Why OpenTable has massive barriers to entry:

• OpenTable is a two-sided marketplace which have significant barriers to entry, see eBay.  Lets say a competitor magically gets 10,000 restaurants to use their OpenTable clone — you have only one side of the market.  Restaurants need new customers making reservations to make this interesting – which OpenTable delivers by virtue of its strong position in Google search results, integration with all the major online local reviews sites like Yelp.com, and increasingly popular mobile applications.  Generating the traffic to drive to restaurants takes years to develop.
• Selling, installing, and maintaining an OpenTable system is not a simple or quick process.  Selling to small business is time consuming and expensive.  Once OpenTable is installed, it’s akin to installing SAP or Oracle Financials for an enterprise – nobody wants to rip it out.

Why OpenTable is undervalued:

• Significant barriers to entry — you would need a minimum of a $50M and 3-5 years to start chipping aways at OpenTable business.  This assumes that OpenTable management is fairly incompetent and does not react.
• Flash sales:  They have an audience and deep merchant relationships enabling them to layer a Groupon like flash sale – very lucrative.
• Mobile:  The volume of reservations will increase significantly as their mobile applications reach critical mass.
• New lines of business: Once they wrap up the restaurant market their is no reason why they can’t do spas, hair salons, and even car-services.

First, What % of Android Devices are Shipping with Google as Default?

Most users are default users.  They use the email service, search engine, browser, etc. put in front of them.   Of these 65,000 Android devices, how many have Google as the default search engine? Almost all.  Lets assume 95% because there are just a few Android devices shipping with Yahoo! Search as the default.  So, 61,750 Android devices ship each day with the home screen search box or built-in search button hardwired to Google.

How many searches per month does an Android user perform?

Last year Google and Stanford published an excellent report on mobile search query behavior comparing the search usage patterns across PC, iPhone, and feature phones.   The report discloses two important numbers: the average number of search sessions (8.06) the average number of queries per session (1.86) users perform on their iPhone over a 35 day period.

Multiplying those two numbers (search sessions by queries per session) produces the average number of queries (14.7) an iPhone user does per 35 days.  Lets adjust this number upwards by 50% for two reasons:

1. The data-set is from the summer of 2008. Since that time as the underlying devices and networks get faster the number of queries users perform increases.
2. Android devices ship with a search box sitting on the home screen or a built-in search button. Whereas, the iPhone the web search box is out of sight integrated into the Safari app.

After adjusting the number upwards by 50% an Android user is performing 22 queries per 35 days, or 19 per 30 days to keep our units similar.

65,000 New Android Devices are  Worth: $7,011/month

$7,000 a month — thats it.  Lets see how we get to this number.  The 61,750 Android devices with Google as the default are generating 1.2M queries per month (# of shipped Android devices times monthly searches per Android device).  At an RPM (revenue per thousand) of $20 that is $23,370 a month or $0.36 per device/month.   Now, hold on. Google does not keep all of this revenue.  Google is paying carriers a traffic acquisition cost (commonly referred to as TAC) anywhere between 60% to 80%.  Using a 70% TAC we get our answer:

Google earns $7,011 a month in search revenues from the 65,000 Android devices that ship each day.

Google earns $0.11 a month in search revenue per shipped Android device.

Looking Ahead: What is the Search Lifetime Value of an Android User?

Android users are worth more then just $0.11/month because they usually keep their phones for longer – twenty-four months or the average contract length.  Assuming twenty-four months the lifetime value of an Android user is $8.63 (monthly search revenues per device x 24 months).  Put simply, each Android device shipping is worth $8.63 in search revenues over the lifetime of their Android device.  As Google improves monetization of mobile search queries this number will go up.  Using a TAC of 70%  Google earns $2.6 in search revenues per user over the life of an Android device after paying the carriers.

So, why was Google trying to bypass carriers and sell Android phones directly to consumers?  Simple economics.  By selling directly they earn 3x more on each Android device, it’s the difference between $2.6 and $8.6.

Notes:

1. If you have better data you can change the assumptions, the spreadsheet is here
2. I did not calculate the search monetization opportunity from the Maps application.  I believe a significant percentage of local search queries are moving from web search to the Maps application, I am not aware of sufficient data to estimate this revenue.
3. Search monetization differs by market — I do not account for this.  I assume $20 RPM across all markets.

