Can PayPal Beat Apple, Google, Amazon And Icahn In The Wallet Wars?
PayPal is in the center of two battles: one for control of every transaction on the planet, the other for control of its own destiny.The clogged roads of San Jose teem with Priuses, which merely serve as earnest slalom gates for David Marcus to blow through in his black Porsche Panamera Turbo on a January afternoon. The 40-year-old president of PayPal has been in a rush since taking the top job 21 months ago. He’s overseen a sweeping overhaul of the payment company’s technology. He’s rolled out a passel of new products to let his 143 million users pay with their phones. And he’s seen his parent company, eBay EBAY +0.69%, become a public target–Carl Icahn has quietly amassed a 2% stake, ahead of a just-promised proxy fight–as the division he runs increasingly appears more valuable than the core business that purchased it.
Eager to show off some of the magic, we’re racing to Birk’s, a bustling Silicon Valley chophouse that accepts PayPal from diners. Marcus fires up the PayPal iPhone app, which locates him in the restaurant and allows him to scan a bar code before the meal and watch the check update on his phone in real time. The idea is to bring the speed and simplicity of Internet shopping into the physical store. “I like to think of it as The Matrix, ” grins Marcus, a slight accent revealing his French and Swiss upbringing.
But there’s a glitch in this matrix. The restaurant is not running the latest program. There’s no bar code to scan before the meal and none on the check. Instead Marcus must type in a seven-digit code attached to the bottom of the check. When the check arrives the code is missing. “ The challenge,” Marcus says, trying hard to mask his frustration, “is not only scaling the technology but having people understand it on the merchant side.” Ten minutes later the waiter returns, code in hand. Marcus enters a tip, pays the bill via iPhone and sighs: “When it actually works you don’t have to wait.”
Marcus and PayPal have neither the luxury of glitches nor of waiting. Money is going mobile, and the race is on to control the flow of bits and cash across a billion smartphones and at millions of online and physical locations. Research firm Gartner estimates that mobile payments will top $720 billion a year by 2017, up from $235 billion last year. The upside remains enormous: Humans made $15 trillion worth of retail transactions in 2013. Whoever ends up with controlling interests in this new digital ecosystem will reap billions in transaction fees, collect massive amounts of consumer data and control the type of targeted advertising that makes marketers drool. Giants such as Apple AAPL +0.35%, Amazon, Google GOOG +0.7%, Visa and MasterCard all want to be your mobile digital wallet, as do several well-financed startups, including Square, founded by Twitter billionaire Jack Dorsey.
Right in the middle of it all: PayPal, the precocious child of the last dot-com boom, which is now inflicting as much disruption on its parent company as it hopes to on global banking. PayPal moved $180 billion in 26 currencies across 193 countries last year, and its revenue grew 20% to $6.6 billion–41% of eBay’s total revenue and 36% of its profits. In fact, it’s no longer fair to call eBay an online auction company. PayPal, purchased in 2002 for what everyone thought was an outrageous price of $1.5 billion, is now worth at least half of eBay’s $70 billion market capitalization, with many people thinking it could be worth far more.
“If you just went out and took it public you’d get a huge premium because of growth,” says Icahn, who is demanding a sale or spinoff. Elon Musk, the billionaire polymath behind Tesla and SpaceX who made his first fortune cofounding PayPal, is even more direct: “It doesn’t make sense that a global payment system is a subsidiary of an auction website. It’s as if Target owned Visa or something.” PayPal, he adds, “will get cut to pieces by Amazon Payments, or by others like Apple and by startups if it continues to be part of eBay.” Such sentiments add another layer to this gold rush. The winner of the brewing mobile-payment showdown will first be predicated on who wins the battle to control PayPal.
(Photo: Eric Millette For Forbes)That eBay, one of the most innovative startups of all time, now finds itself positioned as a lumbering giant has some historical basis. PayPal has a legitimate claim, based on future successes, to the most entrepreneurial founding team ever. Musk (Tesla, SpaceX) was originally joined by Peter Thiel (Facebook, Palantir) and Max Levchin (Yelp, Slide), with an initial mission similar to what Bitcoin is trying to do 15 years later: create an electronic currency independent from governments and central banks. Soon to join: Reid Hoffman (LinkedIn), David Sacks (Yammer), Jeremy Stoppelman (Yelp) and Chad Hurley and Steve Chen (YouTube). It’s almost impossible to find a major startup in Silicon Valley untouched by the PayPal “mafia.”
