PayPal had a major executive shake-up this week when, in a matter of hours, Facebook announced that it was poaching President David Marcus and Eventbrite claimed Senior Engineering Director April Chang.
Marcus is joining Facebook to work on its messaging products, and until his replacement is found, the PayPal leadership team will report directly to eBay CEO John Donhoe. This lack of leadership comes at a critical time: Mobile payments are hotter now than ever before. PayPal should be leading the charge.
And in a lot of ways, it is. In the first quarter of 2014, PayPal and eBay enabled $11 billion of mobile commerce volume, up a massive 70%.
However, the space is getting increasingly crowded. Despite PayPal’s market head-start, a bunch of competitors — Google, Clinkle, Square, Stripe — are working on products that threaten PayPal, making this a moment when the company needs to be more innovative than ever.
It’s almost as if rivals regard PayPal’s incumbency as a weakness, not a sign of strength. Why else would so many companies want in on PayPal’s action?
The ill-timed leadership loss of David Marcus isn’t the only problem that PayPal, and its parent company eBay, have faced as of late. It’s been a pretty tough year for both companies, which have faced a series of technical setbacks and bad press.
Some have even suggested that eBay would be better off if it was broken up, with its PayPal unit spun off into a separate company. That didn’t happen, but it did raise a question: Are things so bad at eBay that the company is worth more torn apart than it is whole, under CEO John Donahoe?
A CEO who is “completely asleep or, even worse, either naive or wilfully blind”?
Not long after activist investor Carl Icahn bought a .82% stake in eBay in January, he penned one of his infamous open letters. In it, he completely shredded the company’s board and CEO Donahoe (whom he called “completely asleep or, even worse, either naive or wilfully blind”), while demanding that eBay spin PayPal into its own company. The public back-and-forth between Icahn, eBay, and board member Marc Andreessen, who Icahn targeted as not having the company’s best interests in mind, raged on for nearly two months.
Icahn wasn’t the only one calling for a split between PayPal and eBay. Keith Rabois, an investor with Khosla Ventures and part of the “PayPal Mafia,” a famed group of early employees, said that remaining a part of eBay dramatically slows down PayPal’s innovation. He even went so far as to say that this is the “John Sculley Era” of PayPal. (For those unfamiliar, Steve Jobs brought in John Sculley to provide Apple some “adult supervision,” in the 1980s. Sculley ended up firing Jobs two years later, and Apple endured an infamous period of slow growth without much innovation.)
Even before the Icahn spectacle, Yammer CEO and former PayPal COO David Sacks publically said that he believes that the payments company should split off from eBay, too. After eBay’s 2013 Q4 earnings report, Sacks pointed out that PayPal is growing a lot faster than eBay. When PayPal sold to eBay, eBay’s transactions were roughly two-thirds or more of PayPal’s volume. But today, eBay is a third or less of PayPal’s volume, and that percentage continues to decrease.
The Icahn-eBay fight finally ended when eBay agreed to Icahn’s suggestion to appoint David Dorman to its board. eBay and PayPal stayed together and a new Icahn-approved board member isn’t necessarily a bad thing, but the whole debacle wasted the company’s time and energy. Rabois commented on eBay’s extremely defensive response: “It’s like that Shakespeare line. The lady doth protest too much, me thinks.”
“That’s unacceptable to me, and the rest of my team”
Meanwhile, in February, in the midst of the Icahn debate, Venture Beat obtained an internal memo from then-president David Marcus where he angrily scolded PayPal employees for not using company products.
“It’s been brought to my attention that when testing paying with mobile at Cafe 17 last week, some of you refused to install the PayPal app (!!?!?!!), and others didn’t even remember their PayPal password,” he wrote. “That’s unacceptable to me, and the rest of my team, everyone at PayPal should use our products where available.”
While eBay was staunchly defending the importance of its synergies with PayPal, the payment company’s president was caught railing on employees who were clearly unenthusiastic about its products. Not great publicity in any situation, but especially at that time.
