The Internet

EBay's Big Plans for PayPal


It's a funny time for a coming-out party. But just when other companies have stopped giving financial guidance because of the unpredictable nature of today's world markets, struggling eBay (EBAY) plans to provide more details about its business than it has in three years, say company insiders.

The venue will be eBay's annual analyst meeting on Mar. 11. In particular, insiders say CEO John Donohoe plans to highlight the promise of the e-commerce giant's PayPal payments unit, which lets millions of consumers pay for products online without having to provide their credit-card information each time. With roughly 50% of the world still using cash or checks for their purchases—and with online shopping growing far faster than the old-fashioned kind—Donohoe is already on record saying he expects PayPal to one day be a larger business than the online auction site.

But analysts have not been given as much information about this business as they'd like. "We're going to give more visibility than we ever have on our sources of revenue, and our growth opportunities," says PayPal senior Vice-President Jack Stephenson. "The stock market doesn't properly value PayPal."

A Shift Toward Fixed-Price Deals

The move comes as eBay is struggling mightily in its traditional electronic commerce business. The company is best known for its product auctions in which people can bid on everything from cars to Pez dispensers, but consumers have been gravitating away from that approach in recent years in favor of the convenience of buying things at fixed prices right away.

As a result, eBay has been shifting towards more fixed-price offerings, but that has forced it to compete more directly with such traditional retailers as Wal-Mart (WMT) and powerful online rival Amazon (AMZN). The business pressures, coupled with broader economic troubles, have dropped eBay's stock by more than two thirds since its peak last year, to just more than 10 a share.

Look for Donohoe this week to do what he can to convince Wall Street analysts to stop focusing on the slowing growth of eBay's e-commerce business, which is measured in "Gross Merchandise Volume," and to concentrate more on "Total Payment Value" that flows through PayPal each quarter. (PayPal typically makes .5 to 2% of that amount.) Says PayPal CEO Scott Thompson: "We will grow the business this year. And in every market we're in, we will grow at a multiple of e-commerce."

Small market Share leaves Room to Grow

Indeed, there are plenty of trends running in PayPal's favor. Even in the U.S., where PayPal is strongest, its share of online payments is just 12%. That proportion is in the single digits in Europe, where it is growing especially fast, in part because PayPal takes much of the hassle out of making cross-border transactions that involve multiple currencies and incompatible financial systems.

Stephenson says the company also wants to grow its business with people who wish to make charitable donations directly from PayPal, and with governments who want to make PayPal an option for paying parking tickets and other transactions, as well as for paying monthly bills such as rent. "There is probably a trillion dollars worth of TPV we can get after," which is not related to retail or purchase of goods, says Stephenson.

Like most online companies, PayPal has plans for the mobile market. The company just announced a new hook-up with Research In Motion (RIMM) that makes PayPal an option for buying apps for BlackBerry devices. And for the future, Stephenson says, they are also working on ways to make PayPal available on billions of lower-end phones that lack Net access—even phones owned by people who don't have credit cards or bank accounts.

(Instead they might get money into their PayPal via direct deposit from their employers or by buying pre-paid PayPal cards at a local shop).

PayPal will also announce plans to roll out technology that will make it easier for software developers to create new ways for consumers and businesses to use the payment platform, much as Apple (AAPL) has done with its iTunes online store. Millions of iPhone and iPod Touch owners use the same payments system to buy songs or buy more than 10,000 different programs from Apple's App Store. "A software developers' kit is being created" for release sometime this year, says Stephenson.

Fruits of the Downturn?

There may even be a modest silver lining to the economic meltdown. PayPal CEO Thompson says they've seen a "significant" number of customers stop using credit cards in favor of PayPal, which lets them spend only funds they have available. Indeed, a new "top-up" card issued in Britain is being used far more than Thompson expected, as more people move to payment options that keep them from spending more money than they have.

Similarly, Stephenson expects merchants to embrace the "Bill Me Later" option, as PayPal continues to integrate operations of the company of that name, which it bought last year. The reason: Merchants who offer credit-card payment are potentially on the hook not only for purchased goods, but for the consumers' credit limit. But the BML software OKs transactions one at a time; should a warning flag go up on a customer, the system would block the purchase of that big-screen TV, for instance. Says Stephenson, "Bill Me Later has proven it can keep the credit losses to an acceptable level," though he wouldn't share precise data.

The better eBay does at singing PayPal's praises, the more likely Donohoe will be asked why he's not spinning it off. Analysts have openly speculated about how much a separate PayPal unit would be worth, free of eBay's troubled e-commerce business. But executives argue the time is not nearly right. While PayPal works to build in new directions, it still gets more than 55% of its new customers from eBay each quarter. "Our eBay business can be double what it is today," says Thompson.

Burrows is a senior writer for BusinessWeek, based in Silicon Valley.

Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.

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