In prelude to spin-off, PayPal eclipses eBay’s marketplace

April 23, 2015, 1:19 AM UTC

And the best, starting with PayPal

PayPal already had a huge following among eBay users when eBay acquired the online payment service for $1.5 billion more than a decade ago. It turned out to be one of the best tech deals of all time. EBay's ownership helped make PayPal even more ubiquitous for buying and selling in eBay's online marketplace. More importantly, it served as a launching pad for PayPal's growth off of eBay with merchants like United Airlines, Dell and Best Buy. If there's any doubt about PayPal's success consider this: It's growing so fast that it will likely surpass eBay's marketplace in revenue within the next couple of years. Yes, PayPal will soon be eBay's biggest business.
Photo: Aidan Crawley/Bloomberg via Getty Images

As it prepares to spin-off PayPal over the summer, eBay reported stronger than expected first quarter earnings Wednesday thanks to its growing payments business. But eBay’s marketplace is declining, which doesn’t bode well for its success after saying goodbye to PayPal.

Indeed, the report hammered home the divergent trajectories of the two businesses in one nugget of data. PayPal, the one-time upstart in the corporate family, has finally eclipsed eBay’s marketplace in revenue.

Sales in EBay’s bazaar of antique vases, used cars and outlet clothing fell 4% to $2 billion. Meanwhile, PayPal’s revenue grew 14% to $2.1 billion, slightly edging out its sister division.

The payments arm has long been the fastest growing business for eBay. The core marketplace business was still growing, although at a slower rate than PayPal. But while digital and mobile payments take off, the marketplace business has recently floundered amid stiff competition from Amazon (AMZN) and others. The changing of the guard was inevitable.

In anticipation and under pressure from investor Carl Icahn, eBay decided to spin-off PayPal, the company it acquired more than a decade ago. CEO John Donahoe explained that the once-symbiotic relationship between the two divisions wasn’t as tight as it used to be and that they could do better alone while focusing on their respective businesses.

While all signs point to PayPal emerging from the spinoff as a healthy company, it will likely be a different story for eBay. Without PayPal, eBay (EBAY) would merely be a slow-growth business at best and a possible acquisition target, and a possible acquisition target of Chinese e-commerce giant Alibaba (BABA) could be an interested buyer as it looks to expand to the U.S.

Short term, however, Devin Wenig, the future CEO of eBay’s marketplace business, mentioned another challenge for eBay’s marketplace. Recent changes by Google to its search algorithm has negatively impacted product listings in results and that eBay is looking to fix the problem.

Thankfully for eBay, it doesn’t look like the company will face competition from PayPal anytime soon. Earlier this month, the company revealed additional terms of the split, with eBay and PayPal entering into a deal that prohibits them from competing against each other after they’ve parted ways. PayPal is blocked from creating its own marketplace for physical goods, while eBay has promised to steer clear of building a payments system. As part of the agreement, the two companies will share data around payment risk and security.

In prelude to the split, eBay and PayPal still report their earnings as a combined company. Its overall quarterly revenue increased 4% from a year earlier to $4.45 billion, in line with analyst expectations. Profits excluding certain expenses came in at $943 million or 77 cents per share, slightly higher than the 70 cents that analysts had predicted.

EBay’s core marketplace quarterly revenue declined for first quarterly decline since 2009. Gross merchandise volume for fell 2% to $20.1 billion. International volume, which was always touted as a huge growth opportunity for eBay, was down 4% in the quarter.

As expected, PayPal had a strong quarter in which payment volume rose 18% to $61 billion and the number of transactions grew 24% to over 1 billion. Mobile payments through PayPal are up 40% year-over-year and now represent 30% of all transactions.

PayPal isn’t immune from competition either, especially on mobile, with Apple Pay, fast growing payments unicorn Stripe, Google and others all vying to power payments for consumers. We’ll see how Wall Street values both PayPal and eBay in the coming months.

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