If eBay swallows PayPal, customers may suffer

If, as expected, online auction giant eBay eventually buys the online payment service PayPal, that could spell trouble for consumers who use the popular payment site, says a prominent analyst.

If eBay purchases PayPal, "it would be a real negative for users," says Avivah Litan, vice president and research director at Gartner Inc..

PayPal is already by far the most dominant online payment service (the company says it has 16 million users). Combining it with the auction site's current service, eBay Payments, which Gartner estimates has about 6.5 million users, would create an entity with well over 80 percent of the online payments market.

"Competition would die down, and PayPal's service would get worse than it is now," Litan says, referring to reports of poor customer service at the company.

While the vast majority of PayPal users likely never encounter account problems, those who do complain the company is slow to answer customer phone calls and e-mail. Many frustrated PayPal users vent on online message boards such as AuctionWatch or the Online Traders Web Alliance. Others have turned to the courts: Two law firms, Jacoby and Meyers and Girard Gibbs & De Bartolomeo, are pursuing class-action suits against PayPal. They allege improper freezing of accounts and poor response to customers' problems.

Executives for both eBay and PayPal decline to comment on the speculation of an acquisition. However, Vince Sollitto, PayPal's vice president of communications, acknowledges that his company's chief executive officer did discuss the topic publicly in April.

"Peter Thiel, cofounder and CEO, said on our first-quarter earnings call that there are certainly synergies between the leading auction site, eBay, and the leading online payment service, Paypal, which processes a significant amount of eBay auctions," Sollitto says.

Thiel went on to say, however, that PayPal "plans to continue operating as a stand-alone business, and in the end any action taken by the company will be done with the mindset of creating the most value for the shareholder," Sollitto notes.

Enticing Offer Gartner's Litan, however, says she believes talks have been ongoing for more than a year. It is just a matter of time before the two reach an agreement, because both have strong motivation to make the deal, she says.

"EBay is getting serious about winning in the market, and the easiest way to win is to buy PayPal," she says. It would take years for eBay Payments to catch up with PayPal in terms of offering seller services such as investment of funds and debit card services, she says.

Meanwhile, eBay is missing out on a portion of the money its own auctions generate, Litan says. "eBay is fierce about this -- there is a lot of revenue to be made here," she adds.

As for PayPal, the company's stockholders and executives are undoubtedly expecting a big payday for the business. The company was one of the few tech-related firms to launch a successful initial public offering this year, Litan says.

"PayPal is pretty arrogant, and their CEO is good, and he's confident," she says. She suspects PayPal is asking about double its current market cap, which sits at about US$1.6 billion.

And that price tag is likely to keep rising, Litan says. Gartner estimates PayPal will reach 25 million users by 2003. PayPal's Sollitto says the company is currently drawing about 28,000 new customers each day.

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