The Looming Threat: Amazon’s role in US v Bazaarvoice/PowerReviews
If the Department of Justice’s victory in H&R Block/TaxAct mapped the way toward future litigation success – less testimony from customers about their preferences; more documents indicating the executives’ own anticompetitive goals for a deal – then the Antitrust Division’s 2013 case against Bazaarvoice’s purchase of PowerReviews was the destination.
In contrast with the failed strategy of fighting the Oracle/PeopleSoft merger through the testimony of customers, whose concerns about the deal the judge dismissed as speculative, the DOJ’s economic expert in Bazaarvoice said such witnesses were poorly placed to assess future innovation and competition.
“Customers, that’s not their business,” economist Carl Shapiro said when cross-examined by Bazaarvoice’s lawyer, Wilson Sonsini Goodrich & Rosati partner Jonathan Jacobson.
“Who has a greater incentive than the customer in terms of whether innovation is going to help them, whether the loss of innovation is going to hurt them? Who is more motivated to investigate that issue than the customer?”
Shapiro answered, “me”; Jacobson ended his questioning.
But the DOJ faced one significant defence in Bazaarvoice that it had not in H&R Block: new entry. Unlike H&R Block, which could point only to potential expansion by existing puny rivals to rebut the DOJ’s allegation of a post-merger duopoly, Bazaarvoice claimed that its pricing after the deal was being constrained by the threat of entry from the Silicon Valley Goliaths: Google, Facebook and, most of all, Amazon.
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Wilson Sonsini is well known for its high-technology client base. When the DOJ lost its case against Oracle’s acquisition of PeopleSoft in 2004, the firm told clients in a memo that this was an important decision for that sector. The division had claimed that Oracle and PeopleSoft were the only meaningful players in the US market for large businesses’ financial and human relations management systems. But in addition to the Oracle court’s finding that the customer testimony didn’t help the DOJ define a narrow market, the memo noted, Judge Vaughn Walker “found no evidence that [third-party rival] SAP could not effectively compete in the United States.” Surprisingly, Judge Walker also discounted the IBM and Microsoft testimony, concluding that Microsoft already did compete and could, in the future, quickly reposition and expand its presence in the market.
When the division sued Bazaarvoice in the Northern District of California – the same federal courthouse where Judge Walker had ruled against the DOJ – the company chose to fight to preserve its seven-month-old acquisition of PowerReviews. The complaint described Bazaarvoice’s business documents as “saturated” with evidence that the company believed buying PowerReviews would kill off its most significant rival.
Today, the company’s trial counsel acknowledges that the papers were damning; “the worst documents in antitrust merger history”, Jacobson said. “They were very senior-level documents talking about how acquiring PowerReviews would eliminate Bazaarvoice’s principal competitor, and how people would not come into the market after that. These were dream documents for the Justice Department and are really why they sued.”
Notwithstanding the documents, Jacobson says Bazaarvoice and its lawyers decided to go to trial based on both customer support for the deal and the likelihood of entry if they saw an opportunity to undercut too-high prices. The defence alleged multiple potential entrants, Google and Facebook among them, and argued that Amazon already was in the business with a basic R&R platform available to anyone. Fruit of the Loom, one of whose executives was a witness at trial, had switched from PowerReviews to using the R&R service on Amazon in August 2012.
During the trial, Jacobson highlighted an email Wilson Sonsini had sent to DOJ attorney James Tierney during the division’s investigation of the merger in late 2012. The email pointed out that Google had announced enhancements of the R&R functionality on its shopping tool, which previously had been limited to product reviews from third parties such as Bazaarvoice and PowerReviews. Wilson Sonsini claimed this announcement, along with Google’s recent acquisitions of restaurant reviewer Zagat and travel publication Frommer’s, showed the search giant intended to become an active collector of user-generated
But, Jacobson says that “on entry, we were going to live or die on Amazon.”
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Reviews on Amazon.com range from helpfully informative to pointlessly vituperative to deliberately nonsensical. In 2006, when hundreds of humorous reviews flooded in for a gallon of milk – $3.99 before shipping – the site briefly took them down, then restored them in time for The New York Times to write a trend piece about the incident.
