March 27, 2014
One of the biggest recent stories in the eCommerce media has been the talk of splitting eBay and PayPal, which was driven by activist investor Carl Icahn. eBay maintains Mr. Icahn’s idea is not new, and that eBay’s board has rejected the notion based on its own previous evaluations of the best strategic paths for PayPal and eBay, saying now is not the time for separation. Icahn has backed off his proposal for a full spin-off, now agreeing that a relatively small public offering of PayPal shares, say 20% would be sufficient after all. (eBay’s shareholders will vote on the proposal themselves on May 13.)
For those of us in the eCommerce industry, there was largely a sense of head-scratching and general befuddlement as to why Mr. Icahn was targeting eBay and PayPal in the first place. Everyone in our industry knows that eBay’s purchase of PayPal back in 2002 is largely regarded as a categorical homerun and a textbook example of synergy executed right. At its heart, PayPal gives eBay buyers a frictionless and trustworthy way to complete a transaction (perhaps THE single most important moment of truth in ecommerce) and eBay remains PayPal’s most important retail partner, a source of continued customer acquisition around the world, insight into the world’s most engaged shoppers and a funding source for innovation in payments. Those are the arguments on behalf of eBay shareholders, but the entire eCommerce industry in the US has an equally vested interest in keeping these two businesses together as the long-term impact on online retailers of a separate PayPal would be disastrous. Here are three reasons why:
- eCommerce needs a strong eBay to defend itself against Amazon. Amazon is the single biggest force influencing retail today. It is a break-even business model which is taking share from just about everyone, largely by underpricing competitors and aggregating 3rd parties. eBay provides an alternative way for merchants to reach large swaths of customers and to capture transactions while also delivering incremental new shoppers to those merchants (and PayPal is essential to those buyers buying on eBay). For merchants that don’t want to do business with Amazon because they fear it is a deal with the devil, but that nonetheless want to grow their business through a marketplace, eBay provides a very viable, effective and non-competitive channel.
- eCommerce needs eBay and PayPal to help it understand mobile commerce. The second biggest force affecting the retail industry now is the smartphone. To complete transactions on mobile devices quickly, we need frictionless payments. PayPal (with its stored billing, shipping and payment details) is one of the few effective ways that frictionless online payments happen, and consumers use the eBay backbone even when they may not realize it (say, when you order a car through Uber – eBay owns Braintree which processes Uber’s mobile transactions). We need partners like PayPal and eBay for the industry so that it helps everyone else improve their experiences. Worse, a divested PayPal could be picked up by a player like Google or Microsoft which may have grand plans but a terrible track record of success in commerce endeavors (Bing Cashback, or Google Wallet anyone?).
- The payments landscape changes drastically if PayPal’s ownership changes. Two outcomes for PayPal are that it becomes independent and faces challenges funding innovation (eBay says it funds a lot of PayPal’s innovation), or it gets acquired, with the only viable buyers who could even afford PayPal being technology companies without great commerce success (e.g. Google, Microsoft). As the industry faces disruption in the face of products like Bitcoin or Square, PayPal is a necessary player to support competition and new market offerings to merchants and consumers. A change in PayPal’s ownership would all but kill one of the most innovative players in digital payments, not to mention a brand that currently has a tremendous level of consumer trust.
The eBay team may tout that eBay and PayPal are “better together” but I’d argue that the entire eCommerce industry (at least here in the US) is better with them together too.