June 12, 2012 by George Eberstadt
I spent last week at IRCE 2012 in Chicago, and the #1 question I got asked was “what do you think of the acquisition of PowerReviews by Bazaarvoice?” Now that I have a quiet moment, I thought I’d set down an answer.
For the merging companies: this is a smart move for Bazaarvoice, and while it’s the end of the road for the PowerReviews team and their products as we know them, it’s the best possible outcome for the PowerReviews shareholders. The $152 million purchase amount, about 13 times PowerReviews 2011 revenues of $11.5m, is a steep price to pay for a unprofitable business that’s a distant second in their segment. So why did Bazaarvoice pay up? Because even though Bazaarvoice won most of the larger accounts in the market, PowerReviews was in every deal competing on price. The downward pressure this put on Bazaarvoice pricing didn’t just kick in on new deals; every time a Bazaarvoice contract came up for renewal, the customer always had the credible threat of switching to PowerReviews to keep a lid on Bazaarvoice prices. What’s the value to Bazaarvoice of eliminating price competition from PowerReviews? Here’s a sample calculation. Bazaarvoice is currently at a $120m revenue run rate. If they are able to increase their price realization by 20%, that’s another $24m in revenue, with no associated cost – ie it’s all profit. The present value of an incremental $24m a year in profit, at a nominal 10% discount rate, is $240m, making $155m a tolerable price to pay. If the PowerReviews business turns out to be worth something, after their team has been shrunk and their prices raised, then that’s all gravy to Bazaarvoice. So that’s what you call a win-win, right?
Well, not if you are a customer. If you are already a Bazaarvoice customer, the effects will be straightforward enough: when your contract comes up for renewal, expect to pay what you’re quoted. Your alternatives just got a lot narrower.
If you are a PowerReviews customer, it’s a bit more complicated. Yes, you should expect to pay more when you renew. But you should also be thinking about what this means to the support your product is going to be getting over time. Here’s my bet on what’s going to happen. Bazaarvoice will keep the PowerReviews Express product. It won’t get a lot of new investment, but it wasn’t before either, since PowerReviews has been focused on their enterprise offering the last few years. It costs little to sell and service this offering, so there’s no need for Bazaarvoice to cut back to maintain the business. On the other hand, Bazaarvoice is likely to cut back heavily on investment in the PowerReviews Enterprise product. This is the offering that’s driving the PowerReviews sales, marketing, and R&D costs, and it competes directly with the Bazaarvoice product line. It’s hard to see Bazaarvoice carrying the R&D cost of two overlapping products or training their soon-to-be-integrated sales team to sell both. On the other hand, they won’t want to alienate their newly acquired customers by forcing a rapid change-over. So I expect they’ll keep the PowerReviews Enterprise product around with minimal investment, and they’ll convert the stores using it over to the Bazaarvoice platform little by little as the PowerReviews platform falls further and further behind. For those who use the core PowerReviews reviews product, no immediate action will be needed, since that’s already a mature, full-featured platform. But for those using or considering the new tools in PowerReviews’ recently-announced “Essential Social Suite” – analytics, loyalty, social sharing, Q&A – the picture is different. All of these new tools are raw, and some are explicitly still in Beta. Without the significant R&D investment needed to bring these products quickly from their current state to even a modest level of maturity, adopting them may cause real pain.