eBay Goals for PayPal: Expansion, Subtraction

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With its deal to buy the market leader in person-to-person payments and keep the PayPal brand name intact, eBay Inc. may have signaled its intention to branch beyond its core auction business to other parts of the Internet payments space.

eBay said that buying PayPal Inc. is "a natural extension" of its trading platform and that the move supports its "mission to create an efficient global online marketplace."

eBay, of San Jose, Calif., said it plans to keep PayPal's management and board of directors, a sign that it will let the company's leaders pursue their ambitious plan to build nonauction transaction growth. After its initial public offering in February, Mountain View, Calif.-based PayPal announced plans to focus heavily on international payments and to serve small businesses by setting up a network of Web sites developers and designers to work with them.

Some industry observers are skeptical that eBay ownership could help PayPal spread its wings. For example, in Monday's announcement eBay said it would shutter PayPal's Internet gambling operation, which generates significant revenue.

The $1.5 billion deal, announced Monday, was also an acknowledgement that the Billpoint payment product, which eBay developed in conjunction with Wells Fargo & Co., was unable to compete with PayPal. Wells Fargo pulled out of the venture earlier this year, and eBay said Monday that it would discontinue Billpoint after the deal closed.

Both PayPal and Billpoint currently handle international transactions, but the services will do so in U.S. dollars only. PayPal has been trying to conduct transactions in foreign currencies.

eBay president and chief executive officer Meg Whitman said in a news release that her company and PayPal "have complementary missions. We both empower people to buy and sell online. Together we can improve the user experience and make online trading more compelling. We can also capture greater value from the e-commerce opportunities occurring both on and off our site."

PayPal CEO Peter A. Thiel said in a conference call Monday morning that his company hopes to attract some of the 25 million eBay users who are not yet PayPal customers. eBay transactions make up about 60% of PayPal's gross payment volume.

Mr. Thiel, who is to keep his title and report to Ms. Whitman, said that eBay's customer base includes 46 million consumers who could potentially use PayPal's service to make purchases on thousands of other Web sites.

"This ever-expanding financial network is what PayPal is all about," he said. "It is very clear to us that by working together, PayPal and eBay can help the other expand."

PayPal spokesman Vincent Sollitto said the company's online auction business doubled in the first quarter of this year from a year earlier and that the nonauction business grew 187%. He said the company remains focused on moving beyond eBay.

eBay is to acquire all outstanding PayPal shares in a tax-free stock swap of 0.39 eBay shares for each PayPal share. The purchase is also expected to include about $18 million in acquisition costs, and is expected to be completed by yearend.

eBay spokesman Kevin Pursglove said the company will stick to its strategy for now. "I think once the deal closes, we'll start to look at that more closely," he said. "It's premature at this time to comment" on a possible strategic shift.

But eBay has already decided that it will eliminate the use of PayPal on Internet gaming sites, Mr. Pursglove said. "Under the current legal and regulatory environment, we just thought this was the best decision for eBay," he said.

eBay will also phase out Billpoint, Mr. Pursglove said. When eBay acquired Billpoint in 1999, he said, it was envisioned primarily as an end-to-end payment service for eBay users rather than a stand-alone business. The company considered taking Billpoint beyond eBay, Mr. Pursglove said, but the publicly traded company was unable to assume the same degree of risk as PayPal - then privately held - in launching an Internet-wide payment service.

"PayPal will now be in the position to offer similar services that Billpoint was offering," he said. "eBay users have very enthusiastically accepted PayPal as one of their primary methods of payment."

James Van Dyke, the founder of Javelin Strategy and Research in Pleasanton, Calif., said that eBay would be wise to keep building PayPal, but that will take a lot of marketing dollars.

"The big opportunity for PayPal is, can it jump beyond the borders of auction payment sites to general commerce payments?" he said. "They've been unable to do it so far."

Gwenn Bezard, a senior analyst at Celent Communications in Boston, said that the deal is good for eBay, because it eliminates PayPal as a competitor, but that the benefits to PayPal are less clear. The sale will probably not help PayPal go outside the auction market, he said, since eBay has not demonstrated an ability to develop Billpoint outside its site.

"My sense it that the acquisition of PayPal by eBay is kind of the end of the story," he said. The deal "is probably going to confine PayPal to the area of auctions."

Mr. Bezard said online gaming makes up about 10% of PayPal's transactions. "That's a huge opportunity, and it's sad news for PayPal that now they're going to move away from this market," he said. "You can see the trend, and you see that PayPal is going to lose significant agility."

Mr. Bezard said the deal may encourage financial institutions, which have been unable to wrest market share from PayPal, to develop real-time online person-to-person payment services. He mentioned the recent deal struck by Toronto-based CertaPay Inc., a payment technology provider, and five Canadian financial institutions to provide real-time e-mail money transfers to customers.

eBay's PayPal acquisition, Mr. Bezard said, "is going to provide incentive for U.S. banks to develop such applications, because it's going to clear a little bit of the competitive landscape."

Also on Monday, eBay reported its second-quarter results. It said its consolidated net revenues were about $266 million, compared with earlier guidance of $260 million to $265 million.

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