Why PayPal Is a Bigger Challenge Than Yahoo

by Peter Lewis   |   January 5th, 2012

 

A month ago The Wall Street Journal had a big story headlined “War Over the Digital Wallet.” “The subhead: “Google, Verizon Wireless Spar in Race to Build Mobile Payment Services.”

Article mentioned AT&T, T-Mobile, MasterCard, Visa, Citigroup, Sprint, and Apple, among others. The word “PayPal” was never mentioned, which is curious because eBay’s PayPal division is by far the global leader in electronic payments.

But not all of the media were ignoring PayPal. TechCrunch the next day carried a story that began, “Hey PayPal, do you realize people no longer trust you?” It continued: “The public’s perception is that there’s a risk in keeping money with PayPal. If something doesn’t change, startups, causes, and merchants will start processing donations and payments elsewhere.”

Something changed. PayPal’s president, Scott Thompson, quit to take over the CEO job at Yahoo!, a media company. When top executives quit, it’s usually because they want a shot at running a bigger or more interesting company. Yahoo is interesting, in the same way that train wrecks are interesting. He will be the fourth CEO of Yahoo in the past five years, not counting those who held the job on an interim basis. None of the previous CEOs, including Carol Bartz, who was fired unceremoniously in September, were able to reverse Yahoo’s seemingly inexorable slide into oblivion.

It’s hard not to chuckle at the highly respected Thompson’s statement that he was leaving PayPal to seek new challenges. “I like doing complicated, very difficult, very challenging things,” he told Reuters. There are challenges galore right under his nose at PayPal’s headquarters in San Jose.

Being ignored completely by the nation’s leading business newspaper in a major story about digital payments, when you are by far the market leader, suggests a nontrivial problem of public perception.

When a major tech blog (itself criticized recently for potential conflicts on interests) scolds that “people no longer trust you,” that stings. Do people really think that AT&T and Google are more trustworthy than PayPal to handle their electronic banking? When I look at my monthly AT&T wireless statement and ponder AT&T’s craven and almost enthusiastic cooperation with the government’s warrantless eavesdropping on American citizens, I can’t imagine ever trusting my digital wallet to a phone company.

PayPal grew impressively under Thompson’s watch at PayPal, doubling its user base to more than 100 million. PayPal in the third quarter of 2011 processed $29 billion in payments. It operates in 190 countries and 24 currencies and has 15,000 bank partners. Revenue was expected to top $4 billion in 2011, and margins were solid at close to 20 percent. PayPal has grown to the point that it now accounts for more than a third of eBay’s operating profits; I would not be surprised to see the tail wagging the dog before too long. John Donahoe, eBay’s CEO, said last year that he expected PayPal to be bigger than eBay two years from now.

Thompson, who is quite savvy about technology and commerce (“e” and otherwise), is credited with the idea to push PayPal out of the cloud and into retail stores. But Google beat him to it, in part by poaching a couple of Thompson’s top lieutenants. (PayPal’s parent, eBay, is suing Google, alleging that PayPal and Google spent two years developing a partnership, then hired PayPal’s point man, who departed with a laptop full of trade secrets; Google denies the charges.) Google then launched its own “Google Wallet” application, beating PayPal to the punch. PayPal still hasn’t articulated its “wallet” strategy.

PayPal’s push into brick-and-mortar retail stores does not appear to be going well. On a visit to PayPal headquarters a few months ago I tried to buy a cup of coffee from the café that operates in its lobby. Sorry, cash or credit cards only. PayPal was not accepted in PayPal’s own headquarters.

Ouch.

Naturally, everyone wonders what Thompson will be able to do in the Augean stables of Yahoo. It is astonishingly hard to revive a declining Internet company, and the task is made more challenging because Yahoo is a media and advertising company very different from PayPal. Both companies recognize, however, that the future belongs to the company that can harvest and sift and parse data, and that’s an area where Thompson has strong chops.

PayPal’s Donohoe said he was shocked by Thompson’s sudden departure; Thomson resigned Tuesday and starts his new job at Yahoo on Monday. Donohoe himself will act as PayPal’s interim president, and promised a “seamless transition.” The person who eventually takes the big chair at PayPal has huge challenges ahead, starting with getting PayPal accepted in its own building.

Peter Lewis

Peter Lewis has covered the tech industry since 1982 as a Senior Writer at The New York Times (where he personally registered the nytimes.com domain), Senior Editor at Fortune magazine, and professor of digital journalism at Stanford University. He is a veteran of two startups. One was named "Cool Company" of the year by Fortune, and folded six weeks later.