“Amazon does, by far, the most and best reviews,” Jacobson says. In 2014, researchers at the University of California in San Diego collected more than 140 million reviews from the website, going back to 1996. The site periodically struggles to ensure that reviews are unbiased, with features such as “verified purchase” and a requirement to disclose whether the reviewer received the product for free or at a discount in exchange for writing about it. Still, for many popular products, the sheer quantity of reviews averages out the outliers, making Amazon a go-to research tool for shoppers even if they ultimately buy elsewhere.
While the government said there was no indication that Amazon had even considered entering the market for product R&R platforms, Bazaarvoice pointed to a witness who said Amazon considered entry almost daily.
In his ruling against the Bazaarvoice/PowerReviews deal, Judge William Orrick said that “Amazon already can be considered a competitor in the market” and could expand its offering. Its R&R service accounted for 28% of the market even by a measurement used by the DOJ’s economist Carl Shapiro: Amazon’s two-thirds share of the in-house solution market, which itself made up 42% of the R&R market.
“All of that said, there is no persuasive evidence that Amazon has plans to enter the R&R market commercially,” the judge wrote. “[T]he court does not conclude that Amazon should be categorized as a rapid entrant.”
His rationale was that Amazon does not currently provide a R&R platform to any website other than its own subsidiaries, and that its executive testified to no plans to license its platform to other online retailers. Fruit of the Loom and others that switched from the merging companies to Amazon for ratings and reviews could do so only by selling their products through Amazon Webstore.
“If he had come to a different conclusion, I don’t think he could reach the same result,” Jacobson says of Judge Orrick. “Everyone agreed that if Amazon entered the market, there was no way Bazaarvoice could raise prices.”
In the ruling, the judge stated: “The marketplace may be filled with many strong and able companies in adjacent spaces. But that does not mean that entry barriers become irrelevant or are somehow more easily overcome. To conclude otherwise would give e-commerce companies carte blanche to violate the antitrust laws with impunity with the excuse that Google, Amazon, Facebook or any other successful technology company stands ready to restore competition to any highly concentrated market.”
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The Amazon defence was still fairly new in federal courts when Bazaarvoice made it to Judge Orrick in October 2013, partly because Amazon itself was not very old. When Staples failed to buy Office Depot the first time in 1997, Amazon did not even sell office supplies; it was still focused on printed books.
But when Office Depot merged with OfficeMax, the FTC’s November 2013 explanation for allowing the deal was that “today’s market for the sale of consumable office supplies is broader,” now including both bricks-and-mortar, big-box stores, such as Walmart, and online retailers. “Company documents show that [office supply superstores] are acutely aware of, and feel threatened by, the continued growth of online competitors, most notably Amazon.”
By the 2017 American Bar Association antitrust spring meeting, Judge Orrick saw the argument that Amazon, Facebook and Google could enter a market as commonplace.
“It happens in a number of cases,” he said, that merging companies urge the agencies and courts to consider “the folks who can come swoop in” and argue for allowing the deal “because an immediate entry by one of these guys” would constrain prices.
He spoke on a panel of judges who had decided on government challenges to mergers, including Washington, DC, federal district court judge Emmet Sullivan, who granted a preliminary injunction to the FTC in 2016 to block the Staples/Office Depot deal. There too, the merging companies put Amazon forward as a competitor – indeed, as part of the reason that the traditional office suppliers needed to join forces.
Judge Sullivan agreed with the FTC that Amazon Business could not substitute for the services that Staples and Office Depot provided to corporate customers beyond lower prices: order tracking, electronic ordering, flexible payment terms, negotiated pricing, consistency of product selection and availability, and, perhaps most importantly, desktop delivery. Unlike Amazon Business, which uses the same shipping services that send products to regular consumers in large brown boxes, Staples and Office Depot had personnel go to their corporate customers’ offices to unpack shipments and distribute them throughout a building.
Jacobson says Staples and Office Depot “have sales forces that call on corporate customers. Amazon hasn’t done that and I don’t know of evidence that Amazon is poised to do that, so Amazon’s entry in that case was more remote.” In contrast, he insists, Amazon’s existing online business model was perfect for entry into the actual market in which Bazaarvoice competed.
“What the government had was really a collection of some of the worst documents ever [from Bazaarvoice], that pointed towards a market definition the government favoured, and pointed toward competitive effects the government favoured” as reason to undo the deal, Jacobson says. “The judge was faced with a choice between Bazaarvoice’s predictions – but in a consummated deal, so the evidence showed those predictions hadn’t borne fruit – versus customers and the looming threat of Amazon.”