eBay Analyst day is upon us.

March 11, 2009

ChannelAdvisor ChannelAdvisor By ChannelAdvisor

eBay kicks off their first analyst day in 3+yrs today at 8am PT, 11am ET.  The PR and IR teams have been active and the foreshadowing seems to point to a focus on Paypal as the crown jewel of the eBay portfolio.

Some datapoints to consider:
  • BusinessWeek has this article that was driven by eBay PR, outright saying that PayPal is having a coming out party today.
  • Colin Sebastian@Lazard has a note out basically saying that eBay told him the marketplace changes will come out in April and be:
    • Product catalogueueues
    • Improvements to search
    • Robust product pages
    • Category based pricing
  • Jim Friedland@Cowen echoes Sebastian’s view (driven by eBay’s investor relations group I believe)
  • eBay issued a release and finally put the event on their investor relations site.  They list the speakers as:
    • John Donahoe, Chief Executive Officer, eBay Inc.
    • Bob Swan, Chief Financial Officer, eBay Inc.
    • Lorrie Norrington, President, eBay Marketplaces
    • Scott Thompson, President, PayPal
    • Mark Carges, President of Platform, eBay Inc. & Chief Technology Officer, Marketplaces
    • Stephanie Tilenius, Senior Vice President & General Manager, eBay Marketplaces
    • Josh Silverman, President, Skype
The speaker list is well balanced between Marketplace, PayPal and Skype.  It is interesting to see a technology person on the list – a first for a long long time.  I hope Mark is ready to get drilled because a lot of the challenges eBay faces on the marketplace side are technology related (search, etc.).  Even with the speaker list, I believe they will still spend 50% of the day on PayPal given the foreshadowing.

Since PayPal went from a public company to part of eBay, many internal datapoints around PayPal have stopped being reported.  Analysts will be particularly interested in some extra data around:

  • Payment source – eBay used to report on this metric about a year after the acquisition, but then stopped reporting it.  I suspect they will revisit that decision today and we may get some insights here.  One interesting thing with the PayPal business model is that PayPal is incented to make it as hard as possible for consumers to use credit cards.  I’ve found that over the last year this has gotten near laughable with the PayPal interface where you have to go through about 6 screens to select credit card.  “Are you sure?  Are  you sure you are sure?”.  As a refresher, there are three ways today buyers can ‘fund’ their PayPal purchases and one probably on the way:
    •  PayPal balance – Using their paypal ‘bank’ balance.  This is the most favorable to PayPal because they pay essentially zero for the transaction, thus it is all margin.
    • Bank transfer – In the payments world we call this an ACH.  This is the second most favorable because PayPal is charged on the order of $.10-$.50 for each transaction
    • Credit card – This is the least favorable because PayPal has to pay 2-3% for the transaction and thus this has very little margin, and sometimes negative margin.
    • BML – I suspect PayPal will add this shortly (I’m surprised it’s taking so long actually – something that raises concern for me. I suspect they are struggling with what to do if the BML is not accepted and how to get folks back into the normal flow of things.
  • Fraud/risk – Another pressure point on PayPal margins is the amount of fraud that PayPal is exposed to.  There are a variety of metrics that eBay could expand on here.
  • Off-eBay aka merchant services – PayPal breaks out the TPV from on and off eBay, but they haven’t given much more insights into the off-eBay business.  Given the tone of the BW article, I suspect they are going to really try and get everyone excited about this business.  In doing so, they may start to carve out some of the above data points (funding source, fraud, etc.) into the two buckets (on/off eBay).
The focus on PayPal is a double-edged sword.  I do agree with eBay’s view that it is possibly undervalued as it is growing at 14% y/y (Q4) so is one of the only areas in the company ahead of the ecommerce growth rate. However PayPal is only 25% of eBay revenues and an estimated 20% of eBay operating profit so PayPal isn’t going to move the needle much in 09/10.
Does the focus on PayPal mean that eBay is essentially giving up on the core business and reconciling that given the decline there and growth in PayPal, that PayPal will be up in the 50% range by year’s end?  Why isn’t eBay ready to talk about changes to fix the marketplace?
Also, remember that 50% or so of PayPal’s TPV is tied to eBay marketplace, so a flu in eBay is at least a cold on the PayPal side.  In fact, that 14% y/y growth would have been substantially higher if PayPal wasn’t pulled down by the eBay exposure.
Finally, talking to analysts on the buy+sell side heading to the event, if eBay sweeps the marketplace problems under the rug and talks about how great PayPal and Skype are, they are going to be extremely disappointed that management is doing a bait and switch on them.
I’ll be live blogging the event and tweeting on twitter any news worthy events so stay tuned.
Seekingalpha disclosure – I am long Amazon and Google