eBay's Changing Identity

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PayPal's largest growth, however, has come from outside eBay. In the first quarter of 2007, it processed roughly $11.4 billion in transactions—about $4.4 billion was on non-eBay sites. That amount was a 51% increase from the prior year. For PayPal users, the service functions as something of an online bank, delivering interest, processing transactions, and even wiring money to friends through eBay's Internet phone service Skype. "The company [PayPal] has a lot of potential," says Matthew Kelmon, a portfolio manager at Kelmoore Investment, which owns eBay shares.

Branching Out

EBay jumped into the communications business by acquiring Skype in September, 2005, for $2.6 billion plus stock (see BusinessWeek.com, 1/9/07, "eBay Pressured to Move on Skype"). The service posted its first profitable quarter this year, growing 123%, to sales of $79 million, and adding 101 million new users. (Skype now has nearly 200 million customers.) EBay uses Skype to lubricate transactions by making it easier for consumers to talk to sellers, ask questions, and build trust. Skype also is a leader in the market for Web phones.

In the future, eBay could merge Skype with its classified advertising businesses to serve click-to-call ads, tapping into the market for local advertising. EBay is currently exploring such a service with Google (GOOG) and Yahoo (YHOO), separately. Market researcher Borrell Associates estimates that about $8.6 billion will be spent on local Web ads in 2010 (see BusinessWeek.com, 1/29/07, "Small Biz Ads: The Year of the Web").

EBay's advertising business and other small services also posted significant growth, swelling 65% to $60 million. This business is perhaps the most complicated of all because it is not confined to simply one kind of advertising. EBay has been serving classified ads through a network of foreign ad sites, such as Kijiji and Marketplaats, as well as via its 25% stake in Craigslist (see BusinessWeek.com, 3/8/05, "eBay's Stealthy New Classified Ads Site"). It shares advertising revenue with Google, which serves search-related text ads on its non-U.S. auction pages. The company also has a wide-ranging advertising deal with Yahoo. By 2010, Internet advertising is expected to become a $27.8 billion market in the U.S. and a $29.5 billion market outside the U.S., according to a January Oppenheimer & Co. (OPY) report.

Stumbling upon New Opportunities

With such large markets available for eBay's new businesses, it is not difficult to imagine a future in which eBay's auction business no longer dominates the company. EBay sees that long-term potential, though company executives underscore that a chief objective is to "reinvigorate" the core business. An acquisition such as StumbleUpon could help eBay's auction business by leveraging its recommendation technology to suggest other specific items related to goods sellers are bidding on or have bought. Currently, eBay recommends related categories of products.

Of course, eBay also could integrate Skype with StumbleUpon, using the call features to strengthen the networking aspects of both. It could potentially integrate the service with its classified ad business, using it to recommend ads related to products people are looking for.

With the variety of businesses that are now part of the company, what is eBay? More than just auctions—that's for sure.

Holahan is a writer for BusinessWeek.com in New York .