Comment Of The Day - Pondering eBay

... it's also a great opportunity for eBay to extend the use of PayPal across the largest collection of content, subcription, and shopping properties on the web.

these days, the value of eBay is more & more based on the value of PayPal... and depending on how much promotion PayPal gets on Yahoo properties, that value could be increased substantially.

[full disclosure: i used to work for PayPal]

Posted by: Dave McClure | May 27, 2006 8:44:17 PM

Dave's comment was seconded by several others in the comments to my Yahoo Extends Their Network post.

So it got me thinking about eBay and what it is becoming. Clearly eBay is still the dominant marketplace on the web and nothing quite compares to it when it comes to buying and selling stuff online. But eBay's stock is down sharply from the mid $40s at the start of 2006 and got as low as $30 before getting a nice bump on the Yahoo! deal. The stock is still not cheap, but it does trade at 24x the 2005 operating cash flow which is a far cry from where it has traded in the past and suggests that there may be value in eBay if it has a coherent strategy for where its headed.

eBay is at a crossroads as its marketplace is under attack from search, free classifieds like Craigslist, and emerging new marketplaces that are either global or focused on a niche.

But as the comment I started this post points out, eBay has something of tremendous value in PayPal, its transaction payment system which seems to be growing stronger every day.  As Dave and Steve point out in the comments, getting Yahoo! to standardize on PayPal is a big deal and one I should not have glossed over in my initial post on the deal.

It seems that a smart strategy for eBay would be to focus on all the services that enable a marketplace to function, like search, payment, reputation, marketing, and so on, and recognize that overtime the web will become the marketplace but eBay can continue to dominate the services that allow transactions to happen.

I am not sure that Skype is a perfect fit in that strategic model, but I've certainly heard a number of arguments that it is a perfect fit.

Either way, a "distributed eBay" model is an interesting one and PayPal is the asset I'd want to start with if I had to execute that strategy.

Comments

[Ken Berger]

Google must agree, as the beta "Google Purchases" seems to be exploring the portability of the payment component.

And new startup Rapleaf http://rapleaf.com is making portable the reputation service of rating buyers and sellers.

-Ken

[Nono]

And Yahoo is benefiting how? I don't see why Yahoo with it tremendous advertising presence on the web it is not pushing more of it own services

Yahoo killed it's cassifieds by charging for them... they should have held off for a couple of years or more.

[Andrew Fife]

I don't see what the barriers to entry are for paypal. The partnership with Yahoo is a coup for Ebay but it still leaves the two other major portals as potential competitors.

I believe that Paypal's core value is allowing individuals and very small businesses to transact using credit and credit cards. Yet, Amazon also offers this ability and if they made their seller registration process easier they could be another source of serious competition.

[Mick Weinstein]

Good point Fred, about eBay focusing on services and forming a distributed model.

The analyst notes and money manager opinions we publish on Seeking Alpha have been tracking eBay's international growth -- another aspect of the distribution, really, as maturity cycles differ geographically and different areas require different types of marketplaces.

Here's one example:
http://internet.seekingalpha.com/article/10766

[Dave McClure]

Andrew: i assume your 'barriers to entry' remark re: PayPal is about why other portals (or startups / services they acquire) couldn't also create successful payment services.

there are 2 primary barriers to entry:
1) sophisticated fraud prevention
2) large installed base of buyers/sellers

#1: the primary reason PayPal was successful in the internet payment shakeout years (numerous competitors from '98-'02, including both established financial service providers & startups) was due to their ability to beat back fraudsters, russian mafia, and other buyer/seller fraud. along the path to figuring this stuff out, they lost millions of dollars to such folks... however, as they say: i don't have to outrun the bear -- i just have to outrun *YOU* (ie, other payment services). while PayPal suffered some setbacks, other payment services were getting killed and had the equivalent of a fraudster internet gun held to their heads. after surviving a series of these ordeals, PayPal was able to work out a manageable mix of fraudulent and legit transactions enough to make money & continue growing. fraud continues to this day for all online payment providers, and it's never easy for anyone to enter the space without going thru the same lessons, and likely losing a ton of money building up the same expertise / prevention techniques & systems.

#2: PayPal has been pretty successful in using eBay as a large platform to grow their userbase, as well as for many other small website & email sellers off ebay. at last count i think they had somewhere north of 70 million users (of which at least 1/3 or more are reasonably active, and haven't forgotten or lost their password ;). while Google, Microsoft, and others might be able to convert a large % of their existing users to a new payment service, it still takes time to grow a userbase of millions... meanwhile, most folks just want to use a readily accepted payment service that other people already have familiarity with. while the use of credit cards and bank accounts online makes this somewhat doable, it will still take years for other large portals or small startups to build a competitive installed base.

the only realistic competitors in this space (at the point of transaction) are Yahoo and Amazon... which is why i'd predict that Microsoft will likely get in bed with Amazon in some form in very short order, since they've now lost out on AOL, Yahoo, and eBay (for now at least). most folks have overlooked how valuable Amazon could be as a competitive payment service, given their installed base of buyers & sellers.

in any case, while internet payments looks like an easy market / service to enter, the iceberg you don't see underneath the waterline is much, much bigger.

- dave mcclure
http://500hats.typepad.com/
http://www.500hats.com/