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Carl Icahn Is Right: PayPal Is the Killer App


Activist investor Carl Icahn is known for taking on big fights. Recently he's been agitating the waters at online auction giant eBay (NASDAQ: EBAY  ) . A major piece of this battle is over the current and future potential of PayPal. Whether or not the payment processor gets broken out of eBay, Icahn is right about its value.

More than an auction house
eBay has been a near universal hit with customers and PayPal was an integral part of that success. The payment intermediary, which started as a third-party service, made using eBay financially simple. It was such a great tool that, after failing to gain traction with a similar offering, eBay bought PayPal for $1.5 billion in the early part of this century.

PayPal was so easy to use and had gained such traction that it quickly went from a way to pay for an auction to an almost universally accepted online payment system. And more recently, eBay has taken PayPal from the virtual world into the real world of brick and mortar stores. And that puts this Internet connected player into the big leagues with giants like Visa (NYSE: V  ) , MasterCard (NYSE: MA  ) , and American Express (NYSE: AXP  ) .

A giant by the numbers
In the fourth quarter of 2013, PayPal added 5.2 million customer accounts. It ended the year with a total of 143 million accounts, up 16% year over year. That's a huge customer base. For comparison, American Express ended 2013 with 107 million cards in force.

American Express largely targets wealthier customers, and its impressive historical performance shows that's a great business model. So it's understandable that AMEX would have fewer customers than PayPal, which will give an account to just about anyone. However, targeting the wealthy means AMEX has to wait until customers are established and then convince them that they want to use one of its cards.

PayPal's customers are young and wired right into the Internet. Although there's surely some overlap between the two customer bases, PayPal already has many of American Express' future target customers and it's giving them a way to grow with a company they, effectively, helped create. No need to convince them of how good PayPal is, they already know, use, and love the brand.

And there's giant growth potential
So eBay's PayPal already has an entrenched seat at the table of the next generation of spenders. But how big is that opportunity? In 2013, PayPal processed nearly 3 billion transactions. Visa processed 58 billion during its last fiscal year, ended September.

(Source: Lotus Head, via Wikimedia Commons)

That's a big difference and speaks to the pair's different business models. Visa acts as a middle man, letting others issue cards in its name. PayPal doesn't do that, but the number of transactions going across Visa's networks gives a hint about the scale of the market PayPal is looking at.

And it's worth noting that PayPal's fourth quarter transaction volume was up 16% year over year. MasterCard's transaction volume advanced 13% in the same period. Like Visa and American Express, MasterCard is a much bigger business than PayPal, but comparing this up and coming payment processor with these established giants highlights PayPal's potential and its successes.

More than just eBay
Another interesting aspect of PayPal is where its business comes from. eBay accounts for about 30% of PayPal's transaction volume—clearly PayPal is much bigger than just auctions. Which is part of the reason why Icahn is asking eBay to issue PayPal shares into the market. It would allow investors to put a price tag on just the PayPal business which, if Icahn is right, will help unlock value now hidden under the eBay banner.

(Source: Bigroger27509, via Wikimedia Commons)

It will be hard to unseat Visa, MasterCard, or American Express, but PayPal doesn't need to do that to have a hugely successful business. In fact the Discover card, which came out of retailer Sears, proves that there's plenty of room for competition. And eBay's PayPal is positioned to blossom right along with the customers that helped turn it into an online giant. Even if eBay fends off Icahn's advances, PayPal will remain a star that's only just starting to shine.

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  • Report this Comment On March 31, 2014, at 6:49 AM, PhilipCohen wrote:

    Notwithstanding that I am otherwise a vociferous critic of eBay, this time I have to agree with Johnny Ho that eBay should not let go of “PreyPal”. Without its existing integrated relationship with the eBay marketplace, the value of the clunky “PreyPal” would be reduced greatly (eBay actually generates ~30% of PayPal new users with no customer acquisition costs for PayPal and half of PayPal's profits come from transactions on eBay where “PreyPal” is well integrated and virtually mandated); and, worse still, without “PreyPal”, the value of the eBay marketplace would be reduced by some 40% (“PreyPal” currently contributes ~42% of eBay’s profits) …

    I hate to admit it, but for once Johnny Ho has got it right; no doubt Carl Icahn is correct in many of his other criticisms of Johnny Ho and eBay’s BoD but with respect to “PreyPal” he clearly has no understanding of the value of the inextricable and mutually supporting nature of the incestuous relationship between these two clunky, disingenuous, unscrupulous, commercial entities, and in particular, the precariousness of the basis of PayPal’s clunky business model …

    Notwithstanding the amount of disingenuous nonsense that constantly steams from the eBay Dept of Spin, PayPal is a clunky middleman, in the main riding—precariously, at the pleasure of the retail banks—on the backs of those retail banks’ existing payments systems. “PreyPal” has little more than one percent (~1.1%) of the world’s total payments business (and even then much of its payers’ funds are sourced via MasterCard/Visa); the “bankcards”, MasterCard and Visa, have ~90% of the payments market between them and Amex has another ~8%.

    Then there is “PreyPal” at physical point of sale?—LOL …

    But even more serious for “PreyPal” is that both MasterCard and Visa have recently launched their own “professional” mobile/plastic, POS/online, digital wallets: MasterCard's "MasterPass" and Visa's "". Undoubtedly these two new professional entrants will ultimately stifle most of the parasitic middlemen payments pretenders—particularly the clunky "PreyPal" ...

    The reality is that PayPal’s “best before” date is approaching; as a “stand-alone” operation that “best before” date would simply arrive even sooner …

    Regardless, none of the above can outweigh the fact that eBay’s Johnny Ho is otherwise a talentless, destructive, narcissistic sociopath and that under his direction eBay Inc. is proceeding apace down the toilet and is undoubtedly ultimately going to finish up at the sewage farm …

    Still, as long as Carl Icahn continues to dig his spurs deep into Johnny Ho’s flanks and I can watch Johnny being made to dance, for me, all is well in the world …

    “Never ever hire an MBA; they will ruin your company.”—PayPal founder, Peter Thiel

    The ugly reality of eBay Inc.:

    eBay's crooked auctions marketplace ... bit(DOT)ly/11F2eas

    eBay Motors (UK sampling): Auction Fraud Galore ... bit(DOT)ly/I2gTEU

    eBay Motors XSS Redirect Scams in Action: video ... bit(DOT)ly/1d46NvE

    eBay/Gumtree / Barclays Bank Motors Scams … bit(DOT)ly/1c9Uwck

    eBay's clunky, unscrupulous "PreyPal" ... bit(DOT)ly/UVXx53

    The ongoing joke of it all ... bit(DOT)ly/YvxFEg

    Fun quotes from the eBay executive suite ... bit(DOT)ly/12xvzyA

    eBay / PayPal / Donahoe: Dead Men Walking ...

  • Report this Comment On April 02, 2014, at 12:15 PM, jbos wrote:

    It is very worrisome that EBAY chooses to not be transparent about the Skype transactions and the insider dealings within the board. Mr. Icahn is correct in calling the board to task for not neccessarily looking after the shareholders interests. We need to have an outside auditor reveiw and report on these transactions to reestablish shareholder confidence.

    John F. Bos

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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