PayPal Tanks as eBay's Influence Expands

In a move that will likely ratchet up the competition in the online payment business, online auctioneer eBay (EBAY) took control of its subsidiary Billpoint Thursday.

eBay paid Wells Fargo (WFC) $43.5 million for the 35% of Billpoint, also known as eBay Payments, it didn't already own, implying a value of roughly $125 million -- a small fraction of the nearly $1 billion market value given to rival PayPal (PYPL), which recently went public. Wells Fargo will continue to process payments made through Billpoint.

Analysts say it is tough to analyze the deal since eBay doesn't break out financials for Billpoint, which was formed in 1998. San Jose, Calif.-based eBay bought into the company in 1999, and in 2000 partnered with Wells Fargo.

But the prospect of eBay trying to push more of its massive transaction volume to Billpoint from PayPal could hurt PayPal, whose IPO came out to great acclaim only last week. Last fall, eBay sought to attract more users to Billpoint by launching a new feature called Checkout, which presented sellers with the option of using eBay's payment system.

"It seems to be a good move to have control over the subsidiary," says Thomas Underwood, who follows eBay for Legg Mason. "Regarding what Billpoint contributes and if it was a good price, I don't know." (He has a market perform rating on eBay and his firm does not have a banking relationship with the company.)

PayPal, based in Palo Alto, Calif., is the payment system of choice among online users, including those doing business on eBay, with Billpoint a distant second, according to research firm Gartner. In a recent survey, it found that 27% of online users prefer PayPal, while 11% choose Billpoint.

About 68% of the roughly $2 billion that flowed through PayPal for the nine months ended Sept. 30, 2001, came from online auction sites, mainly eBay, PayPal disclosed in its prospectus. "eBay could choose to restrict or prohibit its sellers from advertising PayPal for payments or compel sellers to use eBay Payments on eBay's site," according to PayPal's prospectus. "Whether or not eBay imposes such restrictions, we expect eBay to continue to develop and promote its own payment service and to integrate that service tightly into its site in order to foster the use of its payment service."

With that in mind, it's clear that the online payment business is fraught with uncertainty of all sorts. Some observers contend that such services act too much like banks -- they hold deposits and transfer money -- to escape regulation, an issue that delayed Pay Pal's initial public offering earlier this month. According to Gartner, four states, including California and New York, are considering regulating PayPal.

All the same, eBay's move clearly unnerved PayPal investors. Shares were off lately $1.52, or 8.5%, to $16.30, while eBay shares were up $1.01 to $55.38.

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