iOn January 10, 2013, the Department of Justice (DOJ) brought suit challenging the acquisition by Bazaarvoice, Inc. of its competitor PowerReviews, Inc., claiming the transaction, which had been consummated, would substantially lessen competition in the consumer-generated product ratings and reviews (PRR) platform market.[1] The Complaint states that Bazaarvoice and PowerReviews are the top two providers of PRR platforms, and that “[n]o other PRR platform competitor has a significant number of PRR platform customers in the United States.”[2] Bazaarvoice issued a press release challenging the DOJ’s product market definition and vowing to fight the lawsuit in court.[3] In the Joint Case Management Statement (“Case Statement”)[4] submitted by the parties to the Court of Appeals on February 8, 2013, Bazaarvoice claims that the transaction has not actually lessened competition in any relevant market in the seven months following the closing, and that there has been “substantial competitor repositioning and entry and intense competition on price and innovation.”[5]
The DOJ’s Complaint focuses heavily on the parties’ own internal documents discussing the market and competitors in concluding that the parties essentially were the only two competitors in the PRR market. The DOJ is seeking an order requiring Bazaarvoice to divest assets sufficient to create a separate, distinct and viable competing business that can replace PowerReviews’ competitive significance in the U.S. marketplace.[6]
This suit is yet another demonstration of the antitrust agencies’ willingness to challenge transactions they believe may be anticompetitive, whether or not they are required to be reported under the Hart-Scott-Rodino Antitrust Improvements Act. According to Bazaarvoice, despite the fact that the transaction was outside the reach of the HSR Act, the companies had been working with the DOJ to resolve its concerns. [7] However, because the transaction was not subject to the waiting period requirements of the HSR Act, the parties closed the transaction in June 2012, although the DOJ had not yet terminated its investigation.
Background
On May 24, 2012, Bazaarvoice announced that it had signed a definitive agreement to acquire PowerReviews, a transaction that would allow Bazaarvoice to “serve companies of all sizes across major market segments and geographies.”[8] According to the announcement, the transaction would “establish Bazaarvoice in the small to medium sized market and expands the Bazaarvoice network to over 1,800 clients globally, including nearly half of the Internet Retailer Top 500 companies. The expanded client base will create new opportunities to syndicate authentic online word of mouth content across an expanded global network and enhance the ability of both brands and retailers to connect directly with their customers to generate new insights into consumer sentiment…. The bottom line is that this combination will help us create more value for retailers and brands and consumers, as well.”[9]
The transaction was not reportable under the HSR Act because PowerReviews had less than $12 million in revenues in the year before the transaction, which is below the HSR Act’s “size of parties” threshold. It is not unusual for service or internet companies, particularly in the start-up phase, to have very few assets and minimal historical sales levels in the U.S. However, Bazaarvoice voluntarily complied with what it described as the “spirit” of the HSR Act by “provid[ing] the DOJ with extensive documents, data, and information demonstrating that [the] acquisition of PowerReviews was procompetitive and did not result in a lessening of competition. We spent more than six months explaining that there is robust and ample competition in the market for social commerce engagement tools.”[10]
However, some of the documents--particularly e-mails--supplied by Bazaarvoice to the DOJ contained statements regarding the product market and competition. Some of the statements highlighted by the DOJ in the Complaint included the following:
> A co-founder’s April 2011 statement that acquiring PowerReviews would “[e]liminat[e] [Bazaarvoice’s] primary competitor” and provide “relief from [] price erosion.”
> The CEO’s May 2011 statement that the acquisition of PowerReviews was an opportunity to “tak[e] out [Bazaarvoice’s] only competitor, who… suppress[ed] [Bazaarvoice] price points []by as much as 15%....”
> The CEO’s November 2011 statement that Bazaarvoice would have “[n]o meaningful direct competitor” after acquiring PowerReviews, thereby reducing “pricing dilution.”
