PayPal is to be separated from its parent eBay next year, giving it greater freedom to pursue its own strategy and relationships, particularly in the booming area of mobile payments. This has inevitably sparked speculation that it could more easily become a takeover target for a new parent, perhaps Google, creating a combined web and payments platform to worry Amazon, Apple and the emerging Alibaba.
The online payments giant has been a constant presence lurking behind the more-hyped initiatives like Google Wallet, SoftCard and now Apple Pay. It was sceptical about NFC when everyone else seemed to believe that was the only way forwards, and has trialled many approaches including the simple optimization of its existing web capabilities for phones. But with the eBay apron strings cut, it could look for a more radical strategy, perhaps acting as a kingmaker among the other web giants jostling to hold the strings of m-commerce.
There is logic, then, to the idea that Google could make a play for PayPal, adding a far more powerful payments element to its platform than it has ever achieved itself, having made several attempts such as Checkout (now defunct), Money and Wallet (far more limited in uptake than Google had hoped).
One of the reasons why Checkout was discontinued last November was that eBay had blacklisted it as a method of payment on its ecommerce site, highlighting the danger of payments becoming siloed like other mobile services – a danger intensified by the announcement of Apple Pay, which will be propelled by the power of iTunes and live firmly within the iOS walled garden.
So PayPal could certainly add to Google’s power, though the eBay unit is more likely to want to make alliances wherever it can, freed of any conflicts of interest with its parent’s websites, and try to be the default platform for m-payments everywhere, a battle where it will need to take on the efforts of Amazon.
eBay CEO John Donahoe told an investor call: “We want PayPal to be a presence however consumers want to pay”, which many took to indicate a thawing of attitudes to Apple. “The future of payments is one where people have multiple ways to pay,” he added. “We want PayPal to be present in each of those environments.” Earlier, at the launch of Apple Pay, PayPal had been hostile, taking a shot at the iPhone firm’s recent hacking woes with a full-page advert claiming “we the people want our money safer than our selfies”.
The firm recently bolstered its mobile activities with the launch of One Touch, based on last year’s acquisition of Braintree. eBay said in its statement that PayPal processed $27bn worth of mobile payments in 2013 and expects to process onebn mobile transactions this year.
eBay said that splitting into independent publicly traded companies would position both to capitalize on their respective growth opportunities in the rapidly changing global commerce and payments landscape. The split is expected to be completed as a tax-free spin-off in the second half of 2015. American Express executive Dan Schulman has been made president of PayPal and will be CEO once it is split off. He has mobile pedigree – prior to joining Amex he was president of Sprint’s prepaid group after its takeover of Virgin Mobile USA, of which he had been founding CEO.
Devin Wenig, president of eBay Marketplaces, will be CEO of eBay. eBay’s current CEO John Donahoe and CFO Bob Swan will oversee the split and are then expected to serve on one or both boards of directors.
Activist investor Carl Icahn has been calling for the spin-off of PayPal since February, though at the time the eBay board rejected the notion, but changes like the launch of Apple Pay are now making it imperative that PayPal has the maximum flexibility of action.
eBay has been working on an end-to-end commerce platform spanning mobile, web and physical transactions and other services such as digital storefronts and advertising, supported by a string of acquisitions. Those included last October’s $800m purchase of Braintree, its largest since it bought GSI Commerce for $2.4bn in March 2011m, and its twelfth since it snapped up Magento, the basis of its expanded ecommerce business, in March 2010. Most of its purchases have been directed at creating an end-to-end commerce platform, dubbed X.Commerce, for all kinds of businesses. Braintree was the thirty-third deal since buying PayPal itself back in July 2002.
Magento brought an open source commerce software platform that allowed merchants to build online storefronts based on easily customizable templates, which is now fully integrated with PayPal services and those of another acquisition, GSI, a digital ecommerce and marketing firm. Other deals in the area have included RedLaser, Milo, WHERE and Fig Card, which add many aspects of social/local shopping, a key driver of mobile commerce. RedLaser specializes in comparison shopping; Milo links customers to a local inventory of products; WHERE added a location-based advertising network plus a local deals service and guides; and Fig Card is a competitor to Square in offline payments.
PayPal will no doubt remain an integral part of that effort, though eBay too will gain greater flexibility to work with its subsidiary’s rivals.
Those rivals will increasingly include China’s Alibaba, following its enormous debut on the US markets, as well as Amazon and Google. Alibaba is, like Amazon, building a complete services and shopping platform which will drive more compulsive digital purchasing. It has plans to push the Alibaba Mobile Operating System (AMOS) onto handsets as the basis of that platform and has been paying five Chinese manufacturers a fee of $1.92 per year for each handset sold running its OS – reportedly leading to sales of one million handsets in a year.
The company’s Taobao app has been the most popular m-commerce app in China since August 2012. China has upwards of 500m mobile users, and Alibaba claims in its IPO filing that “our mobile apps are top-of-mind commerce apps among Chinese consumers, and we believe that our leading market position in mobile commerce reflects the strong brands of our China retail marketplaces. We intend to build upon our strength in mobile commerce to develop a broader spectrum of consumer offerings.”
It also claims that its Chinese retail marketplaces have a gross merchandise volume of $248bn from 231m active buyers, with $37bn (19.7%) attributable to mobile sales. It says it holds 76.2% of all mobile retail value, with 136m monthly active users. The online retail sector currently accounts for only 7.9% of Chinese total consumption, so there is still a lot of headroom for expansion.
The big question is how far it will look outside China for that expansion. The company is strongly embedded in its homeland’s technology market, with its mobile and cloud offerings funded from the success of its retail divisions. But its US filing could herald a move into new regional markets using the IPO as a PR stage to attract new customers.
Any expansion in North America and Europe would see it compete directly with eBay and Amazon in the retail market. Alibaba’s ability to succeed even with low profit margins is even greater than Amazon’s and could see it viciously undercut the incumbents, pricing them out of their home markets. It could also bring its aggressive acquisition strategy to western markets – it has spent almost $4bn in the past three months alone.