THE BLOG
06/27/2012 07:16 pm ET Updated Aug 27, 2012

Online Retailers May End Up Paying for the Bazaarvoice-PowerReviews Merger

If you're one of the thousand-plus online retailers who relied on PowerReviews to manage your user review platform, you might want to brace yourself for an increase in rates. Market leader Bazaarvoice has sealed the deal to acquire their chief competitor PowerReviews for $151 million. The combined company will be the official customer reviews provider to half of the Internet Retailer 500.

Predictably, Bazaarvoice is excited about its new acquisition. According to its official release, "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."

Maybe. But missing from the announcement was any discussion of what this merger will mean for the prices that their customers will pay. The merger means that there's only one real option at the moment -- and history has shown that when there's only one option, prices will inevitably rise.

Before we get ahead of ourselves, though, let's set the stage a little. If you want your children to work on Wall Street someday, you should pay attention. This story might teach them something.

A Tale of Two Social Platforms

Amazon has been the dominant online retailer since the fledgling days of the Internet. There are a number of factors that contributed to its meteoric rise, but one of the most significant is the website's customer review platform. Unlike other retailers at the time, Amazon allowed shoppers to see what other customers said about a product and how many people had purchased it -- and it even let shoppers view a list of similar products so that they could make comparisons. It was genius, and everyone wanted a platform just like it.

That's where Bazaarvoice and PowerReviews come in. Founded in 2005, both companies hoped to strike it rich by creating a social review platform like Amazon's and then marketing it to thousands of emerging online retailers. But while they shared the same goal, they took radically different approaches to achieving it.

Before starting Bazaarvoice, Brett Hurt founded the web analytics company Coremetrics. He knew how important a strong reporting and analytics capability is to large businesses, and he used this expertise to design Bazaarvoice's software. The result was a powerful social review platform that offered a wealth of customization options. This made the software tricky to master but highly appealing to big-money clients who could afford to pay for aftermarket development.

Fortunately for Bazaarvoice, Hurt and company were after the big fish from the start, and when they started pitching their product, the results were positive. It only took a few years for Bazaarvoice to stock its client list with major companies like Wal-Mart, Macy's and Cabela's. Currently, Bazaarvoice provides the review platforms for more than 700 companies, 159 of which rank in the Internet Retailer 500.

While Bazaarvoice made a killing appealing to the princes of the market, PowerReviews was convinced it could find just as much success among the dukes and earls. Founded by FogDog creators Andy Chen and Robert Chea, the company took an engineer's approach to review platforms. The PowerReviews platform was turnkey, easy to understand and free to use -- as long as users were willing to share their reviews with PowerReviews.

Instead of charging a monthly rate like Bazaarvoice did, Chen's company allowed clients to use its services for free under the condition that they would all be listed on its meta-retail site Buzzillions. This made it the ideal service for small-to-medium sized retailers. Smaller sites with limited traffic could get exposure on a major shopping hub, and in return PowerReviews took a percentage of every sale they directed to a client's site. Retailers who didn't want to work with Buzzillions could simply pay a subscription fee. Unfortunately, the money didn't come in fast enough, so in 2009 PowerReviews also switched to a standard monthly subscription fee for all of its clients.

The accessibility of PowerReviews' platform made it a hit with clients in the Second 500 Internet Retailer list, with 62 second-tier clients as opposed to Bazaarvoice's eight. Next to Hurt's company, PowerReviews was the largest social reviews provider on the market.

But the PowerReviews approach only managed to attract a handful of larger clients -- like Gap, Staples and Sierra Trading Post. They couldn't give it an advantage. So when Bazaarvoice went public earlier this year with a successful IPO that dwarfed the $37 million Chen and PowerReviews managed to raise, the countdown to a sea-change in the market began. That brings us to the present.

The Horizontal Merger

Bazaarvoice has provided several rationales for its acquisition of PowerReviews -- to exploit PowerReviews' technology, to reinforce network benefits and to create new affiliate opportunities. As Brett Hurt put it, "Together, our companies can create tremendous value for retailers and brands and help us to achieve our purpose of putting the voice of consumers at the center of their business. We are incredibly excited about the opportunity to work together with PowerReviews as part of the Bazaarvoice family."

Sure, the acquisition of PowerReviews' clients will help increase the Bazaarvoice family of brands from 700 to 1,800 and it will give them the lion's share of business within the Internet Retailer 500, but when you think about it, the buyout appears to be motivated by competition more than anything else. Just look at the numbers.

Though Bazaarvoice is paying $151 million for PowerReviews, the company only earned $11.5 million in revenue in 2011. Fiscally speaking, that's pretty rich. When you consider what Bazaarvoice has to gain by eliminating their only significant competitor, though, the value of the acquisition becomes clear.

One analysis shows that if Bazaarvoice improves its price realization by 20 percent with PowerReviews out of the way, that could deliver an extra $25 million a year, all of which is profit. Stretch that out over 10 years and you've got a 65 percent return on an investment of $151 million. Anything else they make from their newly rebranded Bazaarvoice Express service is just sugar on top.

And the Prices Rise

Remember your college economics class? The catch with a horizontal merger like this one is that the prices on the customer's end tend to rise. When the top two competitors in a market merge, the market concentration increases. Without the threat of losing customers to PowerReviews, Bazaarvoice has both the ability and the incentive to raise prices for its 1,800 clients.

Such pricing increases have happened before. When leading microfilm businesses Scott Graphics and Kalvar Corp. were amalgamated into the Xidex Corporation, the prices of their products rose by 12 percent and 23 percent respectively. Those figures come from an analysis of numerous horizontal merger case studies over the past 20 years. The analysis found that prices rose in 11 of the 14 studies. More recently, office supply company Staples was prohibited by the FTC from buying out its leading competitor, Office Depot, after research found that the merger would enable Staples to increase prices by as much as 13 percent.

For a market as concentrated and specialized as social reviews, it seems likely that Bazaarvoice prices will see some sort of increase as well.

The Bright Side

Though online retailers who've had their social analytics platforms taken over by Bazaarvoice may see their prices rise in the short term, the good news is that this merger has also opened the door for newer, more affordable entrants to the market. TurnTo Networks, for instance, offers an affordable and in some cases more effective alternative to the platforms provided by PowerReviews and Bazaarvoice. The "Social Q&A" service provided by TurnTo has been proven to generate more user responses than either of the two leading reviews companies, and in a shorter amount of time. Some have speculated that Google and Facebook may develop their own user review platforms as well.

In conclusion, it might behoove those online retailers who don't want to pay higher premiums for Bazaarvoice's service to start investigating alternatives before they're locked into a more expensive contract. With the market for social platforms still developing and the barriers to entry now lowered, it's only a matter of time before another competitor returns the market to equilibrium and prices fall. However, at the moment this is Bazaarvoice's show. All we can do is watch and wait to see how things unfold.