> A May 2012 deal memo to the Bazaarvoice board of directors concluding the acquisition would “block[] entry by competitors” and “ensure [Bazaarvoice’s] retail business [was] protected from direct competition and premature price erosion.”[11]
> Statements from PowerReviews’ former CEO, VP of Strategy and current CEO and CFO are also included in the complaint.[12]
Bazaarvoice discounted the DOJ’s reliance on the email traffic, noting it’s “surprise[] that the DOJ chose to base this case on a series of dated documents. In doing so, they ignored virtually all of our recent ordinary course documents and substantial economic evidence. The documents excerpted in the complaint, when taken out of context as the DOJ did in its complaint, paint an inaccurate picture of the marketplace. During the litigation, we will focus on rectifying the DOJ's inaccuracies.”[13]
Factors Influencing the DOJ’s Decision to File a Complaint
Market Definition
At issue in the suit is the definition of the relevant antitrust market and the extent of competition within that market. The DOJ’s Complaint states that the relevant market is PRR platforms, which “enable manufacturers and retailers to collect, organize, and display consumer-generated product ratings and reviews online…. PRR platforms can range from simple software solutions a company has developed with internal resources to sophisticated commercial platforms offering a combination of software, moderation services, and data analytics tools.”[14] Importantly, some PRR platforms allow manufacturers and retailers to share, or syndicate, ratings and reviews with each other, which improves the content available to each of them, which in turn may improve their ranking (or that of the product at issue) on search engine results pages.
Bazaarvoice took issue with the DOJ’s “overly narrow definition,” claiming “[r]atings and reviews are but one of many tools that brands and retailers can use to engage with their customers as part of an overall social commerce strategy to increase awareness of their products”[15] including via Facebook, Twitter, community forums, and others. Furthermore, acording to Bazaarvoice, “PowerReviews provides a social platform that includes ratings and reviews, Q&A, loyalty, discovery, and measurement capabilities. PowerReviews has built a client base of more than 1,100 retailers, primarily small and mid-size North American retailers, as well as large retail companies…. Bazaarvoice’s technology platform is highly customizable and focused on larger online retailers and brands, while the technology platform of PowerReviews provides a self-service turnkey solution that is often more appealing to medium and smaller sized online retailers.”[16] In the Case Statement, Bazaarvoice pointed to wide variations in customers and products and insufficient consideration of substitutes in arguing that the DOJ did not properly define the market.[17]
The DOJ maintains that social commerce products, including community platforms, forums, and Q&A platforms are not substitutes for PRR platforms because of the “structured, product-level data” provided by PRR platforms, and that the “PRR platforms and other social commerce products serve different purposes, retailers and manufacturer routinely use PRR platforms in combination with one or more other social commerce products.”[18] Bazaarvoice agreed that retailers and manufacturers use many tools to enhance their content. In a public statement after the Complaint was filed, Bazaarvoice noted that “ratings and reviews are but one of many tools that brands and retailers can use to engage with their customers as part of an overall social commerce strategy to increase awareness of their products…. However it disagreed with the implications, stating, “even assuming the validity of the DOJ's product market definition, there is still robust competition for ratings and reviews all over the social commerce landscape — the market is much bigger and more nuanced than the DOJ appreciates.”[19]
Market Participants, Shares and Entry
The DOJ supported its claim of likely anticompetitive effects by pointing to evidence it says shows that the parties were each other’s closest competitor prior to the merger. The DOJ noted that prospective customers routinely played Bazaarvoice and PowerReviews against each other during negotiations, and that other commercial suppliers of PRR platforms are not sufficiently close substitutes to Bazaarvoice’s platform to prevent a significant post-merger price increase.[20] Furthermore, the DOJ pointed to PowerReviews’ “scorched earth approach to pricing” with respect to Bazaarvoice and “feature driven one-upmanship”[21] as evidence of PowerReviews’ allegedly disruptive role in the defined market.
