warning Hi, we've moved to USCANNENBERGMEDIA.COM. Visit us there!

Neon Tommy - Annenberg digital news

Why eBay and PayPal Called Their Partnership Quits

Raakhee Natha |
October 1, 2014 | 10:27 p.m. PDT


The eBay-PayPal split is no surprise to the market since Forbes announced that Carl Icahn, a prominent eBay shareholder, called for a separation earlier this year. Professor Kyle Mayer from USC’s Marshall School of Business echos this sentiment, saying that “it didn’t happen overnight.”

There is however, a slight downward trend in eBay stocks as the market decides how to react to a “newly-single” eBay, reports Street Insider. eBay originally purchased PayPal in 2002, but now the two firms will operate as independent trading companies. Paypal is no longer owned by eBay and no longer a division of eBay. Mayer also anticipates that, “The market will probably react pretty favorably to PayPal being spun off.” However, "Whether the market will be as enthusiastic about eBay’s chances by itself without PayPal, that will be more interesting to watch,” he said.

eBay and PayPal split (Kārlis Dambrāns, Flickr)
eBay and PayPal split (Kārlis Dambrāns, Flickr)
Some key questions are why they finally split and who will benefit from this spin-off. Historically, it made sense for eBay to acquire PayPal. eBay was growing and doing very well in 2002, whereas PayPal was much smaller, explained Professor Mayer. Purchasing PayPal would allow eBay to control the company that processed its financial transactions.

Moving ahead twelve years later, from revenue and similar factors it’s clear that both companies have equivalent value, says Mayer. PayPal has grown and continues to grow rapidly; it has a great place in the market, but this also means that they face increasing competition. The online payments and emerging mobile payments industries have a plethora of emerging competitors.

READ MORE: What’s in Your Digital Wallet?

As much as PayPal may have liked to adopt strategies to enhance their competitiveness, any move would need consultation and approval from leaders that serve both companies, explains Mayer. Any business strategy would need to make sense for both PayPal and eBay, often a tough balance to strike. If a strategy didn’t work for both companies, it couldn’t be deployed. Mayer says that this can be a constraint on eBay’s growth, “being run for the overall benefit of both parties rather than individual maximized value of either one.” Regarding the split, Mayer says: “PayPal is free to compete as they see fit in their market unencumbered by the ownership and oversight of eBay which should make them a more effective competitor. PayPal will be free to do as it sees fit to maximize its own value.” This move enables PayPal to have the flexibility to meet the demands of a rapidly growing payments industry.

Mayer says that when considering why these firms split, one has to ask why would you want these two together at all. “Joint ownership creates additional layers of bureaucracy, additional layers of management, additional controls…there are clearly costs to having two organizations under one roof.” As explained above, historically it made sense to bring these two entities together but with time, it became less clear whether the benefits of being one company outweighed the costs. Mayer says that it came down to a single question: “Is the whole more than the sum of the parts? It needs to be, in order to justify the two being together.”

There is speculation and anticipation around how the business strategies of both these firms will evolve once the split officially takes place in 2015. Marketing Week reports that John Donahoe, the current CEO of eBay, believes that separation will lead to two strong and globally recognizable brands. One of the areas that might be least impacted, is the consumer brand of each respective company. eBay and PayPal have always maintained distinguished marketing identities. However, PayPal will have a new CEO - Dan Schulman, formerly of American Express. The split from eBay and a new CEO offers PayPal the opportunity to rethink its entire business strategy, including its brand, and make any necessary adjustments. Mayer explains that PayPal can now focus on its business model and maximize value and enhance or transform the brand if they want.

The growth strategies of these organizations will impact the success of these firms as they fly solo.  Mayer explains that for PayPal, the focus will definitely be on the mobile arena and the opportunities it provides but also a focus on international growth. PayPal has to define its strategy in light of international players like Alibaba and even Apple, who will be launching Apple Pay in the future. eBay is likely to continue to focus on international growth as well, but also decide how much of an auction house they want to be explains Mayer. eBay have to define their market space and it could be as a hybrid auction house/online retailer says Mayer. And of course, both firms could form new partnerships. Don Davis explains in his write-up for internetretailer.com, analysts say both companies could be takeover targets.

READ MORE: Online Retail Trends

The awkward part of office break-ups is that you still have to deal with your ex at work. Likewise, PayPal and eBay still have to do business with each other, as PayPal still provides services for eBay’s transactions. Mayer says that while there has been no indication that eBay would want to eliminate PayPal’s services, the reality is that they could if they wanted to. eBay has the chance to evaluate other options in the market and see if other firms would provide a better service offering at a better price. A large extent of the break-up discussions might be around service fees and bargaining agreements. Both companies have the freedom to choose what works in their best interests, now they need to prove what they can do with their autonomy.

Reach Contributor Raakhee Natha here.



Craig Gillespie directed this true story about "the most daring rescue mission in the history of the U.S. Coast Guard.”

Watch USC Annenberg Media's live State of the Union recap and analysis here.