Social commerce is one of the three pillars of E-Commerce 2.0:

• Richer user experiences (e-commerce becomes engaging)
• Accelerating disaggregation (e-commerce happens everywhere)
• Social commerce (e-commerce leverages emotional/social forces)

It has also been the one people have been most skeptical about… For a venerable media company such as Hearst to go after Kaboodle IMO is an opening shot for the race to begin in earnest. I thought that event required smart commentary. I don’t live in the trenches so I’m not well-suited to provide it. Some of my companies, for example, Allurent, are doing innovative work in the social commerce space but it’s all in stealth right now. So I asked my friend Gordon Gould, CEO of ThisNext whether he’d do a guest post. He agreed and so you are in for a treat as he is on the bleeding edge. Caveat lector: Gordon is an entrepreneur so this is not an unbiased post.

The two key take-always for me are (a) the importance of serendipity in product discovery (more on my take here and here) and (b) the duality of social merchandising (as media in addition to e-commerce).

Sim invited me to guest blog about Hearst’s recent acquisition of Kaboodle for an estimated $40 million. So who am I and why did Sim ask me to post? Well, I am guessing that since I am the CEO of ThisNext, the leader in social shopping, Sim thought I might have some moderately useful or interesting things to say which only you, dear reader, can judge for yourself. (Shameless self promotion: check out our global shopping activity map which Wired said was the “most fun kind of global window shopping you can engage in without a personal jet and an entourage.”)

In any event, before I get into the details of my POV on the Hearst deal, let’s set the stage and define a few terms first.

Social shopping refers to a class of sites and services that aim to capture and structure word-of-mouth around product recommendations and reviews. Other companies in the space besides ThisNext include Kaboodle, Stylehive, Crowdstorm, Wists, and a handful of smaller players. Many of these social shopping sites are heavily fashion focused and apparently plan to make money on CPA/affiliate and CPC deals and some are selling directly as etailers. The larger players are also working on partnerships and/or display ad deals.

The social dynamic that ThisNext et al leverage is people’s propensity to recommend products to, and take product advice from, friends. Social product recommendations benefit shoppers in two ways:

1. Social recommendations help people discover great products they may never have known about.
   • Offline, discovery represents about 70% of retail shopping decisions where consumers don’t know what they are going to buy until they encounter it in the store.
   • Current ecommerce models are search-driven and do not facilitate much happy serendipity the way a great “experience store” or advice from a friend can and thus leave a LOT of potential sales on the table.
2. Social recommendations validate and enable lifestyle and emotionally-driven shopping which is how most products are bought in the real world.
   • I know the idea of emotional- or lifestyle-driven shopping is not a sentiment many middle-aged, master-of-the-universe type men think they can relate to, but I ask them to consider really what drove them to purchase that sports car, expensive watch, or ultra-fancy/teched-out roadbike component. Most certainly, they rarely, if ever, “need” to drive at 150mph, to broadcast emergency distress beacons while adrift at sea post-plane crash, or reduce the aerodynamic drag on their bikes by buying $1500 carbon fiber wheels. More likely, the “need” arose because of a social, emotional, or tribal need to fit in with or dominate a desirable group or lifestyle.
   • SEM and traditional ecommerce do a lousy job of communicating high-impact emotional, social, or lifestyle product marketing & merchandising messages because they offer a dry, boring, task-oriented, and solitary experiences. Most brands rely on emotional punch to make their case.

Social shopping (which really should be called social merchandising) ties both of these behaviors together into a neat, mutually reinforcing cycle where people discover great stuff and in turn recommend it to friends in exchange for the social capital earned by being a maven and for doing your friends the favor of bringing them into the know. By unlocking this virtuous circle, social shopping/merchandising is poised to help bring the missing 70% of shopping behaviors online and facilitate further migration of erstwhile TV brand marketing budgets online into social media.

So why should you care?

Consider for a minute how gargantuan the social shopping/merchandising market opportunity is: the current US retail market (excluding home and automotive) is around $4+ TRILLION/year and is supported by $150+ billion in advertising, the bulk of which still goes to TV for immersive, emotionally impactful ads. Capturing the proverbial 1% of that total market would represent over $40 billion/year in transactions which is huge!

So, clearly, whomever figures out how to get paid to unlock socially-driven product discovery and merchandising is going to make an astounding amount of money and have a huge impact on net culture.

Which brings me back to the Hearst/Kaboodle deal.

Let me first say congrats to Team Kaboodle, you were a worthy competitor and I hope you all made some good money. And thank you, thank you, thank you for validating the space by selling to a brand-marketer-savvy old media giant.
That said, I don’t think this was a great deal for Kaboodle and probably was a great deal for Hearst. I have no idea why Kaboodle sold early and left so much on the table. Maybe internal politics, maybe they did not see the big picture, maybe they were tired and wanted out. Who knows. Kaboodle’s sale for 1/1000th of 1% of the addressable market will, I think, come to look like an inverse/road-not-taken version of Google’s early decision not to sell to Excite, instead choosing to go it alone to obvious success. Hearst, on the other hand, now has a toolset that they might be able to turn into a cash cow, their culture permitting (though gridlock and stasis would not surprise me).

Whatever the case, Kaboodle is now a captive feature-set for Hearst. In the press release about the deal, Hearst talks about Kaboodle becoming the “MySpace” of social shopping, presumably by leveraging off of the distribution provided by other Hearst properties. I am guessing the heavy breathing strategy sessions preceding the deal probably focused a lot on Cosmo, Lifetime, and O Magazine.

I am way skeptical of Kaboodle being able to grow into a large, stand-alone “MySpace”-sized brand while inside Hearst. Even the biggest, most innovative companies on the net (i.e. Google, Yahoo, ebay, Amazon) cannot effectively build substantial properties that range far from their core. Hearst is not known for being anywhere near as innovative or flexible as say Google so I think it is highly unlikely that they will be the exception to the general rule that innovation happens best outside of large companies. And having worked with old-school magazine editors, I wish Kaboodle luck in persuading them that the readers are as smart as they are and hope for Manish et al that their deal is not heavily earn-out dependent. Culture wars are not only for red/blue states….

More broadly, this deal points to the potential market for social shopping/merchandising as a form of social media, not commerce per se. I say this because I believe a media-oriented approach provides the flexibility to pursue a community-driven model that can build engagement while capturing value from brand marketing budgets and does not immediately force people into a sales funnel. Sure, commerce lead gen is going to be a HUGE part of the biz, but I say leave the commerce plumbing to others and focus on capturing hearts/minds/attention which is where the long-term value is.

My own view and the strategy we are pursuing at ThisNext centers on the belief that we are pioneering a new category of media called social merchandising. That means providing a branded product recommendation layer to the social web. Nobody has done this before and we are executing and intend to dominate this area. Our vision benefits shoppers by helping them spend their hard-earned cash on products they will love, benefits mavens by amplifying their voices to an appreciative audience, and benefits marketers & retailers by helping their customers discover them. Winning means being as big as ebay. That’s the size of this opportunity.