It might sound like an overgeneralization to say email has changed everything, but it’s pretty accurate — thanks to email, we can instantly keep in touch, transfer photo and music files … and now, we can even exchange money.
That latest feature comes courtesy of Internet search giant Google (NASDAQ:GOOG), which just announced a new addition to its Gmail service: the ability to attach money to an email, just as you would a Word document or photo. The recipient doesn’t need a Gmail account and, if your bank account is hooked up to Google Wallet, it’s free.
Such convenience is good news for email users. But it also sounds like bad news for eBay (NASDAQ:EBAY).
While eBay’s PayPal — which provides just under half of eBay’s annual revenue but more than half of its annual growth — currently boasts just 128 million users, that pales in comparison to Gmail’s footprint of 425 million users, which is double the number of Internet users in the U.S.
So should eBay investors be concerned that Google might begin to eat some of eBay’s breakfast? Well, while it might seem like it at first glance, eBay shouldn’t have to worry about it any time soon, for four simple reasons:
The numbers can be misleading. The new service is only rolling out to the U.S. in the coming months, and the country only represents 30% of Gmail’s users — thus, the applicable footprint for now is actually 130 million. To take it a step further, less than 37% of PayPal’s users come from the U.S., meaning the number of users Google could snatch in the near-term is really only 47 million. A decent chunk, but one that can logically be cut in half if we assume approximately 1 in every 2 users even have a Gmail account. So, less than 20% of PayPal’s user base potentially could jump ship to Gmail’s online money exchange option. That’s not good, but not as dire as the headline numbers might indicate.
PayPal is more than just sending money to friends. Of course, users have other reasons to still use PayPal even if they have a Gmail option. See, PayPal also is integrated directly into other sites like Facebook (NASDAQ:FB) and Microsoft‘s (NASDAQ:MSFT) Skype for payments services — things that are far more advanced than a simple attachment. On top of that, PayPal has expanded its reach into the brick-and-mortar space through deals like its partnership with Discover Financial Services (NYSE:DFS), giving it a presence in more than 7 million merchants. Sure, PayPal allows people to send money to one another online, but it’s also so much more than that.
Ebay is more than just PayPal. It also has its Marketplace business, which is still growing at a healthy double-digit clip, makes up for more than half the company’s total revenue and has heftier margins. In 2012, for example, the cost of the Marketplace segment’s $7.4 billion in revenue was only $1.28 billion, or 17% of the total. The Payments division (PayPal), on the other hand, costs the company $2.21 billion for $5.58 billion in revenue — nearly 40% of the total. It seems likely that eBay will be able to make up any lost revenue by focusing efforts back to the more-profitable selling side if the threat to its payment services keeps growing.
PayPal is already mobile. Noted in the fine print of Google’s announcement is the fact that the money attachment is only currently available via desktop. PayPal, on the other hand, not only can be used on mobile devices already, but is in fact banking on mobile (and rightfully so) for continued growth. As eBay’s CEO John Donahoe wrote in the 2012 annual report:
“Mobile continues to rewrite the commerce playbook, and we continue to be a mobile commerce and payments leader. eBay mobile finished the year with $13 billion in volume — more than double the prior year — and PayPal mobile handled almost $14 billion in payment volume, more than triple the prior year. In 2013, we expect each to exceed $20 billion.”
At this point in the game, this huge and growing chunk of the business isn’t at jeopardy at all from Google.
Of course, it is important to note that this is just the beginning of the payments trial for Google. Thus, you can bet Google will keep expanding this service if it catches on, which seems plausible considering Gmail is an ubiquitous mail service and is a part of an online ecosystem people are beginning to use for far more than just mail. If the payments move beyond the U.S., onto mobile, and into other online marketplaces … well, Google is a huge fish and it definitely has the potential to swallow other ones, including PayPal.
Still, that’s a big if, and one that’s much further down the road. Heck, we also were told that Google+ would one day upend Facebook. It might … but it sure hasn’t yet. Not even close.
Not to mention, all of this conjecture doesn’t even factor in the fact that eBay and PayPal might, you know, respond in some way.
After all, eBay was smart enough to realize the potential in a payments service and able to successfully roll PayPal into the fold — and PayPal itself has proven its flexibility and ability to find new markets. There’s no reason to assume it won’t have an answer to Gmail’s advance into the payments world.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.