/ App Economy

Valuing Technology Fairly – Case Study In Seamless And Grubhub

Quartz news recently posted an analysis of the commission GrubHub and Seamless charge to restaurants that participate in their advertising network. Working backward from a claimed billion dollars in delivery orders, QZ calculated that GrubHub and Seamless collected $137 million in revenue through an average commission that approaches 14 percent.

This is completely coconuts, of course, and it got me thinking about how to fairly value technology. Technology can do wonderful things to improve our lives, but most often it seems improve the fortunes of those who are already well off. In this case, technological profit seems to come at the cost of those already marginalized.

Seamless and GrubHub frame their narrative as noble. They’ve struck upon an incredible breakthrough to fix a system and improve lives. In return, they deserve a lavish commission and untold IPO riches.

In my view, this is closer to reality: GrubHub and Seamless happen to control a small amount technological knowledge, which gives them leverage over business owners who are unsophisticated in their knowledge of internet. They’re unneeded middleman, and their compensation is out of line when compared against the value of their service.

The technical solution created by GrubHub and Seamless is hardly groundbreaking. It’s a shopping cart for restaurants, solidified by an anticompetitive merger. In a world where restaurateurs were web savvy, individual eateries could easily implement these systems. The real power in GrubHub and Seamless is that they ‘invented’ online restaurant ordering – introducing the concept to diners, and locking them into their ecosystem before restaurants had a chance to respond.

Let’s suppose that the core team of technologists here is no bigger than 50 – 100 employees. Their company hauls in $137MM in revenue. The entire operation is closer to 700 employees, according to GrubHub’s IPO prospectus, but it’s fair to assume the vast majority of these employees clock in at GrubHub for customer service positions, or are part of their mammoth sales force. I doubt many of those employees hold significant stock options. This slim collection of technologists are skimming a very significant percentage of the money that helps support tens of thousands of restaurant workers.

Based on a 2010 study by the National Restaurant Association (and Deloitte & Touche LLP), average pre-tax profit margins in the  trade range from 2-6 percent. It’s an extremely tight business, staffed with mostly low wage workers: according to the Bureau of Labor Statistics, average pay in the  industry is just $18,130.  It’s hardly a leap to suggest spiraling ‘web’ commissions will impact these wages. One might argue that GrubHub and Seamless are bringing in new business, but it’s more likely they’re supplanting what were once phone orders. The volume of take-out food orders is tied more closely to broader economic health than order-placing technology.

But wait —** it gets worse**! Once a restaurant is doing business with Seamless, they’re pressured to pay extra for better placement within the site. While consumers believe they’re shown restaurants based on ratings, or other objective criteria, placement is actually determined by fee. Their commission can in fact range as high as 18 percent. On top of that, there are monthly “partnership fees” to remain active, in addition to the commissions. Plus, when an order is placed on Seamless or GrubHub, they keep all the cash upfront, and send what’s left over after commissions at their leisure.

What happens when all restaurants are paying ~20 percent of their revenue to continue the business they had before GrubHub and Seamless arrived on the scene? It’s bad for consumers, much worse for restaurants, and another example of technology that benefits only a small cadre of insiders.

I can’t say for certain what compensation is reasonable for a shopping cart software company, but I do recognize what it looks like when one takes advantage of it’s clients. When I order takeout, I pick up the phone.