The real surprise is that it took so long. For months, rumours had been circulating on Wall Street that eBay, the leading online-auction service, would buy PayPal, the dominant provider of Internet payments. When the takeover was finally announced on July 8th the terms, too, were much as expected. The all-share transaction values PayPal at $1.5 billion, slightly above the firm’s average market capitalisation in recent weeks.
The acquisition was predictable because the two companies are not only complementary, but depend on each other. EBay is the most successful surviving dotcom. It is even making money. The firm said on July 8th that second-quarter net profit would be $54.3m on revenue of $266m, an increase of 121% and 47% respectively on the same period last year. But for all its success, eBay has been slow to provide buyers with an easy and cheap way to pay sellers online.
This is where PayPal has excelled. Its users hold an account backed by a credit card or a bank account. They send money by simply typing in an e-mail address and an amount. Launched in October 1999, the service quickly became the payment scheme of choice on eBay; auctions still account for about 61% of PayPal’s business. As of March, 12.2m consumers had signed up to use PayPal, but it is the 3.2m fee-paying business-account holders who make the firm profitable: it is expected to report net profit of about $5.5m on revenues of $54m for the second quarter.
PayPal’s and eBay’s business models are similar. EBay, which started out as a marketplace for collectibles, quickly entered a virtuous circle in which more buyers attracted more sellers, who attracted yet more buyers and sellers. PayPal also took advantage of such “network effects”. To reach critical mass, it initially paid users $10 to sign up their friends — an incentive it was soon able to drop. The firm is now signing up about 28,000 new users a day.
These network effects could start to cause problems, however, if they turn a combined eBay and PayPal into an e-commerce giant with which it is hard to compete. Although eBay does not expect antitrust enforcers to stop the deal, it is bound to face scrutiny in the future. The Department of Justice has already taken a close look at the firm once, although it recently ended its inquiry. Just as worryingly for eBay, its members might not appreciate having to depend on the same firm for both online auctions and payment.
The acquisition of PayPal brings other risks for eBay. Chief among them is the possibility that the firm will be regulated as a bank, which would be costly. The New York Banking Department recently concluded that PayPal is not engaged in banking, but other states may yet decide differently. Furthermore, as PayPal grows internationally, foreign regulators will show more interest. The service already allows users in 37 countries to buy and sell in dollars. On top of this, PayPal faces a number of private legal challenges: three firms are claiming that the service infringes their patents, and disgruntled users have launched four class-action suits.
Despite all this, eBay’s takeover of PayPal could encourage other dotcoms to make deals. One rumour doing the rounds in Silicon Valley is that Yahoo!, the leading web portal, is keen to buy Google, a popular search service. Whether the deal will actually happen depends on which venture capitalist you ask. Some say it is only a question of price, others that Google is in it for the long run. But that is just what PayPal executives were saying until recently.