PayPal Needs a Friend
business2.com
In the run-up for an IPO, challenges are mounting for the online payments pioneer.
By Eric Hellweg, December 21, 2001
If you've poked around eBay this holiday season, chances are you've noticed that PayPal is often listed as a payment option. Nearly 70 percent of PayPal's more than 12 million members report that they use the service for online auctions, with most of those auctions taking place on eBay. Sounds like a huge coup for PayPal, right?
Not exactly. PayPal -- which hopes to launch an IPO as soon as possible -- has no formal relationship with eBay. In fact "they have an adversarial relationship," according to Jams Van Dyke, a research director for Jupiter Media Metrix.
As evidence of this, consider that eBay is ramping up its own Online Payment Services (formerly known as Billpoint) -- an offering that competes directly with PayPal. "We've seen 70 to 80 percent growth in our payment services in each of the last two quarters," says eBay spokesman Kevin Purseglove. What's more, PayPal finds itself increasingly threatened by Citibank's C2it payment service, which recently announced it would offer no-fee services for sellers or buyers -- a move clearly aimed at winning over customers from PayPal, which charges a nominal transaction fee.
This is an unfortunate confluence of events for PayPal, which will face a lot of scrutiny on Wall Street as the first Internet pure play to go public in quite some time. But a tight competitive environment isn't the only worry facing the Palo Alto-based company. Simply put, PayPal's fundamentals don't look so hot.
Yes, the company is a pioneer and a leader in online payments. But as we've all learned, Internet pioneers often pave the way for more entrenched firms to muscle in later and take over emerging markets. That scenario could be shaping up here. PayPal has lost $264 million since its launch. The company recently instituted higher fees for those who use the service for $100 or more per month in sales, but it will be some time before PayPal's accountants can make a run on black ink.
Perhaps realizing it was facing a growing list of obstacles, PayPal shopped itself around last April to eBay, Citibank, and CheckFree, but found no buyers. "No one would buy them because their valuation was too high, and the business is too risky," says Avivah Litan, vice president for financial services at Gartner Group. "Just because they have 12 million users doesn't make them a big success."
Two years ago, it might have. But in 2001, the markets are a lot savvier about what it takes to create a lasting e-business. |
