SAN FRANCISCO — Bazaarvoice Inc.’s acquisition of its main rival led to plummeting competition in the market for online product ratings and reviews, an expert for the U.S. Department of Justice testified Monday as the government wrapped up its antitrust case against the Austin-based software company.
UC-Berkeley professor Carl Shapiro, a government expert, calculated that Bazaarvoice’s 2012 purchase of PowerReviews gave the market a score of 4,590 on the scale government agencies use to measure market concentration. The DOJ and the Federal Trade Commission consider markets with scores above 2,500 on the Herfindahl–Hirschman Index, or HHI, to be highly concentrated, said Shapiro, a former antitrust official and member of the president’s Council of Economic Advisers.
“This is one of the clearest cases I’ve seen where there’s very strong evidence of competition between two parties and no other commercial provider comes close,” said Shapiro, who is expected to be the DOJ’s last witness in its case-in-chief. “That is a powerful fact.”
His testimony opened the second week of a bench trial before U.S. District Judge William Orrick III in the Northern District of California, where the government is seeking to unravel the merger, claiming it extinguishes competition. The DOJ wants a court order that Bazaarvoice must divest enough assets to create a company that can replace PowerReviews in the market.
The combination of two close competitors reduced the market for product ratings and reviews to the combined company, fringe players with negligible market share and in-house solutions that some retailers and manufacturers create on their own, Shapiro said. He concluded that Bazaarvoice now discounts its services less aggressively than it did before the acquisition.
The DOJ’s unusual fight to pry apart two little-known social commerce companies could hinge on market definition. Shapiro defined the relevant market as product rating and reviews platforms offered for U.S. retailers and manufacturers. Represented by Wilson Sonsini Goodrich & Rosati, Bazaarvoice contends that market definition is far too narrow and fails to take into account the variety of other ways in which companies can connect with consumers online, such as through social media sites like Facebook and Twitter.
Shapiro used each company’s share of customers in the Internet Retail 500 list to calculate market concentration. Prior to the merger, Bazaarvoice had won the business of about 40 percent of the 423 companies using product ratings and reviews, followed by PowerReviews, which claimed 28 percent of the list.
Earlier in the trial, Bazaarvoice executives were forced to explain damning emails sent before the acquisition in which they referred to PowerReviews as a “thorn in our side” and crowed that they would be able to raise prices after the acquisition. Those documents support a narrow definition of the market, Shapiro said.
Bazaarvoice executives testified that plenty of competitors will likely emerge in the quickly evolving market. However, Shapiro insisted that doesn’t undermine his analysis.
“You can have a relevant market that’s properly defined even though it’s in the context of quite a dynamic space,” he said.
Before Shapiro took the stand, Bazaarvoice CEO Stephen Collins recounted how the company recently lost the business of Ford Motor Co. to Pluck, another player in the market for product ratings and reviews.
“I see and experience the competitive landscape every day,” Collins testified.
But Bazaarvoice will have to clear a high hurdle to show that new entrants in the market counteract the anticompetitive effects of the merger, Shapiro said. Companies breaking into the market face an uphill battle because customers are reluctant to switch providers, he said.
“There has been no successful entry in this market in recent years,” Shapiro said.
As the cost of software naturally drops over time, the question is whether the price of Bazaarvoice’s services has fallen as quickly as it would have otherwise, Shapiro said.
Collins pointed to Bazaarvoice’s recent financial performance to stamp out the notion that the merger has stifled competition. The company has missed its internal sales targets for several quarters running, and its growth is sputtering.
“Our company’s performance has been quite challenged since the merger,” Collins said. The idea that the company might benefit from less competition, he said, “has not played out in reality.”
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