PayPal and eBay are getting the divorce that a number of billionaires have been agitating for. But while Elon Musk, Carl Icahn and Peter Thiel are pretty happy the payments company is splitting from the online auction pioneer after 12 years together, the future isn't so unambiguously bright. In the half year since Icahn began ratcheting up the noise, PayPal has gone from the hot property being held back by its ties to eBay to the once glamorous fixer upper. And what happens next isn't going to help.
It's going to apparently take about a year to cleave the two companies in half and during that time, it's likely PayPal's best people are going to be heavily recruited away from the company. While there has been much talk about high startup valuations and burn rates here in Silicon Valley lately, the reality is times are quite good, opportunity is knocking and many will choose to answer the door.
For a while it seemed perhaps it was knocking at PayPal -- and it certainly might do so again -- but the events of recent history would have to give anyone pause. Not long ago, David Marcus, the well-regarded man in charge walked out that door to run messaging at Facebook. Whatever he ultimately does there, it was a stunning move. Now, we hear rumors that at least part of it was that eBay CEO John Donahoe overruled Marcus at a critical juncture, choosing to support Samsung's mobile payments scheme when PayPal was in negotiations with Apple for a prominent role in the recently revealed Apple Pay service. Leaving aside whether the specific cause-and-effect occurred precisely as Bank Innovation claims, the reality is PayPal lost both Marcus and Apple.
If that's not enough trouble, Amazon also rolled over a key part of PayPal's turf with a new service that mimics PayPal's online merchant offerings. The ubiquitous PayPal buttons you see on websites might soon be joined by Amazon buttons. Similarly, Amazon added a Square-like mobile credit-card swiping device -- also competing with a PayPal offering.
And the invaders are coming from all directions. Stripe, which competes with PayPal's Braintree division, is winning much of the payments business inside mobile apps. The good news for PayPal is that fast-growers like Uber and AirBnB use Braintree to process their transactions; the less good news is that Stripe didn't exist when they made the choice. Very soon, app developers will have the option of using Apple Pay (on iOS) as a payments option too. It's getting crowded at the gates.
Normally, the conventional wisdom talks of the power of first-mover advantage in establishing and owning a market. But while Thiel was generally positive about the spinoff, he's also a big fan of noting that "last-mover advantage" is what gives the ultimate victor the spoils. Right now, Stripe, Square, Apple, Google and Amazon are all encroaching on the edges of the giant kingdom from which PayPal hoped to control "every transaction on the planet." Back in March, when the leadership was settled and eBay was determined to hold the kingdom together, it was easier to believe some version of that might come to pass.
But given what's happened since, that feels like a long time ago. And given how the next year of uncertainty will only serve to make things worse, the heady days of early 2014 feel like a fantasy. While there was some brief euphoria from the bump in eBay stock, morale is likely to slump substantially as the calendar turns into 2015. To dress up the numbers for Wall Street, hiring at PayPal will quietly slow and a round of layoffs is likely. While top-line growth at PayPal is touted as strong, it was just 19% last year -- solid but unspectacular.
PayPal is profitable, but generates about half the revenue of Facebook with nearly twice the headcount. The good news is that it's not valued anywhere near as high -- perhaps 1/5 as much -- but the reason for that is much slower growth. When it was the part of eBay outdoing everything else, the workforce numbers and near 20% gains were enough. Fending for itself, that's going to be harder to sell.
None of this is to suggest the situation is dire. PayPal has a presence with thousands of merchants and will doubtless remained the most used payments mechanism on eBay for quite some time. As the chart below shows, it has managed to almost double the number of accounts on the service in the past four years alone.
But compare those numbers to Apple and Amazon and you see how small it really is in context:
Set free a year ago, PayPal might have become a juggernaut. It made the right acquisitions, including the one that brought in Marcus in the first place and began a wholesale revamp of its business. But as with many big organizations, things quickly slowed. And discussions of the very spinoff that many wanted became a distraction in the abstract. Now they'll be one in the concrete. For a critical year when PayPal is effectively under siege. By the time it emerges, ruling the roost might be too much to hope for. Living to fight another day might be a more realistic goal.
