PayPal better placed than eBay to profit from spin-off

So, eBay will spin off PayPal, the precocious child it acquired in 2002 for $1.5 billion and which has since eclipsed its parent in profitability and appeal.

Neither eBay nor PayPal is seen as exciting these days. Once a fast-growing internet phenomenon, eBay has struggled to redefine itself in recent years. But it hasn’t quite convinced as a destination site for “buy it now” shopping, and remains for many an auction site for collectibles.

PayPal, once the cutting edge of online financial innovation, is now a mainstream, mature company, but set against upstart young companies and new trends, appears blandly conservative. But some of the dismissive analysis from pundits about PayPal and its prospects are, I think, misguided and unfair.

User base

After all, PayPal has a user base of 150 million people. Revenue climbed 20 per cent in 2013 to $6.6 billion (€5.2 billion) and it handled $180 billion in financial transactions. It contributed 36 per cent of eBay’s profits and 46 per cent of revenue.

Carl Icahn, the maverick activist investor who had pushed for a split between the companies, has termed PayPal the "jewel" of the two. Yes, its business model is under threat, but it has begun to branch into mobile and app payments already, and has a firm customer base on which to build.

Of course, the newer kids on the block, like Irish brothers John and Patrick Collison's red-hot San Francisco-based payments company Stripe, pose a serious threat – one rather pointedly highlighted on the morning of the eBay/ PayPal split announcement, when Stripe announced its Stripe Platform Fund of $10 million, funded by General Catalyst. It will offer tranches of up to $500,000 to companies to develop tools for Stripe users.

Cryptocurrencies

Then there are the so-called cryptocurrencies, of which BitCoin is best known. These could threaten existing payment systems – or might be incorporated into them.

There are online and mobile wallet services like Google Wallet, aimed at making a purchase an easy and secure fast-click transaction (though PayPal's own wallet application is the most used, far outstripping Google Wallet in popularity).

And then there's that great big gorilla that doesn't yet exist, but which is already rattling everyone's cages – Apple's recently announced Apple Pay, which will enable iPhone users to make easy wallet and in-app payments, and could well be introduced more broadly online.

In a statement on eBay's website, eBay chief executive John Donahoe acknowledged eBay and PayPal would likely now do best if separated, noting that "keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively."

Once PayPal is spun out, eBay will almost certainly face more challenges than opportunities. It has been in the doldrums for some time, and losing PayPal’s revenue stream will require it to work hard and fast to make itself more compelling.

PayPal, on the other hand, shouldn’t be underestimated. The company has already transformed itself before to fit what customers wanted it to be.

Some 15 years ago, I was one of the first journalists to speak to a tiny startup called Confinity and its new chief executive. Confinity had just launched an application that would "allow individuals to 'beam' sums of money between handheld devices such as mobile phones, Palm Pilots, and pagers", I wrote for this paper.

The product was PayPal. The chief executive was Peter Thiel. He was confident PayPal would succeed because, unlike wallets and smart cards, PayPal would allow individuals to make payments to each other, not just to retailers or financial institutions. "Most transactions take place between people in the real world, away from the desktop," he said.

I especially love this quote: “All these devices will become one day just like your wallet. Every one of your friends will become like a virtual, mini ATM.”

Visionary

Well, no. It turned out people didn’t want to use PayPal to beam money between their mobiles. They wanted to use it to buy things on the desktop, not away from it. Confinity pivoted, renamed itself PayPal, and you know the rest.

Which goes to show that in technology, no one really is a visionary capable of seeing the future. Right now, it’s impossible to know what people are going to want next in payment capabilities. But some will be in the right place at the right time.

PayPal is in a good position to be among them, but right now, it’s all to play for.