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Yesterday, Walmart Acquired Kosmix.

Announcement:
BRISBANE, Calif., April 18, 2011 /PRNewswire/ -- Wal-Mart Stores, Inc. (NYSE: ) today announced it has signed a definitive agreement to acquire Kosmix, underscoring its commitment to social and mobile commerce. Kosmix, based in Mountain View, Calif., has developed a social media technology platform that filters and organizes content in social networks to connect people with real-time information that matters to them.
[...]

http://www.prnewswire.com/news-releases/walmart-announces-ac...

Business Insider Commentary:
The bottomline is that social commerce is starting to turn into a reality. People are turning to social networks more and more to decide on what to buy, and the businesses who are on the forefront of that trend will reap a windfall.
For a $400 billion revenue company, a $300 million option on social commerce makes a ton of sense.

http://www.businessinsider.com/heres-why-walmart-spent-300-m...

My take:

Background: this acquisition is especially interesting to me, since my current research project involves using Artificial Intelligence with user input, in order to improve shopping for mobile phone users. Additionally, my advisor, my group, and I, study social networks, not just for consumer experience, but for social, environmental, and health purposes as well. (*)

Leveraging social networks for informed behavior, including smarter consumerism, is more than a buzz word. In fact, my friend is focusing her entire Ph.D. on this new area, and she coined a term for it: Social Informatics (you heard it here first, folks). Previous research has established that people in our social network (online and off, of course) affect our baseline for societal comparison, and thus our behavior. If all your friends are overweight, you will tend to be as well; or if your friends are massively in debt, you may be as well. But this works both ways - if you are surrounded by healthy people, that will be your baseline. My colleague's research is about how raising awareness to your network's deviation from society norms can help you make more informed choices about how you choose to live your life. There are also circles of trust - you'll trust a recommendation coming from one of your friends, even a weak tie, more than a person off the street. And you tend to trust a person off the street more than a salesperson. You're also more likely to check something out based on a comment from your friend or a supposedly unbiased person, over an ad or a flyer. (**)

And how is this related to the WMT acquisition? Well, these circles of trust have been permeating how people buy stuff. Yelp is now one of the best and most trusted sources for restaurants and other local businesses; their entire premise is real client recommendations which anyone can add (this is called "user-generated content", and you see it in Wikipedia at its best). Amazon's item ratings are also based on users alone. Groupon receives sky-high valuations and spins off a host of imitations, which will naturally lack the network effect that Groupon has (the more people are on Groupon, the better the Groupon coupons will be, due to advertisers correctly perceiving a wider audience; better coupons bring more customers, and so on).

You've got to understand, though, that Groupon isn't succeeding in a vacuum - it succeeds due to their great referral bonuses, working in concert with the users' ability to share recs on their wider, online social networks without those recs being perceived as spam (as they likely would be if passed by email by your weak ties). Every consumer chain that respects itself (and also those who don't) has a Facebook page to publish their deal of the day, which folks then post to their FB wall, to share with others, if they think it's a great deal. The first time I ever opened a social-coupon website was the day that half my facebook friends passed around a one-day coupon to buy a $20 Amazon gift card for $10 (
http://latimesblogs.latimes.com/money_co/2011/01/livingsocia...
). That one was so big, that it made it off of Facebook and into our departmental email list and then, amazingly, to face-to-face interactions. And the way they do it, there's no real limit to how many people can buy the coupon. Funnily enough, I remembered this coupon - incorrectly - as being offered by Groupon, where it was actually offered by LivingSocial (shows how much I know!).

