As Icahn and Apple Pay fight to take credit, a spin-off won't solve all PayPal's problems

By Michael Carney , written on September 30, 2014

From The News Desk

Carl Icahn deserves credit for loosening the lid on the eBay-PayPal spinoff jar, after nearly a year of activist shareholder fights in search of that outcome. But as the San Jose company today announced plans to complete the separation by late 2015, it’s Apple’s entrance into the mobile payments market via its newly revealed Apple Pay platform that deserves the lion’s share of credit (or blame) for busting the lid off this jar entirely.

Of course, no one at eBay or PayPal will admit as much publicly, but in the month since Tim Cook revealed Apple Pay from the Flint Center stage in Cupertino, and indeed in the weeks and months leading up to the event as rumors and leaks suggested such a product, eBay has seen more “PayPal killer” and “did Apple just kill PayPal?” headlines than in the past decade combined.

In the past, all discussions of PayPal’s death were ones of slow, steady, self-imposed decline at the hands of apathetic management. With the appointment of David Marcus as CEO in 2012 and following PayPal’s 2013 acquisition of mobile payments innovator Braintree (and its sexy Venmo mobile wallet subsidiary) things have been looking up for the aging giant. The company’s reputation with developers has improved dramatically in the last several years, and PayPal’s latest products, highlighted by the Braintree-powered OneTouch, are no longer outclassed.

And yet.

PayPal remains far from a healthy organization, as signaled by the sudden and yet unexplained departure of Marcus this June. Well-placed rumors and speculation indicate that it was largely a conflict between Marcus and eBay CEO John Donahoe along with the company’s more conservative and slow-moving board over PayPal’s ability to innovate that soured the relationship. Now, with PayPal’s most threatening competitor in Apple breathing down the company’s neck, it’s seems Donahue et al see clearly that PayPal is being weighed down by the eBay relationship.

With PayPal spun out as an independent entity, it will hardly be a small, nimble operation – the company employs roughly 13,000 people. But, led by newly appointed CEO Dan Schulman, former group president of enterprise growth at AMEX, the company will for the first time be able to chart its own course and choose its own speed without having to ask permission from a corporate overlord. This kind of freedom is the only way that PayPal stands a chance in its newly intensified e-payments battle.

As we predicted months ago, PayPal’s next CEO speaks volumes about its future plans. The appointment of an outsider, with enterprise payment chops and public company experience suggests that PayPal sees its future less in powering the SMB merchants that sell on eBay (with which it will maintain an arms-length commercial relationship) and Etsy, but more so in cutting the kind of deals that helped launch Apple Pay, like brick-and-mortar and online partnerships with Macy’s, McDonald’s, Walgreens, Staples, and Disney.

PayPal has already been in the news in recent weeks thanks to its “me too” partnership with Samsung to power the Korean electronics giant (and copycat extraordinaire)’s future mobile and wearables payments efforts, a la the Apple’s new iPhone 6 and Watch. [Update: A PayPal spokesperson notes that the company has been working with Samsung since 2013.] As a senior exec focused on enterprise growth at AMEX since 2010, Schulman was almost certainly involved in the company’s negotiations to participate in Apple’s payment program alongside Visa, Mastercard, and several leading banks. This insider knowledge and experience should help PayPal as it seeks to power its own smart-device payments platform within the Android ecosystem.

But while Schuler may have the enterprise payment chops to help PayPal cozy up to retailers and device manufacturers, he has no history of leading the kind of product innovation that will make or break its success once in those positions. Which is why, it’s who was not named to the senior spot at PayPal that is just as important to its future. Braintree founder and CEO Bill Ready has long been held out as the preferred choice among PayPal insiders to take over as CEO of the parent, PayPal. Ready has proven himself a thoughtful and capable product leader, including up and through this month’s launch of Braintree’s new “futureproof” V.Zero SDK and the OneTouch payment functionality that it powers.

If PayPal is to remain relevant in the face of the beautiful and “it just works” innovation that many expect from Apple, a great product leader is a must for the company – this is increasingly true as the line between PayPal and Braintree continues to blur. There’s no telling how Ready will react to today’s announcement, but it’s the rare entrepreneur who’s happy playing second fiddle, inside a giant lumbering organization no less, after being the top dog and moving so quickly for so long.

For what it's worth, Ready told us from the Southland stage (just hours after news of Marcus' departure dropped) that he planned to stay at PayPal. He noted that his decision to join forces with what was up until that point a long-time rival was, in part, a result of Marcus’ leadership and vision, but also the broader leadership team Marcus had built around himself. Ready told Pando's Sarah Lacy:

When David first became president I commented on your article, saying David seems like a fantastic guy but I don’t envy his job. The interesting thing that happened in the last few years is he built a really, really great team. One thing I mentioned at the beginning is there’s a lot of change that needs to happen, and it can’t be just one person. Now, eight out of ten direct reports to David are entrepreneurs.
Donahoe too will be absent from the top spot at either PayPal or eBay, with the latter to be helmed by current eBay Marketplaces President Devin Wenig. With PayPal atrophying under his watch, not to mention eBay losing much of its luster amid competition from Amazon, Alibaba, and specialty vertical sites like ThreadFlip and Tradesy, it’s no surprise that Donahoe won’t be getting the nod to lead either as a standalone unit – although he is expected to remain on the board of one or more of the new companies. We noted previously that staying on to run a standalone eBay would be an underwhelming end to Donahoe's tenure at the company. In that sense, it's not surprising, if he's not running PayPal, that he'll be stepping back from day to day operations entirely.

For too long, eBay and PayPal have relied on their sheer heft, rather than focusing on delivering great user experiences. The introduction of Apple Pay, like the emergence of Braintree, Stripe, and Square over the last half-decade – the former of which it had to acquire to remain relevant – demonstrate that this is a losing philosophy in payments. Consumers and merchants are demanding more from these platforms if they are going to pay exorbitant fees. More, in this case, means things like cross-platform functionality – with mobile and wearables very much looking like the next frontier – low friction, and friendly, competent service. PayPal has done a lot of catching up across these three areas in recent years but still has a ton of ground left to cover, especially with Apple Pay moving the goalposts well down the field.

As we’ve stated previously, a PayPal spin out has been an inevitability for some time. The only question has been when and under how much duress the deal would be completed. Icahn proved to be little more than a nuisance in this regard, with Donahoe and eBay’s board shooing him away handily earlier this year. But when the world’s most valuable company, and one of its most beloved, enters your sandbox, as Apple did to PayPal, maintaining the status quo is no longer an option.

PayPal is indeed better off today than it was yesterday, in no small part due to the certainty that has been rendered in this previously uncertain situation. There remain questions to be answered as to Schulman’s ability to captain the lumbering giant that is PayPal in these choppy waters, but at least he’ll be free from dragging the anchor that is eBay across the seas with him. Things are about to get even more exciting on the payments high seas, as if they weren’t already.