EBay Inc’s PayPal business, aiming to challenge Groupon Inc and LivingSocial.com in the market for online daily deals, plans to start offering coupons tailored to users' buying habits and mobile-phone locations.
The company will make its first foray into mobile deals in the first quarter of 2012, partnering with some of the top 200 US merchants, PayPal president Scott Thompson said.
PayPal is chasing a daily coupon market that may double to $4.17 billion by 2015, according to research firm BIA/Kelsey.
Thompson said PayPal can use its knowledge about customers' preferences to do coupons better than LivingSocial and Groupon with targeted offers that arrive on users' smartphones as they're passing stores.
By moving into deals, PayPal can seek to make more money from its 103 million members, helping it close in on a goal of revenue as high as $7 billion by 2013, compared with $3.4 billion in 2010.
"The experience is going to be completely different than anyone else's through and through," Thompson said in an interview at PayPal's headquarters in San Jose, California, last week. "We'll only give you something that we think fits the category of unique and relevant. Everyone else is going to bombard you."
PayPal's services help retailers and individuals exchange funds for purchases or payments, even without a credit card.
It already counts Target Corp, Hewlett-Packard Co and Best Buy Co as customers, and 103 million individuals have accounts for paying using its system.
Market leaders
Daily-deal sites send coupons for discounted goods and services such as groceries, classes or salon treatments to subscribers via e-mail and keep a portion of the revenue from each sale.
Though the business is growing, market leaders Groupon and LivingSocial will be tough to topple, said Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati.
Groupon and LivingSocial had a combined 73 per cent market share in daily deals in October, according to an estimate from Yipit, a website that aggregates online offers. Both companies offer real-time deals throughout the day, through their Groupon Now and LivingSocial Instant programs.
Users purchasing Groupon's deals will propel revenue to $2.35 billion next year, a more than sevenfold increase from 2010, according to the average analyst estimate compiled by Bloomberg.
'Counterpunch'
Still, the prospect of greater competition has helped drag down Groupon's shares 25 per cent from their peak the day after the company's November 3 initial public offering. Groupon now has a market value of $15 billion, compared with EBay's $39.8 billion.
"EBay could definitely use coupons as counterpunch-type of approach to retain customers," said Sorrentino, whose firm oversees $14.5 billion of assets, including EBay shares. "If you can get consumers to your site for something that has a pretty broad appeal, then you can capture their wallets before the couponing companies lead them away from you. Once you've got the eyeballs, the clicks will soon follow."
PayPal is also seeking to use mobile deals to get a head start in wireless payments, as credit-card companies collaborate to create a standard using near-field communication technology. Such a standard could be years out and require merchants to change their point-of-sale terminals, said Thompson, who worked for a unit of Visa Inc before joining PayPal in 2005.
Mobile wallet
As part of the larger push into wireless payments, PayPal will offer a so-called mobile wallet - usable through phone applications or a PayPal card, or even a name and personal-identification number - that holds a consumer's information from credit and debit cards from multiple providers. PayPal will give users the option to choose which provider they want to use to pay for as long as 30 days after the sale, depending on the merchant, as a way to differentiate its system, Thompson said.
To spur more sales, PayPal has a team of engineers working to create the smartest coupon yet, Thompson said. A location- based offer may be the way to maintain engagement, as consumers are more apt to stay glued to the phone if it means they're getting a deal, said David Spitz, president of ChannelAdvisor, a Morrisville, North Carolina-based Web-strategy consulting company.
The coupons are supposed to keep customers using EBay beyond the payment process, with the goal of helping the Internet's largest online marketplace to widen its user base. E- commerce accounted for just 4.6 per cent of the total retail market in the third quarter, according to the US Department of Commerce.
Internet retailers such as Amazon.com Inc are also vying for online shoppers' attention with price-comparison applications and online daily deals meant to keep customers buying remotely.
Taking on visa
The broader goal is to make PayPal as ubiquitous in stores as cards issued by companies such as Visa, Thompson said. PayPal is working with all of the top 200 US retailers and has persuaded a "significant" number in that group to sign contracts to accept PayPal in their stores. Installation requires programming at existing point-of-sale terminals, but no change in hardware, Thompson said.
Gaining share in the in-store and mobile-payments market may be easier said than done, as merchants try to figure out the best option among pitches by top credit-card companies and technology companies such as Google Inc, which are all trying to create the next payment standard, Spitz said.
"It probably will be complicated for a while and for the near-term may limit the market opportunity," he said in an interview. "Until there's a critical mass such that a standard emerges, you may not see enough retailers adopt it."
Separate businesses?
EBay acquired PayPal in October 2002 for $1.5 billion. As the company's two businesses both mature, it may make sense to split them in two, a situation that could arise in the next 12 to 24 months, said Jason Paraschac, a New York-based analyst at Fitch Ratings.
EBay may benefit from adding more debt, while a drop in PayPal's credit rating would ratchet up its borrowing costs, making its deposits less profitable, he said.
"As PayPal continues to grow and establish itself as a sizeable enough presence, PayPal and the traditional EBay business just become very different businesses with different capital structure needs," he said. "There is an argument to be made that they would need to be financed separately."
The company isn't considering such a split because PayPal benefits from access to EBay's $6.6 billion in cash and short-term investments, Thompson said.
"It's an interesting argument," Thompson said. "I understand the question and the point of view, but I think it's a long way away."
