The Wisdom Behind Wal-Mart's $300 Million Social Media Investment

When Wal-Mart dropped some $300 million on Monday (April 18) buying a Silicon Valley social media startup, the very act showed an appreciation for social media that few retailers have demonstrated. But what the world's largest retailer does with that investment over the next 6 to 12 months will reveal whether Bentonville has truly figured out social media or just sees it as fashionable fad to dump cash into.

Retailers can deal with social media in three ways. The first choice is that they can create their own area where they try and attract shoppers and say tons of great stuff about themselves. Let's call that the Commercial approach. Second, they can get lots of people to visit big, established social sites (Twitter, Facebook, YouTube, etc.), where they can casually say lots of nice stuff about the retailer. This would be the Viral approach.

The third way is to shut-up and studiously watch what everyone is saying, from every corner of social media. That's the Winning approach—and it's what Wal-Mart seems to be doing with its acquisition—because the first chain that masters hearing what those folk are all saying will have the keys to the most profitable merchandising and marketing decisions ever.

The level of investment—$300+ million—is significant. For the record, Wal-Mart did not announce how much it paid for its research prey (Hey! The name is Kosmix, OK?). That "more than $300 million" pricetag was determined by one of The Wall Street Journal's most reliable determiners of such stats (Kara Swisher), and we've historically always found her figures to hold up. Even for Wal-Mart, anything costing more than $300 million is a very serious decision.

Kosmix brings with it its three sites: TweetBeat, which the company called a "real-time social media filter for live events";, which indexes content by topics; and RightHealth, a health/medical site. But mostly it brings an approach to trying to listen to social discussions.

In a blog post on the Kosmix site by founders Venky Harinarayan and Anand Rajaraman, they tried to put their social view into context. "Quite a few of us at Kosmix have backgrounds in E-Commerce, having worked at companies such as and eBay. As we worked on the Social Genome platform, it became apparent to us that this platform could transform E-Commerce by providing an unprecedented level of understanding about customers and products, going well beyond purchase data," they wrote. "The Social Genome enables us to take search, personalization and recommendations to the next level."

One of the interesting aspects of social that few retailers have internalized yet is its huge influence on E-Commerce, M-Commerce and, absolutely, in-store. This is something that many analyst firms miss, because if something can't be quantified by direct purchases or by direct purchase referrals, then it clearly couldn't possibly exist.

In reality, it's the absence of that direct-purchase capability that is what makes social such a powerful influencer of purchases.In reality, it's the absence of that direct-purchase capability that is what makes social such a powerful influencer of purchases. Visit any random sampling of discussions within Facebook, Twitter or YouTube, and you'll find heated exchanges about apparel, cars, electronics, music, movies and even jewelry. The more intensive the social media participant (think teens through mid-20s), the more likely those topics will dominate the discussions.

They aren't talking about those things in the abstract. The conversations are focused on specific brands, models and configurations. Within 72 hours, those electronic exchanges will materialize into very specific purchases at the major chains. They won't most likely link directly to their iTunes account to purchase the talked-about song or immediately buy the device on Amazon, but those recommendations have a huge impact on purchases.

Why would I say that it's the absence of a direct-purchase function that makes those recommendations so powerful? If someone talking about how great a particular singer's new concert is—or how great a particular outfit looked—suddenly flashed up a pop-up that said, "Agree that this a great account? Type in your credit-card number and you'll be wearing it tomorrow night," the conversation would die and, with it, any influence that that recommendation held. Thank your POS stars that most social sites can not tender purchases right there.

But those conversations about products often barely mention the retailers where it can be purchased. Oh, it is indeed mentioned, but as an afterthought. Why is it so critical to know? You want to know when you're being suggested and when you're not. This way, you can market to the social influencers more effectively.

The next stage, by the way, is theoretically much harder. Then again, depending on how Kosmix handles its databases, it might be relatively easy. That next step is going from the general to the specific. In retail terms, that means advancing from understanding the trends from the aggregated conversations of a billion global shoppers and being able to zero down to the specific voice of identifiable consumers. And then marrying those specific comments to an existing CRM file. Or to perhaps create an anticipatory CRM file, awaiting the day when that person walks into one of your sites or stores and is identified.

Suddenly, you have the ability to have an understanding of customers that is many orders of magnitude more sophisticated than today. This much Wal-Mart has figured out: The chain that masters social and mobile will own retailing for the next five years.

This is where things get dicey. Wal-Mart's pocketbook can absolutely buy the company called Kosmix. And it can lock up a handful of execs with employment contracts, or at least it can try. But the bulk of the brain of Kosmix—its unusually talented rank-and-file—can't be purchased. If they find the day-to-day realities of being a Wal-Mart employee distasteful, they're gone.

If the Wal-Mart team doesn't let these people function as they are used to, well, it's a good thing the acquisition brought them so many social search engine tools. If they blink, they'll need those tools to find where all of the Kosmix employees have fled.