PayPal IPO

Jim Whitehead
Fri, 19 Oct 2001 13:47:41 -0700

Right now, about 70 percent of PayPal's business comes from auctions,
"particularly eBay" auctions, according to PayPal's prospectus. It's far and
away the most popular electronic payment method on eBay, dwarfing the
auction company's in-house competitor, Billpoint.


There are some points in PayPal's favor that would make it an attractive
purchase. For one thing, it's got the network effect going--that is, the
more people who use the service, the more desirable it becomes.


While PayPal is probably close to achieving network effects lock-in, they're
not there yet. There are two major vulnerabilities to their business: EBay's
rival billpoint service, and the credit card companies.  Since much of
PayPal volume right now is EBay transactions, EBay pulling the plug would be
a big blow.  As well, in the most recent quarter, over 50% of the "real"
money entering the PayPal system came from credit cards.

If you assume that PayPal will be able to navigate past these obstacled to
become *the* winner-take-all in this category, the next question is whether
online transaction brokering is a viable business segment at all.  The quote
in the article about fraud is concerning: "Between July and October, a
'significant fraud episode' cost the company $5.7 million, 64 percent of all
chargebacks for the year."

My bold prediction is that PayPal will achieve lock-in before other
competitors in this space, and before the credit cards enter with competing
products. They will eventually become profitable, and will survive for the
long term. I'm less sure as to how to assess a reasonable market valuation
to them. $400-$500 million feels "right" to me, but valuing companies is
certianly not my area of expertise.

- Jim