eBay (EBAY), which operates the PayPal payments service, has just agreed to shell out $800 million for Braintree, which operates a platform for online and mobile payments.
Wall Street apparently likes the deal, as investors have bid up EBAY almost 5% as of early Thursday afternoon. But there’s something bigger at play here, too:
This transaction might be a sign that startups are looking at IPOs as a tougher proposition.
There’s little question that mobile payments are expected to see explosive growth. According to comScore, the market is expected to exceed $25 billion in the U.S. for 2013 — 25% better than in 2012.
And Braintree has been one of the biggest beneficiaries.
Braintree has built an extensive network with tools that makes it easy to add mobile commerce (m-commerce) functions, for which it charges merchants a 2.9% commission and a 30-cent transaction fee. The company has a client list that includes Airbnb and OpenTable (OPEN), and on an annualized basis, Braintree expects to hit about $10 billion in gross volume, according to the Wall Street Journal.
“Braintree is part of an emerging trend to sell software as a service directly to software developers,” Byron Deeter, a partner at venture firm BVP, told me in an interview today. “Developers will try out the technology, which is usually very easy to do. If it works out, the company will then buy the software. It turns the direct-sales model on its head.”
So if Braintree is in such a hot market, why is it selling out?
Well, in a blog post from CEO William Ready, he makes the following argument:
“By joining with PayPal, we’ll be able to expand more quickly around the world. We’ll have more tools to offer to our customers through our developer platform. The universe of consumers that we can reach with our services that make it easy for people to pay on a mobile device will expand significantly.”
It’s all about scale, which is key to the payments business. It’s why the traditional industry has only a handful of players — think Visa (V) and MasterCard (MA). This is a winner-takes-most business.
So when it comes to m-commerce, the winners are likely to be companies that already have global networks, top-notch engineers and trusted brands. For example, AT&T (T), T-Mobile USA (TMUS) and Verizon (VZ) have joined forces to create Isis, an m-commerce platform.
In Google’s case, it has been leveraging its Android operating system to promote its Wallet application. As for Apple, its new iOS 7 platform has a myriad of security options, such as fingerprint access, that could end up playing a crucial role in m-commerce. (And it doesn’t hurt that AAPL has more than 500 million credit cards on file.)
We still might see an m-commerce IPO here and there. One good prospect is Square, the payments tech company led by Twitter co-founder Jack Dorsey; it has raised $341 million and has partners like Starbucks (SBUX) and Visa.
But for most of the other startups — and there are plenty in this crowded space — it could be difficult to get enough of an edge on the mega-players.
In other words, investors looking to tap into the m-commerce revolution might be relegated to more watered-down plays such as Apple, Google or Ebay.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.