eBay Grooms Another Phenom

eBay's gross merchandise volume -- the total amount of goods traded through its global sites -- reached $34 billion last year. Compare that figure to world economies, and eBay's marketplaces would rank 88th, right behind Kuwait and Kenya. But to put PayPal's potential in perspective, the gross merchandise volume of all merchant services (that is, the volume of all consumer merchant transactions made online) is $300 billion, which would make it the 29th largest economy, ahead of Saudi Arabia.

eBay paid $1.5 billion for PayPal in 2002, a figure that struck observers at the time as too rich but which seems like a bargain two and a half years later: PayPal is now worth between $6 billion and $7 billion, estimates Legg Mason. The merger has helped both companies grow: eBay gave PayPal a critical mass it needed to succeed, and PayPal gave eBay a higher transaction volume, as buyers and sellers took to its format.

"The advantage eBay has is the 450,000 individual small merchants using PayPal on eBay," says Mark Mahaney, an analyst at American Technology Research, which does no underwriting for companies. "There's the risk that eBay wastes time and money pushing PayPal off its sites, but it strikes me as an open opportunity for them."

The task that eBay faces as it moves PayPal beyond its sites is winning acceptance from online merchants, whether a niche seller or a Fortune 500 giant. Retailers have been grumbling about high fees that the handful of major credit card companies charge for transactions, a discontent that opens the door for PayPal as a cheaper alternative.

PayPal is farther along in reaching that potential than many suspect. After only five years, PayPal handled payments for 9% of consumer e-commerce transactions in the U.S. and 5% globally. And it has signed up 64 million accounts around the world, a million shy of the number of people who hold American Express cards.