July 21, 2015
Will PayPal lose itself in the payments space? Or will it become an 800-pound gorilla in payments? Will it become an agile and fast moving payments innovator? Or will it gobble up startups and become an aggregator of several great startups (like it has done with Braintree, Venmo, Paydiant, Xoom)? These are some questions that are floating around, post the parting of ways between eBay and PayPal earlier this week
eBay and PayPal are no longer together. The e-commerce marketplace and the payments platform decided to part ways in September last year and yesterday was the final curtain call. Post the spilt, PayPal will be able to engage with other online retailers and marketplaces, which include Amazon, one of eBay’s strongest competitors, Alibaba and the likes. The break up settlement does include some restrictions like PayPal not being allowed to create its own online commerce marketplace and eBay not permitted to develop its own payments systems on its core platform. The companies were together since 2002, following eBay’s $1.5 billion acquisition of the payments company.
One of the world’s largest internet payment companies, PayPal moved $228 billion in 26 currencies in 2014 across more than 190 countries, generating a total revenue of $7.9 billion (around 44% of eBay’s total profits). Thanks to PayPal, eBay had a foot in the door with millions of sellers and the payments platform was largely accountable for eBay’s outperforming stock. So what really caused the drift in the partnership? eBay’s slackened pace of growth and the riding on the shoulders of its acquired companies led to the relationship withering, say most industry experts. eBay’s problem stemmed from the fact that it had few product specialist engineers on board. The company didn’t pay as much attention to promote engineering and design to better the product, as much it did to recruit MBAs, which resulted in many lost opportunities to modernize the selling platform. According to insiders, the company’s search algorithm was stored in text files for years and could be accessed by select business employees, who could also get updated search results so as to prioritize items with higher prices to try and push company revenues higher.
Another downslide came when eBay changed its fee structure leading to angry protests from the site’s regular sellers. As a result of the changes, sellers found low fees when listing items, but eBay took a bigger cut, when the items sold. The site also made a radical change to directly challenge Amazon, offering fixed-price sales rather than auctions, making its loyal customers very angry, who even created YouTube videos criticizing the move and targeting then CEO John Donahoe. This coupled with the fact that the company lost some of its key leaders like Jack Abraham, who was heading eBay’s push into local in 2012 and PayPal president David Marcus, who was leading to an imminent downfall. There was also considerable chaos within eBay and PayPal over the latter going private, strategy decisions and political fires raging within its ranks.
This led to the board finally accepting the fact that parting ways in the changing business landscape would offer more opportunities for both eBay and PayPal. In a statement issued by the company, they pointed out that, Separation will create sharper strategic focus and better position each business to capitalize on those growth opportunities as independent companies. The road for eBay seems a difficult one for now. As most in the industry are pointing out, Chinese e-commerce giant Alibaba is already hot on its trails for an acquisition. While ebay decides on its fate, PayPal has to deal with two challenges that lie ahead, one of infiltrating stores and other of fending off the large numbers of big and small players now entering the payments space. It is already valued at more than $50 billion on Nasdaq under the new ticker symbol PYPL.
Also read The opportunity for Paypal by Dan Schulman, President and CEO, PayPal.