Its first great success was figuring out how to beam dollars between Palm Pilots and, later, transferring cash via e-mail. Like credit card companies, PayPal charged the seller a fee of about 3% of the transaction, but the founders figured out how to make a decent profit in the low-margin business of transaction processing by encouraging people to fund payments with checking accounts, which let PayPal avoid having to remit that 3% fee right back to credit-card-issuing banks. To this day, that direct link to bank accounts is an advantage that Amazon, Google and Square lack.
Its speed, convenience and security made PayPal popular with eBay’s small-time sellers, and by late 2000 the service had amassed more than 3 million customers. One of the first IPOs after the Sept. 11 attacks, PayPal jumped more than 50% on its first day of trading. Less than a year later eBay bought it for $1.5 billion. The original PayPal team waited until their lockup agreements expired and then were gone, en masse. By that point most of eBay’s founding team had moved on as well.
“Ebay had a very different way of doing things,” says Eric Jackson, the CEO of Caplinked, who was PayPal’s VP of marketing during the transition and later wrote the book The PayPal Wars . “Lots of meetings, lots of PowerPoint slides, lots of committees, decision-making slowed down.”
Its engineering department turned into a slog of nine groups fighting constantly over resources and often building redundant products (log-in screens, sign-up forms, checkout pages). Programmers across the globe wrote tiny strips of code without knowing, or caring, about the final product. “They would just reinvent the wheel,” says Hill Ferguson, PayPal’s chief product officer. “Every time you changed something you had to do it 30 different times. It was a staggering technical debt.” Instead of a few days, it took almost two months to add a new server, and nearly 70 days to change text on the home page. “Under the old format many great technologists left,” says Marcus. “If you had a choice between Google and PayPal you’d go to Google.”
Its website design was clunky (the same photo of a kissing couple greeted home page visitors for years before its removal two years ago) and its customer service so poor that websites exist for the sole purpose of trashing the company. Says eBay CEO John Donahoe, with the understatement only a former management consultant can muster: “Our consumer and merchant products needed to be updated and refreshed.”
For Donahoe and former PayPal head Scott Thompson, global growth trumped chasing the product innovations from startups like Square. “Would you rather have a big, global payment system working at scale or refocus on a domestic system for a device attached to an iPhone for a very small, mostly offline merchant?” says Thompson. “It’s tough to debate, that. The only way you’ll get to the right answer is to look back ten years from today.” Under Thompson PayPal’s revenue more than doubled from $1.9 billion to $4.4 billion.
To Icahn, however, PayPal has just been riding a wave. “I don’t think eBay is a well-run company. When the tide is rising high, everyone looks good. Just compare eBay to Amazon. PayPal is a jewel, and eBay is covering up its value.” While eBay shares are up 80% since Donahoe took over in March of 2008, over the same period Amazon is up 400%; Visa and MasterCard are each up 245%.
The new Icahn-eBay feud only makes more complex PayPal’s ongoing war with tech’s most dangerous giants. Google released a wallet product for its nearly billion Android users and inked a deal with MasterCard to get access to millions of retailers. Apple has been able to use its retail stores as laboratories. It thinks it can convert its nearly 600 million iTunes customers to use the service offline and has slapped thumbprint readers on its iPhone 5s, with the idea of replacing credit card signatures. Amazon just announced that it’s developing a Kindle-based payment system to allow its 230 million customers to send money to each other and check out in stores.
Most frustrating to PayPal: the rise of Square, which had none of the inherent advantages of the tech giants and yet has built a platform, from scratch, that could become a mobile payment standard. “I was shocked that PayPal didn’t already have something like this,” says Marcus, who took over as the division’s president two years ago. Says former PayPal COO David Sacks: “If you allowed PayPal to pursue its destiny there are moves it could make to become the largest financial company in the world.” But first it must get its act together.
Can PayPal Beat Apple, Google, Amazon And Icahn In The Wallet Wars? - Forbes