Reference no: EM131230228

To Pay or Not to Pay: Zagat's Dilemma

Founded by Tim and Nina Zagat, the Zagat Survey has collected and published ratings of restaurants by diners since 1979. Zagat publishes surveys for restaurants, hotels, and nightlife in 70 major cities. Zagat has come a long way from its roots in the early 1980s, when the foodloving Zagats started compiling lists of their favorite restaurants for personal use and to share with their closest friends. But with the rise of the Internet, e-commerce, and mobile technology, Zagat has struggled to find a business model that stayed true to the company's origins. To generate their first survey, the Zagats polled 200 people, and increased that number over time. Executives, tourists, and New York foodies alike found the list to be indispensable. Spurred by this success, the Zagats decided to publish their survey themselves. The few booksellers that took a risk in stocking the book were rewarded with sales so robust that the Zagat Surveys became best sellers. The pair also published similar lists for other major cities, including Chicago, San Francisco, and Washington, D.C. In addition to print books, Zagat opened a unit that creates custom guides for corporate clients, like the ones at Citibank. For a long time, this business model was sufficient to ensure that Zagat Survey was successful and profitable. When the dot-com bubble came along, venture capitalists were attracted to Zagat for its brand recognition-the Zagat name is instantly recognizable to food-lovers, travelers, and restaurateurs alike. Zagat was one of the first companies to popularize user-generated content, collecting restaurant reviews from its readers, aggregating those reviews, and computing ratings. In addition to numeric rating scores, the survey also includes a short descriptive paragraph that incorporates selected quotations from several reviewers' comments about each restaurant or service. Venture capitalists saw that Zagat had a golden opportunity to migrate its content from offline to online, Web, and mobile. Of the many decisions the Zagats faced in bringing their content to the Web, perhaps the most important- was how much to charge for various types of content. They ultimately decided to place all of their content behind a pay wall, relying on the Zagat brand to entice customers to purchase full online access. One of the most prominent members of the Zagat investment group was Nathan Myhrvold, formerly the chief technology officer at Microsoft. Myhrvold supported the Zagats' decision to use a pay wall for their content and maintained that putting all of their content online for free would have undermined their book sales. Although Myhrvold and the Zagats themselves favored the pay wall, other Zagat investors argued that placing content online for free allowed companies like Yelp to get its results on the first page of Google search results, which is critical for maintaining the strength of a brand in today's advertising environment. By not taking this approach, Zagat left itself open to be surpassed by Yelp, Groupon, Google Places, and other similar services offering free content supported by advertising from local businesses. Sure enough, these companies soon began attracting numbers of online visitors that dwarfed Zagat's. In 2008, the Zagats tried to sell their company. They failed to do so, partially due to Yelp's growing popularity. Prospective buyers were more intrigued by Yelp's much larger online audience and growth potential. The Zagats' failure to sell the company in 2008 highlighted their failure to effectively go digital. Food blogs and similar sites abound on the Web nowadays, but Zagat was in a unique position to get there first and establish itself as a market leader, and it failed to do so. For much of 2011, Zagat continued to lag behind Yelp and other free review sites in the battle for eyeballs. Yelp drew much greater traffic than Zagat. com. From January to April 2012, Zagat.com had only 310,000 visitors, while Yelp had 31 million. The Zagat Web site claimed it has more users, but the disparity was still significant. Zagat saw its fortunes change in September 2011, when Google paid $151 million to buy the company. Although the Zagats had sought $200 million in 2008, the deal was considered by analysts to be generous. Google was seeking to establish itself in the local search marketspace, and after failing to purchase Yelp for $500 million in 2009, Zagat was next on their shopping list. In fact, after the Yelp deal fell through, Google and Yelp have become heated rivals, and Yelp has alleged that Google is rigging its search results to favor its own services over those of its competitors. In the year following the acquisition, Google and Zagat worked together to allow Zagat reviews to appear alongside Google searches on various platforms. Google wanted to use Zagat's customer generated guide format and apply it to any place that can be searched for: restaurants, retail outlets, nightlife, hotels, resorts, spas, golf courses, and more. A growing percentage of Google searches are for information on nearby locations-20 percent of all searches, and 40 percent of that subset are made using mobile phones. In May 2012, Google formally announced the inclusion of Zagat guides and online reviews in its new service, Google+ Local. With this service, Google hopes to more effectively compete with Yelp in local search. Because Google values eyeballs over all else, the company opted to remove the pay wall from Zagat content for the first time. Zagat had been charging $25 per year or $5 per month for access to its online reviews. Zagat will still charge $10 a year to use its iPhone app, and after a free six-month trial, it will charge $25 annually to see reviews on devices running Android. Still, normal Google searches on the Web will feature Zagat content for free, and Google is considering dropping the other subscription fees for mobile devices. Google hopes to combine Zagat reviews with its mapping technology to better compete with Yelp. Trying out both services highlights some of the differences between them. Zagat.com's home page is streamlined, with a minimal number of search boxes and links immediately available. Restaurant reviews are organized by several major "hub" cities as well as popular lists of the top restaurants of a certain type. Clicking on a restaurant shows visitors a portion of the data Zagat maintains on that restaurant. For example, the site now shows the percentage of users that "like" the restaurant, and several featured reviews. Many more reviews of the restaurant are available if the user wants to keep scrolling. Yelp's front page is much busier and less streamlined than Zagat's, but has a great deal more content available immediately. The front page has lists of the most popular restaurants, retail outlets, bars and clubs, and many other categories, all free to the user. Looking for a dentist in New York City? Yelp has reviews of doctors and dentists that include videos put together by the practices to give visitors more information. Like Zagat.com, Yelp's reviews are organized into a similar list of larger cities, but reviews exist for almost any location you can think of, including less prominent cities and towns. Google is also working towards the goal of ubiquity. Yelp's strategy is to sell local advertisements wherever businesses exist and to provide free content funded by these sales. Yelp has also relied more on individual reviewers. Instead of distilling reviews into one coherent whole, as Zagat's does, Yelp allows its reviewers to post full, unaltered reviews, which allows top reviewers to gain followings and even receive invitations to special events. The drawback of this approach is that many reviews are far longer than necessary and individual reviews may contain distortions or false claims designed to damage reputations. Zagat reviews give a clearer and more concise impression of a restaurant than most Yelp reviews, and they are aggregated and given a score. Investors believe that Yelp is on "a different trajectory" because of its unique business model. Zagat sold content to consumers and corporations; Yelp sells advertising to local businesses. Many analysts believe there is much more potential for growth with Yelp's business model than with Zagat's old model because it is a useful advertising vehicle for small businesses everywhere, not just major cities. Zagat may also have hurt itself with its slow response to the emergence of the mobile digital platform. Most analysts agree that Zagat could have avoided this state of affairs by making a more aggressive effort to go digital. The choice to use a pay wall may be the biggest culprit. But did it necessarily hurt Zagat's bottom line? The company has always been profitable, according to Tim and Nina Zagat. Other successful Web sites have used a pay wall. Zagat book revenue is still strong-the New York survey is still on the New York nonfiction best-seller list, and its corporate custom guide unit is very profitable. Despite their acquisition by Google, the Zagats plan to continue to publish their physical books. Nevertheless, it's also possible that going with a pay wall before establishing a loyal online audience may not be the right time to make the move towards a paid model. So far, the pairing of Google and Zagat has been successful, and will allow the two companies to better compete with Yelp in local search. But Google also hopes that incorporating Zagat's user-generated content model into Google+ will help its fledgling social network to better compete with Facebook by providing uniquely valuable services to its users. Google envisions Google+ users searching for "pizza", and being given a map with the closest pizzerias marked with Zagat reviews, some of which may be written by their friends on the network. For Google, acquiring Zagat was just one of a myriad of acquisitions they made in 2011; but from Zagat's perspective, its acquisition represents another phase in a long e-commerce journey, and illustrates the difficulty of developing just the right business model for your company.

CASE STUDY QUESTIONS

1. Evaluate Zagat using the competitive forces and value chain models.

2. Compare Zagat's and Yelp's e-commerce business models. How have those models affected each company's Web strategy?

3. Why was Zagat's content well suited for the Web and for the mobile digital platform?

4. Do you think Zagat's decision to use a pay wall for its Web site was a mistake? Why or why not?

5. Will Zagat's acquisition by Google make it more competitive? Explain your answer.