Earnings Are Not Important At Ebay This Quarter, But Something Else Is

(Photo Credit: Kārlis Dambrāns)

We are creatures of habit. We have a damn hard time changing our behavior, even when we know we should. This is a point of soreness for tech entrepreneurs who create new apps with the potential to improve the quality of the lives of their users, but fail to win adoption outside a small ring of enthusiasts.

The would-be users aren’t to blame for techies’ problems. It’s difficult to break existing patterns of behavior, even if change would clearly lead to a superior outcome. Much sleep has been lost struggling to push users to adapt new technologies which only offer marginal improvements over existing ones. One area where where there has been limited success in amassing adoption is mobile payment technologies, but that industry now appears to be on the brink of an inflection point.

Apple Pay (AAPL) is set to launch this weekend and eBay (EBAY) announced on September 30 that it will be spinning PayPal off into a separate business. In the fight to dominate mobile payments, the contenders are taking off their gloves. 

Last quarter mobile advertising revenues from Google (GOOGL) and Facebook (FB) demonstrated that mobile connectivity is growing exponentially and has already reached a massively profitable scale. Now Apple Pay and PayPal are vying to capitalize on the mobile-internet ecosystem by trying to finally make mobile payments an everyday reality.

Monday Peter Thiel, technologist and Co-Founder of PayPal, went on CNBC to discuss the timing behind eBay’s decision to set PayPal free. Thiel pointed out that in 2002 when eBay acquired PayPal 75% of all transactions on the website were going through PayPal anyway. It was an obvious target for vertical consolidation. By 2008 that number had dropped to 50%, and has dropped to roughly 25% today as eBay has shifted away from its online auction roots toward becoming more of a traditional e-commerce retailer. Thiel commented, “Today the companies have naturally diverged, it makes sense for them to spin [PayPal] out again and for PayPal to focus 100% on building a good payments system.”

PayPal and Apple Pay will both be gunning to control mobile payments, but they won’t quite be bashing heads, at least initially. Apple Pay is going to start by focusing on enabling merchants to accept payments from consumers at point of sale terminals. There are probably plans in the cards to expand to peer to peer transfers later.

Although PayPal also enables businesses to accept electronic payments, their company will probably take the opposite strategy and focus on the peer to peer transfers that made eBay a possibility in the first place.

These aren’t the only two companies going after mobile payments, but right now they appear to be the favorites. Ultimately mobile payments will only achieve the success that techies dream of if they provide a user experience that is vastly superior to what we already have, cash and credit cards. Frankly one touch payments look awesome, but it’s unclear if mobile payments are enough of an upgrade from plastic to drive mass user adoption. 

In the case of long distance peer to peer transfers, a system like PayPal will be greatly superior to current payment methodologies like wire transfers as long as mobile payments are secure. In May eBay was hacked compromising over 100 million accounts. It will be good for PayPal to distance itself from eBay as reputation and security are essential to building the necessary consumer confidence for driving adoption. Now that PayPal is being spun off, it can focus on improving its own brand.

With local peer to peer transfers, don’t be surprised if mobile payments continue to struggle. We’ve had platforms like PayPal, Square Cash, and Venmo for quite some time. Even though we’re all connected, excluding the behavior of tech enthusiasts cash is still the go-to vehicle for small transfers of value. 

We’ll get our next look at the state of the industry when eBay reports earnings on Wednesday after the close. Last quarter PayPal added 4 million new users bringing its total to 152.5 million. However, quarter over quarter the total number of payments was only up 2%, not exactly the exploding metrics that PayPal would like to see. This quarter contributing analysts on Estimize are expecting eBay to report lackluster earnings, falling in right in-line with Wall Street’s expectations. The earnings forecast may be boring, but the PayPal metrics that eBay reports could make this one of the most telling releases of the entire earnings season, as it’s otherwise difficult to gauge the growth of mobile payments.

A bullish report on the state of PayPal could be great for both the parent company and competitors like Apple who are looking to swoop in and carve out their own slice of an industry which could skyrocket in coming years. Pay attention to the PayPal metrics after the close.