Generally speaking, among untrustworthy statements “we’ll still be friends,” when uttered in the context of people breaking up, ranks right up there with “the check is in the mail.”
Luckily, despite legal conventions that say otherwise, corporations are not exactly people, which means that when they go their separate ways – as eBay and PayPal will be doing formally later this year – they are able to negotiate detailed contracts to make sure that relations stay friendly.
The world at large got a glimpse of what “staying friends” will look like in the aftermath of the eBay/PayPal split yesterday (April 9) when eBay updated its Form 10 with the SEC. The 210-page document is a summary of the operating agreement between eBay and PayPal, and details what the future of the partnership between the two companies will look like. It also discloses some additional information about the new board structures of the two firms and offers some insights into the financial impact of the agreements.
While we are sure that the truly dedicated will fill their weekend devouring every last word, MPD CEO Karen Webster caught up with eBay CEO John Donahoe to talk about the filing and what it means for the future of both businesses.
“In simplest terms what we’re trying to do is maintain as much continuity as possible between eBay and PayPal for customers, employees and investors,” Donahoe told Webster. “We also want to maintain the synergies wherever possible and also provide as much strategic flexibility as possible.”
He then told Webster that the impressively thick document eBay filed yesterday essentially has four pillars – Penetration, Data Sharing, Product Development and Non-Competition – that the firm hopes will guide the currently one – soon to be two – companies as they attempt to keep the transition as smooth as possible.
Preserving The Special Relationship
Though the two firms will no longer ride under the same banner – eBay and PayPal have an undeniably synergistic relationship that has been a strong boon to both the payment and commerce side of the eBay business. Today, Donahoe told Webster, about 80 percent of the transactions on eBay are paid for using PayPal – and that’s a ratio an incentive arrangement will seek to preserve over the next five years.
“PayPal is the simplest way to pay on eBay,” Donahoe noted. “You have 150 million consumers habituated to paying with PayPal on eBay today and often they have their credentials stored and it’s one click to buy. There’s a natural momentum there.”
And that is a momentum worth maintaining from eBay’s point of view. And also the point of view of its partner merchants, noted Webster – a point Donahoe rather emphatically agreed with.
“We think every merchant that sells on eBay will offer PayPal, because you’d be crazy not to. Among consumers I think the penetration rate will continue to grow very naturally.”
The new arrangement develops a very simple metric to keep the 80 percent ratio intact – if it is maintained, nothing happens. If eBay ups its PayPal penetration by a certain amount, eBay is paid a bonus. If penetration falls below 80 percent, there’s a penalty imposed.
Reciprocally, Donahoe noted, as eBay creates new users for PayPal, PayPal will pay out an incentive for new users.
And although Donahoe says these arrangements may cause some flow of capital between the two businesses, he told Webster that the expectation is that the movement will be minimal and the true purpose of the “carrots and sticks” built into the arrangement are largely to preserve the status quo and provide stability for investors in both companies.
“We do not anticipate there will be any material movement between financial flows between the two. There will be some, but it’s not something investors will see a material movement in profitability from one to the other.”
Defining What Data Is For Sharing
The full data transparency that currently exists between the firms will obviously become a thing of the past when the separation is complete, but, Donahoe told Webster – eBay and PayPal will still be sharing some data – particularly as it relates to “risk, trust and customer purposes.”
So, for example, a confused consumer in need of help from either of the two businesses can reach out to one, or the other, and have a strong expectation of support because of the data transparency pledge in the “customer purposes areas.”
“If an eBay customer calls eBay customer support they can get eBay or PayPal support, or vice versa,” Donahoe told Webster.
On the other hand, some data will be closed off. For example – data collected about consumer behavior for marketing purposes is – generally speaking – not at all up for grabs.
“The data cannot be shared for marketing purposes unless there is a commercial agreement established between the two entities,” Donahoe said, while further noting that while a future joint marketing arrangement could be conceived of – a dual Facebook campaign was a possibility he offered – it likely won’t occur often.
“It’s very limited today,” he noted. “I wouldn’t say there are enormous marketing synergies today. There’s not a whole lot of outbound marketing done across the two businesses.”
Webster pushed the issue a little further – noting some services by PayPal might blur the line between payments and marketing.
