.
Think about the best restaurant meal you've ever eaten. Who should you thank for producing that experience? The master chef who perfected the recipe, the production chef who prepared your meal, the waiter/waitress who took care of you, the farmers who raised the ingredients, and even (though you probably never think about this) the cleaning staff. You might also thank the owner, who in a small restaurant was probably one or more of the people I've already listed.
But none of those people -- probably not even the owner, the "small businessman" that conservative rhetoric idolizes -- is making much money. None of them approach the wealth of Open Table's founders, or even of the investment banker who managed Open Table's IPO, or the speculators who have run up its stock price.
You see, our market economy doesn't reward producers, it rewards gatekeepers. You don't make money by building roads. You make money by finding (or creating) bottlenecks and setting up toll booths.More comments on this on Reddit. (http://www.reddit.com/r/Economics/comments/eajrd/the_open_table_service_a_simple_example/)