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Chapter 10 E-commerce: Digital Markets, Digital Goods 443

To Pay or Not to Pay: Zagat’s Dilemma

CASE STUDY

F ounded by Tim and Nina Zagat, the Zagat access. One of the most prominent members of

the Zagat investment group was Nathan Myhrvold,
Survey has collected and published ratings
of restaurants by diners since 1979. Zagat
formerly the chief technology officer at Microsoft.
publishes surveys for restaurants, hotels, Myhrvold supported the Zagats’ decision to use a pay
and nightlife in 70 major cities. Zagat has come a long wall for their content and maintained that putting
way from its roots in the early 1980s, when the food- all of their content online for free would have
loving Zagats started compiling lists of their favorite undermined their book sales.
restaurants for personal use and to share with their Although Myhrvold and the Zagats themselves
closest friends. But with the rise of the Internet, favored the pay wall, other Zagat investors argued
e-commerce, and mobile technology, Zagat has strug- that placing content online for free allowed compa-
gled to find a business model that stayed true to the nies like Yelp to get its results on the first page of
company’s origins. Google search results, which is critical for maintain-
To generate their first survey, the Zagats polled ing the strength of a brand in today’s advertising
200 people, and increased that number over time. environment. By not taking this approach, Zagat left
Executives, tourists, and New York foodies alike itself open to be surpassed by Yelp, Groupon, Google
found the list to be indispensable. Spurred by this Places, and other similar services offering free con-
success, the Zagats decided to publish their survey tent supported by advertising from local businesses.
themselves. The few booksellers that took a risk in Sure enough, these companies soon began attracting
stocking the book were rewarded with sales so robust numbers of online visitors that dwarfed Zagat’s.
that the Zagat Surveys became best sellers. In 2008, the Zagats tried to sell their company.
The pair also published similar lists for other They failed to do so, partially due to Yelp’s growing
major cities, including Chicago, San Francisco, popularity. Prospective buyers were more intrigued
and Washington, D.C. In addition to print books, by Yelp’s much larger online audience and growth
Zagat opened a unit that creates custom guides for potential. The Zagats’ failure to sell the company in
corporate clients, like the ones at Citibank. For a long 2008 highlighted their failure to effectively go digi-
time, this business model was sufficient to ensure tal. Food blogs and similar sites abound on the Web
that Zagat Survey was successful and profitable. nowadays, but Zagat was in a unique position to get
When the dot-com bubble came along, venture there first and establish itself as a market leader, and
capitalists were attracted to Zagat for its brand rec- it failed to do so.
ognition—the Zagat name is instantly recognizable For much of 2011, Zagat continued to lag behind
to food-lovers, travelers, and restaurateurs alike. Yelp and other free review sites in the battle for
Zagat was one of the first companies to popular- eyeballs. Yelp drew much greater traffic than Zagat.
ize user-generated content, collecting restaurant com. From January to April 2012, Zagat.com had
reviews from its readers, aggregating those reviews, only 310,000 visitors, while Yelp had 31 million. The
and computing ratings. In addition to numeric rating Zagat Web site claimed it has more users, but the dis-
scores, the survey also includes a short descriptive parity was still significant.
paragraph that incorporates selected quotations from Zagat saw its fortunes change in September 2011,
several reviewers’ comments about each restaurant when Google paid $151 million to buy the company.
or service. Venture capitalists saw that Zagat had Although the Zagats had sought $200 million in 2008,
a golden opportunity to migrate its content from the deal was considered by analysts to be generous.
offline to online, Web, and mobile. Google was seeking to establish itself in the local
Of the many decisions the Zagats faced in search marketspace, and after failing to purchase
bringing their content to the Web, perhaps the most Yelp for $500 million in 2009, Zagat was next on their
important- was how much to charge for various types shopping list. In fact, after the Yelp deal fell through,
of content. They ultimately decided to place all of Google and Yelp have become heated rivals, and Yelp
their content behind a pay wall, relying on the Zagat has alleged that Google is rigging its search results to
brand to entice customers to purchase full online favor its own services over those of its competitors.

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