Liberating PayPal - eBay's golden goose

16:00, Feb 21 2014

About 20 years ago I worked as a public servant. It didn't go well. But there were some interesting learnings.

One was from an IT contractor who successfully bid on a bunch of old public service mainframe computers. He paid close to $1000 for a room full of what I considered to be junk, but seemed happy about it.

A few years later I ran into him and asked what he did with them all. He smiled and said he'd taken them apart to access the many gold plated components inside (gold being an excellent conductor), then separated these out and sold them at a handsome profit. Where no-one else had seen anything remarkable, he had seen submerged value and was quick to extract it.

This incident came to mind as the various US web giants reported their quarterly earnings in January and shareholders sought to extract value from the results.

Amazon stock fell close to 10 per cent after it announced a miss on its earnings per share target, and that it was looking at having to raise the cost of its Prime super shipping subscription by US$20 (NZ$24.17).

Twitter shares dropped also after new monthly users were found to be growing at only 4 per cent.


eBay also reported slowing growth in the US marketplace, plus increased expenses from its "bill me later" business, and lowered its earnings guidance. However there was good news on the PayPal front.

eBay reported continued solid growth of PayPal active users (up 16 per cent to US$143 million) and plans to grow this further through additional sales and marketing.

This has been a familiar pattern at eBay for some time - flat to moderate growth in core operations while PayPal powers ahead. eBay bought PayPal in 2002. It was a reluctant purchase as eBay had its own payment service Billpoint, a service they later closed.

Over the ensuing decade, PayPal grew to be the de facto payment method on the web, buoyed by the "network effect". This is where the value of a service grows exponentially as the number of interactions grows.

Today, PayPal revenue provides 41 per cent of eBay's total income.

Last year it delivered $3.4 billion of income. Every month it adds another million active, mainly offshore, accounts. And with the dizzying rise of rise of mobile payments, it's safe to assume there's more growth left.

Gartner Research predicts mobile payment transactions will triple from its existing level of US$235b a year to US$721b by 2017. Not surprisingly everybody wants a bite of that cherry including Google Wallet, Apple Payments and Jack Dorsey's Square.

But the heir apparent is PayPal. Last year it moved US$180 billion across closed to 200 countries last year. And it'd like to grow that by gobbling up as many mobile payments as possible.

The only thing holding it back is potentially its owner. So long as it is owned by a global marketplace giant, PayPal is unlikely to be able to focus fully on the opportunity at hand, or have the autonomy to innovate quickly.

Enter billionaire corporate raider and shareholder advocate Carl Icahn. Icahn owns 2 per cent of eBay and is pressuring the company to divest itself of PayPal, to allow the payments company to fulfil its destiny and realise value.

Icahn has a pedigree of taking large stakes in internet companies - like Yahoo, Time Warner and Apple - then pressuring boards to make radical structural change.

Now he's poking the borax at eBay, but chief executive John Donahoe isn't blinking.

Donahoe has written to all staff saying that PayPal and eBay are more valuable together than apart, suggesting that eBay's investment funds PayPal's growth. And he's been busy telling shareholders the same.

While this may have been true once, it's harder to see it being true now. Not when the payments company delivers 41 per cent of revenue and is on a much steeper growth trajectory than its flat parent company.

Meanwhile the claims around eBay ownership stifling innovation do seem to ring true.

Consider Square, the cute little widget that plugs into your mobile phone and turns it into a zip-zap credit card machine.

Off a zero-base two years ago, it's become endemic in the United States - from florists to cab drivers. If anyone was going to come up with something like this it should have been eBay - who has ended up looking asleep at the wheel.

The elephant in the room for Donahoe is Amazon. While not mentioned in their recent earnings, the battle of the giants is as intense as it ever has been as eBay launches new mobile innovations almost every month while Amazon fights back with increasingly faster delivery options and cunningly sharp recommendations.

Until Donahoe gets a degree of assurance that his retail fortifications are sufficiently shored up, he's unlikely to quietly agree to selling off his top-performing asset.

When my contractor friend liberated the valuable gold-plated connectors and circuit boards 20 years ago, it left the remaining components largely valueless.

The same might be true of a PayPal-less eBay if it doesn't get the Amazon threat sorted out.

Mike "MOD" O'Donnell is an ecommerce manager and professional director. His Twitter handle is @modsta and the only gold he's ever extracted was at Hokitika's Shantytown.