To Pay or Not To Pay: Zagat’s Dilemma
Source: Laudon, KC & Laudon, JP 2013, Essentials of Management Information Systems, 10th Edition, Prentice Hall, New Jersey
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. Today, as more people use their smartphones for information on the go, Zagat is moving its content online and onto the mobile platform. It has been a struggle.
Zagat has come a long way from its roots in the early 1980s when the food loving Zagats started compiling lists of their favourite restaurants for personal use and to share with their closest friends. To generate the 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 a book with 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 DC. 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 recognisable to fool lovers, travellers and restaurateurs alike. Zagat was one of the first companies to popularise 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 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 favoured the pay wall, other Zagat investors argued that placing content online for free allows 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.
In 2008, the Zagats tried to sell their company. They failed to do so, partially due to Yelp’s growing popularity. 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, 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 trailed Yelp and other free review sites in the battle for eyeballs. Yelp drew much greater traffic than Zagat.com. In January 2011, according to comScore, Zagat.com had only 269,000 visitors, while Yelp had 26 million. The Zagat Web site claims it has more users, but the disparity is still significant.
A quick visit to the two sites highlights some of the differences. Zagat.com’s home page is streamlined with a minimal number of search boxes and links immediately available. Restaurant reviews are organised by several major “hub” cities as well as popular lists of the top restaurants of a certain type. Clicking on a restaurant shows visitors only 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. However, individual ratings for food, décor, service and cost are all behind the pay wall. The site also features a store where users can buy any of the Zagat surveys, Zagat-rated wine and even Zagat t-shirts.
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 organised into a similar list of larger cities, but reviews exist for almost any location you can think of, including less prominent cities and towns.
As of July 2011, Yelp had 20 million reviews and estimated that users would write another 5 million reviews by the end of the year. In contrast with Zagat’s online offerings, which are primarily restaurant reviews, only 25% of Yelp’s reviews are for restaurants, with another 25% coming from shopping and 10% apiece from local entertainment, services and health and beauty. Yelp has already launched a check-in service to allow mobile users to tell their friends where they’ve been dining and Yelp’s mobile app has well over 3 million unique users.
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 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 sells content to consumers and corporations; Yelp sells advertising to local businesses. Many analysts believe that there is much more potential for growth with Yelp’s business model than with Zagat’s, 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, but migrating Zagat’s content from offline to online and mobile has not been as easy or lucrative as envisioned by investors. Their choice to use a pay wall may be the biggest culprit. But is it necessarily hurting their bottom line? The company remains profitable, according to Tim and Nina Zagat. Its 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. The Zagats also counter criticisms of the pay wall by noting that Time.com, The NYTimes.com and other sites have recently begun instituting pay walls and that more companies are beginning to view their Web strategy as the right one. But it’s 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.
Perhaps realising this, in February 2011, Zagat Survey relaunched its Web site featuring more free content in response to the rising popularity of Yelp and similar sites. The site features revamped search tools that allow users to find restaurants in particular neighbourhoods or near prominent landmarks. Members receive more recognition for being active and respected reviewers, including their own quotes in Zagat’s previously anonymous reviews. Users can now “like” reviews similar to Facebook, and they can also upload their own photos to the site. Full access to the site, however, still costs $24.95 per year.
Zagat is also doing more of the right things to compete in the mobile landscape. It developed a smartphone app that runs on Android, Apple, BlackBerry, Windows Mobile and Palm platforms. Zagat is optimistic that more mobile users will pay $9.99 for its smartphone application than the few Web users that have paid for full access to its Web site. Zagat was on Android phones nearly a year before competitors and embraced other emerging firms like Foursquare and Foodspotting early as well, so it has already made strong progress in the mobile marketplace.
Zagat’s mobile app features access to Zagat premium ratings and reviews and the ability to find nearby restaurants using geolocation. The latest version, released in early 2011, includes a full visual overhaul to increase ease of use and integration with Foodspotting and Foursquare and to provide photos of dishes and meal tips based on diners with tastes similar to the user’s own. These changes are intended to make the application more social. Another compelling feature of Zagat’s app is the ability to download its guides directly to phones. That way, users can access the information even if the Internet is unavailable or if they are outside the United States.
Zagat was bought by Google in September 2011. The acquisition strengthens Google’s position in mobile and local search, helping it to compete against Yelp for high volume searches for restaurants and hotels. It also means that Google will own some of the media content it serves up for searches, and the content will be of higher quality than in the past. There is less potential for inaccurate or biased reviews or abuse, because Zagat surveys the crowd and then aggregates its opinions rather than posting unfiltered individual reviewer comments. As of this writing, Zagat had no post-acquisition plans to change its content pricing. Will the marriage of Google and Zagat turn both into stronger companies?
Questions
1. Compare Zagat’s and Yelp’s ecommerce business models. How have those models affected each company’s Web strategy? 2. Compare the value chain models and competitive advantage for Zagat and Yelp. 3. Discuss the effectiveness of Zagat’s and Yelp’s websites in relation to good web design. 4. Discuss the methods of communication used by the organisation, evaluate the effectiveness of these and suggest methods that may be applied in future 5. Zagat was an early innovator. Discuss the pros and cons of an organisation updating their information system to be the first in their industry to change ie the innovation dilemma, relating this to Zagat and Yelp.