But that Amazon coupon was a one-off rarity (in fact, that link above says it may have been sold at a loss to LivingSocial). Mostly, the lukewarm coupons die off silently, and the cool ones may circle around in relevant interest groups until the end of the day, when they make way for the next day's coupon. Most will be lost in the shuffle, here's why (based on my own experience as a quite-average mid-to-late-20s FB user):

* I get upwards of 300 news items a day
* I would get more, but there are many people I have pushed out of my newsfeed due to their content being unappealing to me on a regular basis
** regular in this case = normally one really annoying item, two moderately annoying items in quick succession, or three items over time
** This is a very easy thing to do, not just for programmers like me, it's a one-click thing
* Also, these news items include things I consider far more important than coupons, such as photos of my family and friends, world or tech news that my friends highlight, and status updates (some are mundane, some downright boring, others amazing); Oh, and birthdays, that's another big one (with 465 friends as of ten minutes ago, rare is the day in which it's not someone's birthday)
* Shares that my friends like (literally - they will click on the famous :like: button), or otherwise comment on, will float to the top of my news feed. If a coupon isn't that great, it'll rarely float over the average status update or photo album posted that day.
* I don't even sign in to facebook every day, so some of the news items pass me by completely. When I do go to FB, I have a preset limit in my browser to block it after 30 minutes a day (in these two, I am actually quite atypical; FB is an enormous time sink for the average user, all day every day. Some people even decide to close their account due to this sole issue).

I can't comment much on twitter since I barely ever use it, but I assume that some of the same issues are applicable. In some ways, all twitter is is just status updates. But in another way, it's a stronger marketing tool. Remember, facebook mainly focuses on real-live people, and organizations posing as people (whether they do so obviously, or backhanded-style) are highly frowned upon. Twitter, however, happily intermingles people and corporations without any clear distinction (check out TMFDukeSt on twitter to see an example - this is our Rich, representing himself as a person and the Duke St service all in one). This lends a hand to companies pushing out their deals unobtrusively, in a manner that is both readily available to those interested, while not annoying those who are not. And if someone you do follow chooses to "retweet" a commercial or coupon posted elsewhere, well, you trust them more than the other guy, right?

Hopefully by this point of the post, you can see how navigating the choppy waters of getting consumers to see your amazing deals in a timely and relevant matter, yet without being obnoxious, is not at all trivial. Also, you may see why the network effect means that the few that do make it to the top, will make it big. This is Taleb's "Extremistan" - the winner reaps rewards that are way out of proportion than what you would expect. And remember - without the extremely successful dual platforms of facebook/twitter, social shopping would be nearly impossible. These networks of trust lay the foundation for anything that is then layered on top.

Finally, there's one more point I want to make. Critics will say that social networking and social media are overrated, overvalued, and a complete bubble. They won't be entirely wrong: we all love buzzwords, and often get in too late, after the territory has been carved out. I don't doubt that if and when facebook has an IPO, the stock will be outrageously valued compared to any rational market metrics (in fact, it already is, when looking at secondary markets). Likewise with twitter, for sure, and the upcoming Groupon and LinkedIn IPOs. Plus, the winning companies have more-or-less been announced: there's no chance MySpace will ever catch back up with FB, and social bookmarking sites like Digg, del.icio.us, and reddit have fallen far behind Twitter despite being there before anyone thought of that funky word "tweet". Family/genealogy websites like Ancestry.com and Geni.com will remain niche, as far as I can see (this coming from a huge Geni.com fan). Plus, no less importantly, the money-wise winners are also largely determined: I highly doubt that individual investors will be able to make the big bucks on those - the original VC/angel investors are the ones making the big bucks this time around (after all, for a company facebook's size and influence to still be private is nearly unheard of). That's not to say there's no profit left to be made, but the days of facebook's exponential growth are (at least partly) behind it. (***)

And yet.

And yet.

I have two things worth responding to such critics (including, of course, my inner critic, which may be the harshest of all):

1. Every bubble ends with a few winner-take-most situations. Think about the real winners of the tech bubble: most of them are still here today and kicking butt. Google, Amazon, and eBay are just the first examples that come to mind, but they are not the only ones. Sure, tons of companies lost big-time in the tech bubble's aftermath. But the ones that managed to pull away from the crowd and differentiated themselves successfully, those that appropriated their funds intelligently, and that got good returns on invested capital - they are the ones who are still with us. Now, we already know that WMT knows how to do all these good things in the retail space. Will they be able to transfer that success online to the social networks? I don't know. Time will tell, but yesterday's acquisition is a great first stab at that.

