(Bloomberg) -- EBay Inc., preparing for a day when its PayPal online-payment unit is its biggest source of revenue, will lay out a three-year plan tomorrow for expanding the business and warding off threats from Google Inc. and Apple Inc.
At a meeting with analysts, EBay will unveil its strategy for the mobile version of PayPal, the BillMeLater service and its open-platform effort, which lets outside programmers work with its software, the San Jose, California-based company said.
While Chief Executive Officer John Donahoe will discuss plans for the entire company, he'll devote close attention to PayPal -- EBay's fastest-growing business . The payment service is on track to generate more revenue than EBay's e-commerce marketplace in coming years, the company has said. Key to that growth will be fending off threats from technology companies and the three largest credit-card networks, which are all investing in online-payment systems.
"There is a huge opportunity for innovation and share gain in the payment space over the next five years," said Dana Stalder, a former PayPal executive who's now a venture capitalist at Matrix Partners. "PayPal is the best-positioned of any company to seize that opportunity, but it will take a lot of great execution."
The effort is led by Scott Thompson, a former Visa Inc. executive who joined PayPal in 2005. He aims to capitalize on PayPal's head start and avoid the fate of EBay's auction site, which lost its lead in e-commerce to Amazon.com Inc. PayPal declined to make Thompson, 53, available for an interview.
A growing array of rivals is offering alternative payments -- transactions not done with cash, check or credit cards -- spurred in part by the rise of smartphones.
Apple and Google are both working on enabling payments through so-called near-field communications, a wireless standard that would let users glide through checkout lines by waving their phones, people familiar with the plans said.
Using PayPal on mobile devices requires consumers to download its application. That hurdle may give an edge to Apple, Google and carriers such as Verizon Wireless because they can weave their payment technologies directly into a phone's interface.
"They are going to have to continue to innovate in mobile, and they are somewhat at a disadvantage in that they don't control the mobile platform," said Aaron Kessler , an analyst at ThinkEquity LLC in San Francisco.
'It's All We Do'
PayPal says its advantage is its narrower focus. "PayPal clearly is a leader in payments -- it's all we do," said Anuj Nayar, a spokesman for PayPal, which has its own campus down the road from EBay's headquarters. "There are a lot of new entrants in the payments market. Many of them have one or two of the capabilities that PayPal delivers. Nobody has all of them."
Facebook Inc. , meanwhile, has served as both a boon and a threat to PayPal. People who play games on social-networking sites use the payment service to buy virtual goods, such as a tractor for "FarmVille" or a gun on "Mafia Wars." Those kinds of items now account for more than 33 percent of payment volume at PayPal, according to Deutsche Bank AG.
Facebook, though, has begun taking a 30 percent cut of transactions on its site. It's promoting its own option called Facebook Credits, which works with PayPal as well as other payment services. That may restrict the potential market.
Another challenge: While PayPal has helped revive growth at EBay, it's come at a cost. The division carries lower profit margins than EBay's marketplace.
The main business has margins of about 40 percent, according to Spencer Wang , an analyst at Credit Suisse Group AG. At PayPal, the figure was 22.1 percent at the end of 2010, though the margin will grow to more than 25 percent over the
next five years, he predicts.
"The EBay business is structurally far more profitable," said Stalder, who became a venture capitalist after leaving EBay in 2008. "In order to achieve the same cash flow, PayPal has to be dramatically bigger than EBay ."
PayPal also faces competition from startups such as Square Inc. and Zong Inc., along with MasterCard Inc., Visa and American Express Co., which spent almost $3 billion last year to buy Internet-based payment processors.
"PayPal has to figure out how to create loyalty to the PayPal brand," said David Robertson , publisher of the payment-industry trade publication Nilson Report. That may mean offering users rewards to sign up for mobile services, or wowing them with gee-whiz applications.
It also won't be able to rely as much on the EBay site to promote PayPal. Most EBay buyers and sellers already rely on the payment service, so the marketplace is losing its power to find new PayPal customers.
That's adding pressure for PayPal to spread out, said Rich Aberman, co-founder of payment startup WePay Inc.
"PayPal rode on the EBay wave into the mainstream," he said. "PayPal is obviously trying to change that because EBay is not the golden goose it used to be."