According to the Complaint, of the 500 largest internet retailers by online sales revenue, 150 do not collect and display ratings and reviews. Of the remaining 350, approximately 245 (70%) use PRR platforms provided by Bazaarvoice or PowerReviews and most of the remaining approximately 105 use in-house PRR solutions which can be expensive to develop and complex to develop and maintain.[22] According to Bazaarvoice, the two companies served “over half of the Internet Retailer Top 500,” but served a lower percent of all companies, with “over 20 percent of the Fortune 500 and over one-third of the Fortune 100.”[23]
The DOJ pointed to Bazaarvoice’s network to claim that entry or expansion by other firms is unlikely to alleviate the competitive harm caused by the transaction.[24] According to the Complaint, Bazaarvoice, which was founded in 2005, and PowerReviews, which was founded in 2006, have since been the largest competitors in the PRR market.[25] The DOJ acknowledged that “other providers exist,”[26] but noted that “they have struggled to win customers and gain market share” due to factors such as Bazaarvoice’s syndication network between manufacturers and retailers of a product.”[27] Indeed, Bazaarvoice has identified its “powerful network effects” as a competitive strength in its filings with the Securities and Exchange Commission.[28] However, in the Case Statement Bazaarvoice pointed to in-house solutions as proof of a lack of entry barriers and also to large firms who may be able to expand current offerings to cover PRR, as well as current PRR providers who could add features and functionality to their platforms to match the PowerReviews offering. They focus the inquiry on “whether the market can replicate the competition previously offered by PowerReviews–not Bazaarvoice as its exists today.”[29]
Documentary Evidence
Regardless of the parties’ arguments at this stage, the DOJ’s Complaint prominently features the statements of Bazaarvoice management outlined above. In its recently released “Horizontal Merger Investigation Data for Fiscal Years 1996-2011,”[30] the Federal Trade Commission tracked market structure information as relevant to its decision whether or not to challenge a merger. The Commission also noted the presence or absence of three factors[31]: “hot documents,” strong consumer complaints,” and “entry conditions”.[32] Notably, of the transactions in which a second request was issued, the FTC sought relief (including cases where the parties abandoned their merger after a full investigation) in approximately 90% (25 of 28) of the transactions in which hot documents were present. However, the FTC sought relief in approximately 65% (150 of 230) of the transactions which did not involve hot documents.[33]
Comments
The Bazaarvoice challenge highlights the need for merging companies to manage the document creation process daily, and well in advance of any announcement of a proposed transaction. The DOJ referred to other evidence in its Complaint, but the parties’ own documents -- including informal emails and formal board presentations--were used by the DOJ to develop its theory of the case. Party statements are heavily relied upon by the enforcement agencies, and create distractions and hurdles whether or not they are factual or ultimately determinative. Bazaarvoice, in its press release, dismissed the statements of management as “dated” and “out of context”, but their significance is now for the court to decide. In most cases “puffing” or misleading statements can be avoided while the parties’ strengths are highlighted with truthful, appropriate statements.
Whether a transaction is on the horizon or not, and whether a potential transaction with a competitor is of the “bet the company” nature or a “small add on,” management should be sensitized to the fact that all communications, whether formal or informal, need to accurately reflect the company’s view of competition. While the Bazaarvoice transaction was “too small” to be HSR reportable, the agencies’ have increased their investigation of non-reportable and/or closed transactions over the past several years, especially when the parties’ own documents point to a potential anticompetitive outcome.
The Bazaarvoice challenge also confirms that, as outlined in the 2010 Horizontal Merger Guidelines,[34] the federal enforcement agencies are not tied to a step by step analysis that starts with market structure and shares, though the DOJ did point to the parties’ relative shares of the top 500 internet retailers. When the parties’ own ordinary course, internal documents reflect a plausible market definition, structure or share, the agencies have repeatedly used this information as evidence of the same.
Anyone who has purchased something on the Internet has been asked to provide feedback. The consumer content generated in such reviews helps manufacturers and retailers spot issues, enhance search engine results, and accurately describe products, all of which potentially helps consumers. A quick search for product “reviews” will provide links to manufacturer sites, retail sites, review sites and industry overviews, among others. The review sites themselves are rated and ranked, depending on the quality of the reviews posted. The DOJ Complaint presents a review of the Bazaarvoice-PowerReviews transaction. It may be a court that provides the feedback.
[1]http://www.justice.gov/opa/pr/
[3]http://www.bazaarvoice.com/
[5] Id. at 3.
[6] http://www.justice.gov/atr/
[7]http://www.bazaarvoice.com/
[8]http://www.bazaarvoice.com/
[9]http://www.bazaarvoice.com/
[10]http://www.bazaarvoice.com/
[11] http://www.justice.gov/atr/
[12] http://www.justice.gov/atr/
[13]http://www.bazaarvoice.com/
[14] http://www.justice.gov/atr/
[15]http://www.bazaarvoice.com/
[16]http://www.bazaarvoice.com/
[17] Case Statement at 4-5.
[18] http://www.justice.gov/atr/
[19]http://www.bazaarvoice.com/
[20] http://www.justice.gov/atr/
[21] http://www.justice.gov/atr/
[22] http://www.justice.gov/atr/
[23]http://www.bazaarvoice.com/
[24] http://www.justice.gov/atr/
[25] http://www.justice.gov/atr/
[26] http://www.justice.gov/atr/
[27] http://www.justice.gov/atr/
[28] http://www.sec.gov/Archives/
[29] Id. at 5.
[30] http://www.ftc.gov/opa/2013/
[31] These factors were tracked with respect to investigations involving three or fewer markets.
[32] The DOJ does not publish the frequency of “hot documents” identified in its merger investigations.
[33] http://www.ftc.gov/opa/2013/
[34] http://www.ftc.gov/bc/mergers.
