EBay`s PayPal Holds Off Google`s Checkout

When Google rolled out “Checkout” in 2006, their own online payment system, it was touted as a PayPal killer before it was even released. Checkout is a follow up to Google Base, their (free) product listing package. But as time has gone on, both Google Base and Google’s Checkout have not made the waves expected by publicists, media, analysts, and maybe even Google itself.

  

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When Checkout was rolled out, the amount of animosity it generated between eBay and Google was the stuff of corporate battles, with eBay immediately making it clear to its users that anybody who listed Checkout as a payment system would be de-listed, citing “security reasons.” eBay explained through spokespeople that the payment system had not yet been verified.

Google however claimed that Checkout was not released to compete against PayPal, but to satisfy the teeming hordes who browsed for products using the Google search engine, and other search products provided by Google, such as Froogle and Base. Checkout was also supposed to be for their advertisers who wanted to provide a one stop payment system for buyers. Despite their denials, various websites immediately started taking payments via Checkout alongside PayPal; Google Base and Froogle did not become the default choice for shoppers online.

Considering that shopping is one of the top three activities online after mail and search, the consequences are dire for eBay if they lose their position as the premiere product listing and auction service web site online. Does Checkout present decent competition for Meg Whitman’s PayPal? If it doesn’t now, will it in the future? Will Base and Froogle ever truly catch on? From the indications of this last holiday shopping season, the answers are a series of nos; but then again, perhaps there is something the indicators are not showing.

Rush Hour

The holiday spending season is the “rush hour” of shopping. Including online shopping, from Black Friday through New Year’s Day, a flurry of gift buying and spending goes on worldwide ( and especially in the US) that could put a department store in the black from just three months of sales. Spending on EBay rose 29 percent in the last quarter of 2006 (rush hour); sales were $1.79 billion. Analysts and investors alike were happy about the situation and Meg Whitman was quoted as saying that Google’s foray onto electronic payment processing was good for business since it raised awareness about PayPal.

This was all well and good, but Google remained silent on the whole matter. Lest we think it is either corporate laissez faire or Google giving eBay the “silent” treatment, let’s look at the indicators that have eBay claiming to have triumphed over Google’s Checkout, and then we will see why really, the whole eBay versus Google situation was just a big misrepresentation — because Google was actually being honest. Checkout is not PayPal’s competitor.

The very first thing we should note is that eBay is not simply an online auction site; it is THE online auction site. It is the best brand for bidding for products online, it is trusted, and it has advertisements on close to 250 million items on AdWords (do a search on anything, and eBay shows up). It is a highly specialized company which does only one thing, sell. As a way of offering value to its users, it bought PayPal and currently PayPal is the recommended payment system for eBay users. PayPal, however, is also big off eBay since it serves as an online payment system for buyers, through which sellers receive their money electronically, and then have their money transferred to their bank accounts in their respective currencies.

As an auction site, eBay has no real competition online. The numbers which are used as indicators of its continued dominance are in an area where Google’s Checkout don’t exist (Google Checkout is still prohibited on eBay). PayPal earned $417 million from $11 billion worth of transactions (an increase of 57 percent). These numbers reflect an increase in online activity; from search to email use and even online shopping, as online advertising rises, online shopping parallels it, rising at equal rates, if not greater. eBay inevitably made money.

EBay’s Profitable Price Hike

On July 19, eBay hiked listing costs six percent to the howls of sellers, many of whom moved to Yahoo auctions, while others set up their own web sites. EBay hiked pricing to eliminate commodity products which simply occupied space, and to increase the unique listings which bidders had identified eBay with. Analysts differed on how this would affect eBay, but seven months down the line we can see increased growth, less expensive commodity listings and more money made than the first two quarters of 2006. The increase in listing charges was one of the core reasons why EBay’s revenue increased, as more bidders sought to buy more competitively priced goods.

EBay had to increase its turnover, because the rash of competing products had started telling on the auction giant. Just before the third quarter of last year, EBay bought back two billion dollars worth of shares from investors to keep market value strong. Its brand was getting diluted by dozens of mom and pop shops which were listing overpriced goods. The core identity of EBay, which is  ”hard to find items for rock bottom prices,” was rapidly being lost, but by the last quarter, brisk sales of Nintendo Wiis and Sony PS3s (both hard to find) as well as other products at competitive prices brought the auction giant back.

In terms of branding, PayPal has a stronger brand than Google Checkout. Nobody really knows what Checkout is (a means for buyers to buy products from online merchants without filling credit details continuously). Google has the problem it faced with Google Base; nobody knows what it is.

Anti Trust Violations?

This increase in business also increased PayPal’s revenues, while Google Checkout remained banned on eBay. So while eBay was not affected by Google Base, the same cannot be said of PayPal, since Checkout cannot even be used on eBay at all (which sounds a lot like what Microsoft does). So how exactly does Google Checkout affect eBay?

It Doesn’t

Google Checkout is not available on eBay, so it is clear that PayPal has no competition inside eBay. As an online payment system Checkout is only available inside the United States — and note that Checkout seems to be in beta testing. According to Google they were “testing it in the US market and aligning it as a value add to their ad customers.” Initially Google only created Checkout for AdWords customers and users of their products (such as Google Base).

Checkout Over-hyped by Media

The whole “Checkout is a PayPal killer" rumor was a product of eBay’s paranoia and the media wishing it to be true. It seems the only person Google actually ever competes against is Microsoft (not Yahoo search nor Yahoo mail) and its products ranging from MSN, IE and Hotmail. Simply put, Google hardly ever focuses on competing with anybody else. Sometimes they just roll out products in order to have a “new” product in the market, and to have a product in every web application field. The media touted Checkout as a PayPal killer because it seemed that PayPal would actually have competition from a big competitor (there are other online payment systems, but none that could really touch PayPal).

eBay was justifiably worried. Most brands are affected by the entry of a strong second brand, and with complaints over its product (PayPal) in terms of rates, service and even security, most users and analysts welcomed a reliable alternative (PayPal is useful but even I would like to have a choice). The lower transaction costs which Checkout offers would be disruptive to PayPal’s model. It is certain that if Checkout was accepted on eBay, for the transaction fees alone, sellers and buyers will switch.

Google Set to Grow

Inevitably, the use of Checkout as a viable system of online payment will increase over time, or one of the other Internet companies will develop or buy out another payment system. But to knock PayPal off its pedestal, Google has to do better than just offer lower transaction costs. PayPal, like eBay, is highly specialized (it’s not just a back end product, it can stand alone even without eBay). Checkout is already an option for sellers and buyers in the US, and it is affecting PayPal, since every payment made on Checkout makes one less that would have been made on  PayPal.

The current one nation status of Checkout compared to PayPal’s 55 nation coverage really makes the idea of competition moot, but Checkout will definitely grow over time as more people use Google and shop using Checkout as an all in one payment system. However Check out will never be a peer to peer payment system; it will predominantly be used to purchase goods online from cooperating merchants.

PayPal is far more popular both worldwide and in the United States, but as Checkout grows it will be a viable alternative for buying goods online. This is a place that PayPal would love to penetrate, but most online shoppers use their credit cards directly for this purpose. And this is where the real battle is going to be fought, as both PayPal and Google know; every online payment system’s vision is to ultimately become the preferred online payment system. It’s not a peer to peer payment system that will come out on top in that particular case, but a cheap, convenient, checkout system.

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