The Ebay/PayPal Split

Posted in: Sector and Company Insights, PayPal, Amazon, Tech, ebay, News, wallet wars

 

 Ebay and PayPal are parting ways so what does this mean for both companies - and the future of online payment solutions?

Recently Ebay announced that in 2015 it will split with online payment giant PayPal in the hopes that the move will benefit both companies. Acquired by eBay in 2002 for $1.3 billion, PayPal ultimately became eBay's fastest growing segment. PayPal lets customers use their bank accounts to make payments and money transfers without using credit cards, debit cards or checks. It makes money by charging a fee for many transactions. Here we’ll profile the relationship between the two companies since 2002, as well as take a look at what this move will mean for both companies and for e-commerce and online payments more generally.

Since Ebay’s acquisition of PayPal in 2002 the online auction site has accepted payments through PayPal almost exclusively. Tracing PayPal’s rise after being acquired in 2002 in a VentureBeat article, Eric Jackson notes that “PayPal soared from a few thousand users to over 1 million accounts in less than half a year, while burning through $10 million per month.” Fast forward to the present, we see how high PayPal has climbed with 153 million accounts globally and 26% annual volume growth (compared to 9-12% for Visa & Amex). Over the past year PayPal processed about $203 billion in payment volume. Ebay has also benefited from this relationship, as Mr. Jackson points out in his review of the history of these two companies: “For several years since the end of Meg Whitman’s tenure (1998-2008) as CEO, eBay’s core marketplace business languished, hurt by a poor user experience and the rise of alternative e-commerce distribution channels for small businesses (especially Google Adwords). But during this otherwise dark period for eBay, its payments division continued its steady growth, and in [a] recent quarter (Q4;2012), PayPal contributed $1.37 billion in sales, or just over 40% of all of eBay Inc’s net revenue,” contributing to its 22% year-over-year revenue growth.

If both companies have experienced unprecedented growth in their respective areas as a direct result of this relationship, why would a split be beneficial to either company, let alone both? Carl Ichan, activist investor with a 2.5% stake in the two companies believes Ebay is holding PayPal back. In a recent Forbes article highlighting the split, Mr. Ichan suggested that “PayPal’s a jewel and eBay is covering up its value.” He continues: “If you just went out and took it public you’d get a huge premium because of growth.” This agrees with Forbes contributor Eric Jackson’s opinion that the acquisition was “the worst tech decision in the last 10 years.” His argument can essentially be summarized as: PayPal left too much value on the table by selling early.

PayPal’s upcoming independence will allow the company to offer its services to a much greater number of customers including consumers as well as online retailers. A major roadblock to PayPal’s growth has been the perception that its corporate parent was a rival to many other large online retailers. Now with that conflict out of the way, accepting payments for Amazon and Alibaba is possible—and that possibility opens up huge growth opportunities. Ebay is excited to be able to accept payments beyond PayPal including Apple’s new Apple Pay, as well as offerings from Amazon, Google, and all the major credit card providers. For Ebay, it essentially comes down to being able to provide more options for customers and retailers alike.

There have been dramatic changes recently in the online marketplace space with the so-called “Wallet Wars.” Apple, Google, Amazon and Paypal have already penetrated, or are poised to penetrate this space with online payment solutions.

Stay tuned to DataFox as we will be evaluating new companies competing in the Wallet Wars as a follow up to this article.