At PayPal, people “who just don’t get it”
Then a few months later, in May, ex-PayPal director of strategy Rakesh Agrawal went on a public Twitter rampage against some PayPal employees and, eventually, the company in general. Agrawal accused PayPal of being “bogged down” by people who “just don’t get it,” and said that the company needed to let go of employees that don’t meet high expectations. He also wrote that few people at PayPal “actually want to get stuff done.”
Although the wide-view of the several week-long situation may have cast more doubt on Agrawal than PayPal, the entire episode undeniably brought on negative publicity and an unease that maybe PayPal isn’t moving fast enough. After Marcus stepped down this week, Agrawal tweeted “Did David Marcus also realise that PayPal is going nowhere?” and wrote in a LinkedIn post that “At the time I quit, I had reached the point where I could no longer claim that PayPal had a huge future, that it could execute on delivering the future of mobile payments or that it was an agile company.”
This wasn’t some random employee: Those words came from PayPal’s head of strategy.
And then things got worse
At the end of May, eBay also had two major technical setbacks. The company revealed that a big data hack two months prior required all users to change their passwords. Hackers had gained access to a database that contained customers’ names, encrypted passwords, email addresses, physical addresses, phone numbers, and dates of birth, although, luckily, no financial information.
eBay also took a significant hit when Google updated its search algorithm. The update, known as “Panda 4.0,” stripped eBay of 80% of its best search listings, according to Larry Kim, CEO of search marketing company Wordstream. Google routinely changes its search algorithms to weed out results from lower quality or spammy websites, and Wordstream’s Kim says that eBay’s bad ad practices caused its results to get punished. This is huge for eBay, because it relies heavily on search traffic. When you Google a product that you want to buy, eBay wants one of its listings to be on the first page of results. Since Google’s update, eBay results have lost their prime real estate. However, the update is still new and eBay will likely regain its searchability as it adapts to the algorithm changes and purchases additional product listing ads.
Of course, things are not all bad for eBay and PayPal. eBay beat expectations for both revenue and EPS on its Q1 earnings call. PayPal’s total payment volume grew 27% and it gained 5.8 million new active registered accounts, ending the quarter at 148 million, up 16%. That’s solid growth. As CEO John Donahoe said on the company’s earnings call, “despite the potential distractions of our proxy fight, our teams stayed focused and delivered strong results.”
Ignore the peanut gallery — the strategy may be sound
With the payments industry on fire as of late, PayPal should be poised to completely dominate the space because, unlike smaller competitors like Stripe that are working on similar products, it has widespread, mainstream name-brand recognition (which is particularly important for payments: Consumers need to trust the companies they’re handing over their data too).
All the top tech players — including Amazon, Apple, and Google — are announcing new payment products or being rumoured to have something new in the works. Now that former PayPal president David Marcus has joined Facebook, the company will likely start trying to monetise Messenger, perhaps by letting users send money to each other through messages. Both Google and Square already let users send each other money via email, and Venmo lets users send money through its app. PayPal also allows users to send each other money, but now they’re not the only ones doing it. Amazon is also aggressively taking on PayPal’s ubiquitous payment button by partnering with e-commerce sites for Login and Pay with Amazon.
As PayPal’s strategy and business is being attacked from all sides, now more than ever eBay and PayPal need to recover from this tough 2014 and start moving faster. Much of the two companies’ problems are cosmetic rather than fundamental. Executives can be replaced. Headlines don’t last long.
And there are signs that the companies’ underlying strategy is sound — mobile revenues are up, after all. That doesn’t happen when you’re failing.
Moreover, PayPal acquired Braintree last September. Insiders saw it as the company trying to play catch-up in regards to mobile. With it, eBay also captured Venmo, which is owned by Braintree. Braintree processes payments for Airbnb and Uber, two huge mobile businesses. The Venmo mobile payments app was started because its young founders needed a way to send money to each other, and realised that even though PayPal made that possible, no one they knew was using the feature.
So eBay and PayPal now own a massive chunk of the mobile payment space in terms of companies and clients.
“eBay and PayPal are both great businesses and they support and reinforce each other,” CEO John Donahoe said on eBay’s earnings call. “We will continue to aggressively drive synergies that enhance our overall growth and competitive positions.”
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