“Would you consider enabling PayPal Credit on a particular merchant site marketing or just another payments option?” Webster asked.
Donahoe considered the question and noted that it would depend on where exactly the consumer credit had been offered.
“PayPal’s ability to offer credit for a consumer for an eBay transaction when on eBay they could share the data, that would be a continuation of things probably for risk purposes. But PayPal cannot use any eBay data for any commercial purpose off of eBay,” he said.
Building Apart – Working Together: The Future Of Product Development
As the companies are tied together closely for the next five years with an active intention to remain each other’s biggest customer – it is unsurprising that part of the agreement entails PayPal’s continued development of products for use on the eBay marketplace.
“When PayPal has new products and services – say the latest mobile application or one touch – they will be available on eBay,” Donahoe told Webster.
Those products will, in general, be part of PayPal’s overall R&D efforts – Donahoe notes that PayPal does not have to develop products for exclusive use on eBay
“No more so than they are today,” he remarked in response to the question. “eBay is a unique marketplace and PayPal’s functionality can serve cross-border and can serve eBay’s needs very, very well. And nothing is prohibited, so PayPal can decide to provide a unique product for eBay – but this agreement does not require them to.”
Most Favored Nation Status
The elements of non-competition between the companies are exactly what one might expect. Donahoe explained that after the split is official, PayPal is free to pursue partnerships with other marketplaces and eBay is free to incorporate alternative payment providers to increase flexibility for both firms.
That flexibility however does not extend into direct competition with each other – PayPal, for the next five years, cannot create a rival marketplace and eBay cannot create a replacement payments platform within eBay once PayPal is spun off.
“PayPal is free to serve any merchant it wants. PayPal is free to serve an Amazon or an Alibaba if it wants to, but it must provide most favored nation [pricing] status to eBay,” Donahoe told Webster – noting that PayPal is free and encouraged to design whatever wonders it wants – as long as it doesn’t cut eBay off from access to said wonders in favor of another marketplace.
Those non-compete provisions will be in effect for five years (plus a one-year transition period), with one possible exception laid out by Donahoe – the event of an acquisition by a handful of particular players.
“We do not envision either of them being taken over, but if there is M&A activity both of these operating agreements would still be in place. Except in the case of a few named – and not publicly named – predefined eBay competitors. If they were to buy PayPal, then eBay after 18 months would be free to pursue other payments strategies.”
Donahoe noted that this language was placed in the deal to signal investors that “no onerous restrictions,” were part and parcel to the deal, and that there are no plans for an acquisition of either firm.
Though PayPal and eBay will go forward as two businesses – it seems that the leadership of both firms is committed to contradicting the adage “breaking up is hard to do.”
“The whole goal is as much continuity for customers as possible,” Donahoe told Webster as he explained the new board positioning that will go along with the PayPal spin-off. “To provide continuity in the short term I will become Chairman of the PayPal board while Tom Tierney (current eBay Inc. Board Director) will become Chairman of the eBay Board.
The world today is not the world it was when eBay and PayPal first joined up a little over 15 years ago, Webster noted. Even 10 years ago, she said, marketplaces were still an evolving concept instead of the epicenter of the explosive growth of digital retail – now made even more explosive thanks to the proliferation of mobile devices. When she asked Donahoe about the implications of those changes for eBay moving forward, he answered this way.
“It’s really a continuation of what we’ve been seeing. Ten years ago the only time anyone could access eBay was at your desktop or laptop at work. Today you can access it 24-hours-a-day, seven-days-a-week on your tablet or mobile phone. The whole market has expanded from just eCommerce to holistic commerce.”
And, the good news, from where he sits, says Donahoe, is that the playing field is so ripe with opportunity – this doesn’t have to be a zero-sum game for online merchants any more than Walmart’s success means that all other retailers are summarily doomed.
“There will be multiple winners. Just as in retail, there are multiple winners.”
At the end of the day – consumers will continue to need to buy things. And Donahoe believes that a global third-party marketplace where the marketplace does not compete with its sellers and a global payment system that can guarantee both simplicity and security no matter where on earth one wants to use it, or what kind of device one wants to pay from, is the value proposition that eBay uniquely offers.
And that is what eBay and PayPal have done for 16 years and believe they can do even better moving forward – and apart from one another.
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