2. WMT is entering a slightly different sort of space than the carved-up space I mentioned above. FB and Twitter are the foundation networks, the ones actually mapping out the networks of trust I keep talking about. Same with Geni and Ancestry, just specializing in the family space, and LinkedIn in the professional/employment space. In these networks, connecting is in a sense its own reward: you hook up with people you haven't seen for years, or met once, or even never met face-to-face. You get a one-stop-shop to keep up with everybody and update them about what's happening with you. But what's going on now, in the social commerce space and elsewhere, is this additional layer of utilizing and leveraging these extremely powerful networks for purposes outside of just connecting for connecting's sake. Groupon is a definite first-mover here: without facebook and twitter to fuel their engines, it's unlikely they would be such a crazy growth story. But Groupon's success does no preclude other companies succeeding as well: Groupon's model caters to different needs than Walmart does. Walmart is far from a first-mover in social networks, but it's not quite late to the game yet either in terms of its natural competitors. I don't see BBY on one end of the spectrum, or Kroger/SVU on the other end, nor anyone in between, rushing in with mobile or social network applications for marketing their products successfully, targeting consumers who are truly interested, or leveraging the networks of trust. If WMT plays its cards right, they might just gain a significant competitive advantage in the currently nonexistent social-shopping space. The only real competitor currently playing in this space is Amazon - and that is not a competitor to be trifled with. In fact, it's quite notable that the group that founded Kosmix have sold a previous startup to Amazon as the core of their recommendations engine. But even there, Amazon is relatively new to categories such as food and clothing, as these tend to be those rare categories where folks handily prefer a brick-and-mortar store over an online one.

TMFShirKi's Bottom Line:
I think Walmart did a very smart thing, and I doubt they actually overpaid for Kosmix by much. The clincher will not be the direct price that Kosmix alone is worth, but rather if/how Kosmix (as the newly minted Walmart Labs) will be able to transform Walmart's obviously rich data warehouses into a useful, amazing or silly mobile/social apps. They've got a pretty decent headstart compared to most commercial and retail chains. If they do well, it could launch Walmart on a new and perhaps unexpected growth trajectory. If they fail, well, at best they spent 300M for nothing. At worst, though, they could end up as last century's retailer, with Amazon or another competitor leaving them in the dust.

Hope you enjoyed my super-long commentary on this acquisition.
Please let me know what you think. Will Walmart rise to the challenge, or fall by the wayside?

Best wishes,
-Shiri

MDP Home Fool - a community member like you

Lengthy disclosure:
long GOOG, BBY, and of course WMT - much more after today!
no position in SVU, KR, EBAY, AMZN, ACOM (Ancestry.com)
no position in any of the still-private companies mentioned:
Facebook, Twitter, Yelp, Groupon, LinkedIn, Geni.com, LivingSocial, Digg, del.icio.us, reddit, MySpace, or Kosmix

Tangential comments:
(*) One study I'm working on is doing air quality sensing via mobile phones, and sharing the aggregate data with the entire city. Another study which a friend works on, in conjunction with the UCSD med school, is about weight-loss intervention. They are leveraging a subset of the participants' social network (their strong ties) to help them stay on track with being healthier and smarter about their lifestyle choices.
(**) In non-consumer applications: you trust your colleague's colleague more than a stranger (e.g. LinkedIn); a news item that your friend deemed relevant is more important than a random article; and a service-provider that has referrals is more trustworthy than a yellow pages ad.
(***) Please don't quote me on this one; I didn't have time to check the tarot cards or tea leaves with Tim's seer friend. :-)
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