Why eBay is buying recommendation engine Hunch

EBay (s ebay) has announced it is buying New York startup Hunch, a recommendation engine created by Chris Dixon and Caterina Fake, to help improve its recommendation services. The purchase price hasn’t been announced, but venture capital investor and former TechCrunch editor Michael Arrington has said it was about $80 million.

EBay said it will use Hunch’s “taste graph” technology to provide its users with non-obvious recommendations for items based on their unique tastes. The company said it will also apply Hunch’s technology to other areas such as search, advertising and marketing, in order to better surface product information based on its customers’ tastes.

“We are engaging consumers in innovative ways and attracting top technologists to shape the future of commerce,” said Mark Carges, Chief Technology Officer and Senior Vice President, Global Products, Marketplaces. “With Hunch, we’re adding new capabilities to personalizing the shopping experience on eBay to the individual relevant tastes and interests of our customers. We expect Hunch’s technologies to benefit eBay shoppers as they browse and buy, and to bring sellers on eBay new ways to connect the right products with the right customers.”

Hunch will remain in New York with co-founders Chris Dixon, Tom Pinckney and Matt Gattis staying on board with the company. Fake, who also co-founded Flickr, (s yhoo) stepped away from the company earlier this year.
Dixon said in a blog post that he and the team decided to sell because of the opportunity to apply Hunch’s Taste Graph to one of the top e-commerce leaders. He said Hunch will continue to operate a standalone site and will be providing eBay with predictive merchandising, interpreting unstructured data and creating merchant insights. Hunch had reportedly turned down previous offers for as much as $60 million from suitors including Google (s goog).

I think the purchase could improve eBay in a number of ways. For one thing, it could help the retailer better compete with Amazon(s amzn), and it keeps Hunch out of the hands of its rival, which has been well-regarded for its ability to recommend products to users based on their purchase history and preferences. EBay launched its own recommendations last year to help suggest items based on past searches, but it clearly has a long way to go in matching Amazon, which moved ahead of eBay in sales last year. Earlier this year, Om wrote that Amazon should buy Hunch because of its ability to create an interest graph that can be tied into social commerce. And as retailers like Amazon and eBay build out almost limitless inventories, matching recommendations to these products becomes even more important. Here’s what Om wrote in April:

“Amazon should buy Hunch. It could use the decision engine to help customers sift through the ever-expanding array of offerings and make purchasing decisions. That little kernel of an idea still looms large in my thinking, especially as I wonder what the future of media and e-commerce looks like….Interest graph, for me, is the underpinning of a new kind of e-commerce experience. Think of it as a new kind of social commerce experience that goes beyond the notion of group shopping (Gilt Groupe, Groupon (s grpn)), shopping communities and recommendation engines,”

Hunch could allow eBay to create some very smart recommendations based on more than just searches. I think past search or purchase history is limiting, and sometimes an inaccurate predictor for recommendations because a lot of gifting happens on these sites, which can skew the suggestions. Hunch uses what it knows about a person’s likes and interests along with answers to personal questions to help understand a user’s tastes, then makes very intelligent recommendations based on those answers and their correlation to other data. Hunch originally began a consumer-facing service but changed course last year to license its technology to retailers who participated in its Hunch Partner Platform.

I think this could also help with eBay’s self-described goal to become a technology-driven company. The company is in the midst of a big push to become much more than just a seller of goods. You could see that at eBay’s X.commerce Innovate conference, where it showed off its X.commerce platform for retailers and developers. EBay has been on a buying binge recently, buying a number of companies that have helped it aspire to be a sort of plumbing or infrastructure for e-commerce. It has bought GSI, Magento, WHERE, Milo and RedLaser, much of which is being put into the new X.commerce platform and also its bid to enable payments in-store. Hunch is a very intelligent company that uses a lot of machine learning and data mining to create recommendations. And it has a smart team led by the well-known Dixon, who can also help build out eBay’s presence in New York

Adding Hunch could be another tool for X.commerce customers, who could plug smart recommendations into their business operations. EBay is really trying to build a commerce operating system for businesses, and it’s putting all these new assets together into one big resource to help enable sales for retailers and developers. Increasingly, retailers need better ways to engage consumers and personalize service to the tastes of their users. By providing a tool like Hunch to X.commerce customers, it can make the platform that much more attractive.

I think the move makes sense for eBay and follows through on CEO John Donahoe’s attempts to remake the online seller into a technology company. Donahoe said at the X.commerce conference that eBay is not done buying up companies and it looks like it will continue to add more pieces to its growing collection of e-commerce assets.

Here are a couple of video interviews we did earlier with Dixon: