During the gloomy spring of 2009, few tech companies were under a darker cloud than online auction giant eBay EBAY 2.53% . Its online marketplace, one of the breakout Internet businesses of the 1990s, had seen its revenue stall. Competitors like Amazon AMZN 0.89% had cut into its market share, consumers had slashed their spending, and the company’s stock was down more than 80% from its 2007 peak.
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The key word here is almost.
On April 14, the company announced its plan to let Skype go. But even as the news went out, Donahoe was having second thoughts about PayPal. Apple AAPL 0.40% had just disclosed that its App Store had crossed the 1-billion-download mark. And thanks to the soaring popularity of the iPhone, tech executives were urgently pondering the potential of the smartphone as a tool for commerce. PayPal, meanwhile, was the world’s only major digital-payment brand; it already had 70 million users, and payment volume was growing 20% annually.
The more Donahoe pondered, the more foolish a spin-off seemed. “Mobile was exploding,” he recalls, and “there were obvious synergies between eBay and PayPal.” Canvassing board members, he found that their feet were as cold as his. Sentiment turned to action: In July, at a retreat at the Rosewood Sand Hill, the resort in Menlo Park, Calif., where Silicon Valley’s elite swap gossip over Cobb salad, the board rescinded its decision on PayPal, choosing long-term potential over a short-term fix.
That potential went unfulfilled. The spin-off that wasn’t has never been reported until now. But in hindsight, the decision cost PayPal six years of freedom and changed the history of the digital-payment industry. Insiders and analysts agree that eBay never took sufficient advantage of PayPal’s “first mover” status by branching out or innovating; instead, it lost valuable time while rivals established themselves. That delay cost PayPal a chance to dominate the digital side of the $900 billion payment-processing industry the way that Facebook FB 1.84% dominates social media and Google GOOGL 0.08% dominates search. Keith Rabois, an early PayPal employee who’s now a venture capitalist, puts it succinctly. The eBay years, he says, were PayPal’s “lost decade.”
The irony, of course, is that eBay eventually did spin off PayPal. The company became independent in July 2015, and it makes its debut on the Fortune 500 this year. And make no mistake: PayPal is big. The company, whose “virtual wallet” lets consumers make online payments connected to their debit and credit cards, has 184 million active users and serves 14 million merchants. In 2015 it processed $278 billion in payments, generating $9.2 billion in revenue.
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But most of that revenue comes from website commerce—from the familiar checkout-button interface that feels almost quaint in a mobile era. On other fronts, PayPal has fallen behind, says Sucharita Mulpuru, an e-commerce analyst at Forrester Research. Square has captured the in-store payment market for small merchants. Entrenched credit card giants are muscling into the digital-payment turf. Want to tap your phone to a cash register to pay for an item? It’s a piece of cake with Apple Pay or Google’s Android Pay in the U.S., but PayPal has only a limited pilot for such payments, in Europe. “When I look at PayPal, I don’t see a company as innovative as Amazon or Google,” says Mulpuru.
It falls to PayPal’s first post-spin-off CEO, Dan Schulman, 58, to change that. “I want consumers to use PayPal not just twice a month but twice a week and then from there, every day,” says the effusive New Jersey native, a Richard Branson protégé and former American Express exec who favors cowboy boots and jeans. He’s sprinting to make that a reality: In less than two years, PayPal has acquired valuable new technology while building on promising holdovers from the eBay years, like Venmo, a peer-to-peer payment app popular with millennials.
The big question is whether PayPal can make up for lost time and compete in an increasingly cutthroat digital-payment world—or join companies like AOL VZ 0.69% and Yahoo YHOO 1.58% in the ranks of Internet 1.0 afterthoughts. As Brendan Miller, an analyst at Forrester Research, puts it, “PayPal’s biggest challenge right now is shaking off its past.”
Before Tesla TSLA 1.79% , SpaceX, and LinkedIn lnkd , there was PayPal. The company, whose founders and early employees included Elon Musk, Peter Thiel, and Reid Hoffman, created the first reliable way for people to send money to each other digitally. PayPal survived the dotcom wipeout, accumulated 16 million users, and went public in 2002. Just a few months later, it was acquired by eBay for $1.5 billion.
PayPal’s culture favored geeky mathematicians and computer scientists who made decisions quickly and then wrote code into the wee hours of the morning. But eBay’s approach, veterans of the era say, was more bureaucratic, and new ideas took what seemed like ages to be approved. Most of the innovative leaders known as the “PayPal mafia” left the company. Rabois opines, “The right culture with the right acquirer—people would have stayed.”
It’s understandable that eBay didn’t feel the need to reinvent PayPal. Owning the service enabled eBay to be paid twice for every auction: once for its own cut of the sale and once for PayPal’s transaction fee. PayPal grew from being the payment method for 40% of eBay’s auctions in 2002 to 90% by 2005, and it grew at a healthy rate. But what it missed was the early days of powering payments through mobile phones—an opportunity that was inspiring upstarts like Stripe, Square, and Braintree.
(Source : http://fortune.com/paypal-fortune-500-digital-payments/)