Beyond the rather humorous back and forth between Arrington and the entrepreneur is the larger question… Are these securities laws created in the early 1930’s in response to the market crash and Depression still relevant in 2008?

To the best of my knowledge the only person to challenge these laws in any type of serious manner was the founder of a small microbrewery. Wit Brewery as chronicled by Andrew Klein (founder) in his book Wallstreet.com successfully raised a few million dollars allowing them to expand marketing and distribution outside their initial core market in NYC. After multiple unsuccessful VC pitches Andrew turned to the web in the early 90’s where he published a prospectus that users could download, review, and if interested send them a check. Reaching out to his passionate customers Wit Brewery quickly attracted thousands of investors each investing a few hundred to a few thousand dollars. This phenomenon attracted the likes of the Wall Street Journal which in turn attracted the SEC lawyers. Given Andrew’s background (he was a corporate lawyer prior to founding Wit Brewery) he was able to keep the SEC at bay and with the insight he gained from the public capital raising process he ultimately transitioned Wit Brewery into Wit Capital — an investment bank.

Yet, the core of what Andrew was trying to accomplish — allowing small investors with an interest or passion for a specific product to invest in small businesses looking to raise capital is still mostly a dream more then a decade later and one of the core reasons for this are the prohibitive securities laws mentioned above. Consider the following:

If I am software engineer making $130K/yr I can loan a deadbeat $10K to repay their $40K in credit card debt via Prosper yet I can’t efficiently (i.e. with a few clicks on a site) invest $10K in a former colleagues new technology venture (something I know a whole lot about) or a local frozen yogurt store looking to expand their stores in the region (again something I know a whole lot about because I see the lines out the door on a nightly basis from my apartment). Furthermore, small investors in these small businesses (unlike loan officers or American Express who are the usual sources of capital for small businesses) are willing and able to become product evangelists for these young companies.

I think its about time we revisit these securities laws.

In the fall, the personal finance software space — led primarily by Mint.com (which did a superb execution job for a V1 product) and Wesabe was all the rage. Its clear that this space was due for a refresh and had grown stale as both Intuit and Microsoft starved their products for too long creating an opening for the likes of Mint and Wesabe, but its too early to write the eulogy for Quicken and Microsoft Money as Omar and others suggest.

It will be a few years before we can declare any winners in this space — but there are three questions that the likes of Mint and Wesabe need to answer in order to be considered long-term viable competitors?

First, do Mint.com and Wesabe investors have the patience that is needed to fight this out over the long-term? Building a loyal user base in this space will take time as even the early adopters will only dip their toe before committing significant financial data to these services as they want to be certain that these services are committed to privacy and security but perhaps as importantly that their built for the long haul. Nobody wants to wake up two years from now reading an email that they are shutting down and moving all of your data to ACME Financial Service Inc.

Secondly, can they expand the set of users in the personal finance market beyond the Quicken and Microsoft Money base? The personal finance software market is relatively small as the effort to reward curve is steep — your forced to spend lots of time and energy setting up Quicken or Money before you start to see its benefits which only works for a small and dedicated set of the market.

Finally, can they broaden the value proposition beyond simply providing a 360 degree view of your spending and wrapping it in a slick user interface? Sexy pie-charts are interesting for all of 3 minutes, but what will keep people engaged?� The savings trick employed by Mint is a good start, but from my short experience with it not super helpful (i.e. it’s an execution problem).

In a world of information overload there are few must reads, but if you appreciate what Warren Buffett has done then here is some really good stuff by Jeff Matthews…

Jeff has a series of posts entitled “Pilgrimage to Omaha.” I only read two posts in a series of 10 (plus 2 extras for intro and conclusion) and I am super excited to read the rest (that rarely happens)— here is but one of the many laconic and insightful points Jeff makes:

“Thus it is that whether he’s talking about food companies or airlines or newspapers or oil companies, Buffet has clearly made it his business to identify the single most important variable for each business—and knowing those crucial variables, he can determine whether the values offered in the stock market at any given time are attractive, or not. Without using a spreadsheet.”