EBay Boss Says PayPal Will Exceed One-Third of Company in ’09

It's been implicit for a while, but eBay Inc. on Wednesday made it clear that it has big hopes for its PayPal payments subsidiary as the company evolves from its core Internet auction business. “PayPal's opportunity and its niche is to power all of e-commerce,” eBay president and chief executive John J. Donahoe told shareholders today at the company's annual meeting in San Jose, Calif., eBay's headquarters city. PayPal accounted for about 20% of eBay's $3.3 billion in revenues in 2004 and 25% of $8.5 billion in revenues last year. “PayPal will be over a third of our company this year as it grows and reaches its potential,” said Donahoe. He later called PayPal “a second core business in our company” that will be bigger than the Marketplaces segment of auctions and fixed-price product sales. The original core of online auctions brought in only about 25% of revenues compared to more than 50% four years earlier. In that time span, PayPal has branched out to serve off-eBay merchants?and such merchants now account for just over half of payment volume. The parent company, meanwhile, has grown its fixed-price business and has diversified by adding or growing newer services such as the Skype voice-over-Internet-protocol video chatting system, online classified advertisements, and the StubHub secondary ticket-sales business. PayPal finished 2008 with $60 billion in total payment volume, up 25% from $48 billion in 2007, and 70.4 million active users, up 23% from 57.3 the year before. Last week, eBay released first-quarter numbers that show continued strong PayPal growth despite an 18% decline in the Marketplaces segment, which was hurt by the recession and currency fluctuations. Total payment volume grew 10% from the year-earlier quarter to $15.9 billion driven by PayPal's merchant-services unit and the contribution of Bill Me Later, the transactional-credit system eBay bought last November (Digital Transactions News, Oct. 6, 2008). Payment transactions hit 254.1 million, up 20% from 211 million in 2008's first quarter. Active accounts grew to 73.1 million, up 22% year-over year. Merchants accounted for 53% of payment volume. In fact, PayPal has become more profitable at a time when most merchant processors are struggling to keep growing and credit card issuers are trying to contain a troubling rise in chargeoffs. The net payments revenue rate was 2.37% of the sale in the first quarter based on a gross rate of 3.81%, from which processing expenses of 1.16% and losses of 0.28% are subtracted. In 2008's fourth quarter, the net rate was 2.29% calculated from a gross rate of 3.78%, processing expenses of 1.16% and losses of 0.33%. Those numbers mean PayPal is sustaining pre-tax profit margins of over 60%. Donahoe didn't go into detail at the annual meeting about the specifics of PayPal's growth plans, but briefly mentioned technological enhancements. The first-quarter report says, “The payments business will continue to focus on the acquisition of new merchants, greater penetration into the Marketplaces business, and the growth of Bill Me Later.” Bill Me Later currently accounts for 1% of net payment volume. Only two shareholders asked questions at the annual meeting, one of whom said eBay's stock has performed worse than the overall market and e-commerce leader Amazon.com Inc. EBay also has angered sellers in the past year or so with various policy changes as it attempted to reinvigorate the Marketplaces segment. Donahoe admitted that “we did a poor” job of communicating to sellers, and that he took “full responsibility” for that. Donahoe said Skype, while providing a good communications channel for users, didn't turn out to be a way of connecting buyers and sellers as eBay hoped. Now eBay plans to spin it off in an initial public stock offering next year.