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|EI Vice President David D. Smith has dealt with antitrust issues in a wide range of industries. Before joining EI, he was an economist at the Antitrust Division of the U.S. Department of Justice.|
A recent decision by Judge Orrick of the U.S. District Court of the Northern District of California explicitly addressed the controversial issue of whether mergers in high-tech, dynamic industries should receive special treatment under the antitrust laws. The judge ultimately decided that the Court’s role was to assess the alleged antitrust violations, not to debate the proper role of antitrust law in high-tech markets. Indeed, the judge applied a traditional Merger Guidelines approach in analyzing the competitive effects of this merger.
Bazaarvoice acquired a competitor, PowerReviews, on June 12, 2012. Two days later, the United States Department of Justice (DOJ) launched an investigation. DOJ filed suit on January 10, 2013, alleging that the transaction was anticompetitive and violated Section 7 of the Clayton Act. The judge found for DOJ. Although this ruling means the government “would be entitled to an injunction that requires Bazaarvoice to divest PowerReviews,” he stated, “[t]his is not a simple proposition 18 months after the merger.” He asked the parties to file a Joint Statement Regarding Remedy Phase on January 17, 2014, and attend a Case Management Conference on January 22, 2014 to discuss the remedy.
The judge found that the relevant product market was Ratings and Reviews (R&R) platforms, and that the relevant geographic market was the United States. R&R platforms provide software and services to Internet vendors to collect, organize, and display product reviews and ratings from consumers. These reviews and ratings appear on the vendors’ websites for potential consumers to read before making purchases. R&R platforms are valuable to vendors because they tend to increase sales, decrease product returns, improve a website’s ranking by Internet search engines, and provide consumer sentiment information. Even negative reviews improve sales because they confirm the authenticity of the reviewing process.
R&R platforms are one type of “social commerce” tool. Social commerce refers to the interaction of consumers in the shopping process, typically through a website. R&R platforms provide a user interface and review forum. They usually prompt consumers to rate products on a five-star basis, and they offer an option to write open-ended reviews of the product. The more sophisticated R&R platforms allow manufacturers to “syndicate” or share ratings and reviews with their retail partners. For example, Staples.com can display ratings and reviews for a Canon printer that Canon collected on Canon.com. Another important feature of R&R is called “moderation.” Before a review is posted on the manufacturer’s or retailer’s website, it is given an automated scan and then reviewed by a human moderator to ensure that it complies with a particular website’s standards. Moderation helps ensure that the review is credible and inoffensive.
Bazaarvoice and PowerReviews both offered sophisticated R&R platforms to large enterprise manufacturers and retailers. Both platforms were full-featured, offering syndication and moderation. Each R&R platform sale was negotiated individually with the specific customer.
The judge did not find that products in a broader social commerce sector (e.g., customer commentary, blogs, pictures, Facebook shares and “likes,”) competed with R&R platforms. The court did find that social commerce is a “constantly evolving space” and that the “future composition of the industry as a whole is unpredictable.”
The judge relied heavily on documents and testimony from the merging parties to define the relevant product market. He wrote that “in the years preceding the acquisition, Bazaarvoice executives repeatedly expressed that Power Reviews was its most significant, and often only, R&R competitor.” The judge also found evidence that PowerReviews disciplined Bazaarvoice’s pricing. Bazaarvoice acknowledged “that many customers brought PowerReviews into negotiations as a ‘lever to knock [Bazaarvoice] down on price.’” Recognizing heightened competition from PowerReviews, Bazaarvoice responded with “Project Menlogeddon,” which was described as “a special project to defeat our only meaningful competitor.”
Other evidence of expected price effects came from pre-merger documents giving reasons for the merger. A Bazaarvoice executive wrote that one of the benefits of acquiring PowerReviews would be to “[e]liminate [Bazaarvoice’s] primary competitor,” and provide “relief from…price erosion.” He also wrote that the acquisition would allow the combined company to “avoid margin erosion” caused by “tactical ‘knife-fighting’ over competitive deals.” Another Bazaarvoice executive saw the acquisition as an opportunity to “take out [Bazaarvoice’s] only competitor, who…suppress[ed] [Bazaarvoice] price points…by as much as 15%.”
Bazaarvoice also had documents indicating the rationale for the acquisition was procompetitive. The judge, however, found this evidence less convincing than that consistent with anticompetitive effects. “The most plausible conclusion from the evidence presented at trial is that Bazaarvoice wanted to buy PowerReviews to use its enhanced market power in R&R platforms to keep competitors out of the R&R market and use its dominance to avoid competition in pricing and innovation while also pursuing the other long long-term objectives…”
The merging parties argued that the relevant geographic market is worldwide because technology knows no borders and R&R software is easily sold worldwide. The court, however, found evidence pointing to a U.S. market more convincing. First, R&R platform providers license their products for specific websites that are often limited by geography. Second, to offer a commercial syndication service in the United States, an R&R platform provider must have ratings and reviews written for the specific version of the product that is sold in the United States. Third, U.S. customers prefer reviews written by U.S. native English speakers.
Using several alternative measures, market concentration in the relevant market was found to exceed the standards of the Merger Guidelines. The judge also found that “syndication, switching costs, intellectual property/know how, and reputation” were formidable barriers to entry and the expansion of existing competitors. There was also additional economic evidence of unilateral anticompetitive effects.
With regard to the application of antitrust laws in rapidly changing high-tech markets, the judge wrote, “The Court’s mission is to assess the alleged antitrust violations presented, irrespective of the dynamism of the market at issue…. [W]hile Bazaarvoice indisputably operates in a dynamic and evolving field, it did not present evidence that the evolving nature of the market itself precludes the merger’s likely anticompetitive effects.”
The judge provided extensive cites to company documents and testimony supporting his conclusions on market definition and competitive effects. The decision was intensely fact-based. He did not rule out the possibility of reaching a different conclusion in a different high-tech merger with different facts.