High-profile or highly profitable firms are no longer the sole targets of post-merger divestitures by antitrust enforcers. Today, firms that have little or no revenues, including some that operate in emergent industries with little or negative profits, also find themselves subject to merger inquiries, as demonstrated by the recent merger review of Bazaarvoice’s 2012 non-reportable $160 million acquisition of PowerReviews.
These competing firms were both operating at a loss in the relatively small ratings and review (R&R) market. Yet, the nature of competition in the industry and the industry’s potential importance to adjacent industries – combined with statements by the acquirer’s executives prior to the transaction – attracted the scrutiny of antitrust enforcers. Ultimately, Bazaarvoice agreed to divest all of its PowerReviews assets, including employees and client base, to a small competitor, Viewpoints – which had initially entered R&R space by building a solution for Sears – for $30 million.
This article considers the economic arguments and evidence used by the court to reach its decision in United States v. Bazaarvoice.
R&R platforms offer an online interface for customer reviews of different products, which can help to drive sales, increase product visibility, and offer valuable information on customers to brands and retailers, allowing brands to respond to customer concerns in real time. Leading platforms offer clients the following services: confirmation of the authenticity of customer reviews; moderation of reviews (e.g., removing offensive language); syndication that combines reviews from multiple retailers to increase the visibility of a product; data on retailers and social media analytics to support marketing; and search engine optimization to drive traffic. Bazaarvoice and PowerReviews offered clients all of these services, but Bazaarvoice generally provided more customizable features at higher price points to larger clients. Bazaarvoice offered human moderation of customer reviews, for example, while PowerReviews offered only automated monitoring.
In 2012, Bazaarvoice had 800 employees and revenue of $106.1 million; in 2011, the privately held PowerReviews employed just 80 people and reportedly had revenue of $11.5 million. Although PowerReviews did not publicly report its profitability, according to Bazaarvoice executives, the smaller firm was operating at a loss. Similarly, Bazaarvoice itself reported consistently negative operating margins in 2011–2013 that were no higher than -23%.
At the time of the court ruling (January 2014), actual competition from other platforms in the R&R market was marginal, composed primarily of a handful of start-ups with inferior products or of larger firms that offered complementary products. Direct competitors like Pluck, Gigya, Practical Data, Rating-system.com, and European Reevoo were tiny, with few customers and weak services. More established firms that might have acted as potential competitors, such as Google, Facebook, Oracle, and Salesforce, were more interested in partnering with Bazaarvoice than in competing in the R&R market. Meanwhile, Amazon accounted for 28% of e-commerce revenue and maintained (and still does, as of August 2014) its own R&R platform, which was not available to competing retailers.
In its review of the transaction, the U.S. Department of Justice (DOJ) applied competitive analysis that ignored more traditional focuses on supracompetitive pricing, high margins, and immediate harm to consumers. The analysis focused instead on the nature of competition in the R&R industry, including barriers to entry and the anticompetitive potential for long-run harm to consumers as detailed in the assessments of Bazaarvoice senior staff.
Low margins: The parties were losing money. Their profits were a far cry from the supracompetitive profits often associated with companies targeted by antitrust litigation. In previous antitrust cases against Microsoft, for example, the company’s margins on Windows and MS Office had played a significant role at trial. Similarly, the potential for enhanced market power and exceptional margins contributed to the DOJ decision to prevent Microsoft from acquiring Intuit in 1994–1995.
Barriers to entry: Bazaarvoice’s extensive syndication network, in particular, became a major component of the case. The DOJ argued that it would be extremely difficult for competitors to develop a comparable syndication network of retailers and brands, allowing Bazaarvoice to leverage anticompetitive economies of scale across many important clients. These advantages, combined with the difficulty of switching from one R&R platform to another – as demonstrated by the reluctance of PowerReviews customers to switch to the Bazaarvoice platform – would effectively block new entrants from the market. While the DOJ’s argument was much less convincing with respect to other barriers to entry, such as the company’s technology and reputation, clearly antitrust enforcers had seized on important elements of the relationship between Bazaarvoice’s value proposition and the growth of the R&R market.
Bad documents: These potential anticompetitive implications were explicitly referenced in Bazaarvoice’s own internal documents, which became instrumental in court. The firm’s current CEO remarked that there were “literally, no other competitors” beyond PowerReviews, and the former CEO wrote that after the proposed acquisition of PowerReviews, Bazaarvoice would have “[n]o meaningful direct competitor.” Bazaarvoice senior executives openly acknowledged that syndication networks created high barriers to entry in the R&R industry and clearly described that the elimination of Bazaarvoice’s “primary competitor” would provide “relief from price erosion.” The DOJ seized on these documents, arguing that the merger would increase prices and eliminate the “substantial price discounts” that retailers and manufacturers received as a result of competition between Bazaarvoice and PowerReviews.
In this case, the court noted these apparent competitive weaknesses and remained on the lookout for changes in the R&R market. In fact, in the 18 months from the time of the acquisition on June 12, 2012, until the case’s ultimate outcome on January 8, 2014, the only post-merger evidence that was considered dispositive by the court was the absence of serious entry to the market. The court explicitly rejected the use of pricing data, suggesting that it could be manipulated. The same pricing data that regulators might have expected to rise above competitive levels – and that therefore could have created space for new entrants in the R&R market at lower price points – was viewed as suspect. The DOJ case was structured instead around the absence of a credible entry threat in the R&R space, despite Bazaarvoice’s annual margins of around -30%.
The court’s focus on the entry threat and its dismissal of pricing policies is curious, because the two issues are highly related. In an industry characterized by prices so low that the market leader is highly unprofitable, new firms have no incentive to enter. To become profitable, Bazaarvoice would have had to double its prices, and yet no evidence presented in the case demonstrated that entry would be impossible at that much higher price level. Surprisingly, the court did not connect these two issues in a meaningful way.
For Bazaarvoice, the challenge was less about responding to customer concerns or even to actual prices than it was about addressing the incendiary internal paper trail left by the company’s senior executives. In fact, as the testifying expert for Bazaarvoice/PowerReviews, Dr. Ramsey Shehadeh, pointed out, customers expressed no reservations about the merger, and Bazaarvoice had not raised prices. Ultimately, the court discounted Bazaarvoice’s arguments related to the absence of actual anticompetitive effects, noting that the firms could moderate their behavior while under antitrust scrutiny, and focused instead on the firm’s own internal documents, which had detailed a plan to block competitive pressure. Bazaarvoice found itself fighting its own internal assessment of the competitive effects of the proposed merger, in addition to the DOJ’s economic arguments. The internal documents and emails were far more difficult to explain away than the economic circumstances, resulting in a full divestiture. ■
This feature is adapted from Managing Principal Rebecca Kirk Fair’s panel discussion of antitrust enforcement in the case of United States v. Bazaarvoice at the May 2014 New York State Bar Association Antitrust Law Section meeting.