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PayPal on track to lead eBay, opens doors to outside developers for more growth

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While eBay (NASDAQ: EBAY) has been working hard to manage its marketplace in a trying economy, its PayPayl business has been growing comfortably and could become the company's biggest earner. For the past two years, eBay has focused on improving the look of its website and helping buyers and sellers to get along in a virtual world built entirely on trust.

In the background, though, the segment of the business that moves money from Point A to Point B has been on fire. Even with payment processing competition from Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG), PayPal has been able to do more than hold its own.

From its 1998 start, PayPal has become a behemoth, posting $688 million in revenue last quarter, up 15% year-over-year. And, more people are using the service: from 65 million active users at the end of Q3 2008 to 78 million by the same point in 2009. In addition to momentum from already widespread adoption, PayPal doesn't share users' financial info with merchants, providing an extra layer of privacy.

So, PayPal is at the front of the electronic payment market and doesn't yet have any nearby threat. By 2011, eBay CEO John Donahoe expects PayPal to pull in revenues of $4 billion to $5 billion, while the marketplace business -- consisting of eBay.com, Shopping.com and other selling sites -- is forecast to reach $5 billion to $7 billion in revenue that year. Donahoe also believes that PayPal could generate more profits than the marketplace business (later on), even though the margins are thinner.

The next generation for PayPal looks like it will be the intersection of small payments and small blogging (micro logging, that is). A new solution, Twitpay, has been launched using access offered to outside developers. Essentially, PayPal is deputizing the software development community -- as Twitter, Facebook and Apple (NASDAQ: AAPL) have -- to extend the opportunities for user interaction . . . and ultimately revenue passing through to PayPal itself. Initially, Twitpay used Amazon to move money but changed because of PayPal's large user base.

That said, PayPal doesn't have an unobstructed future. Even now, many of the 3 million retailers that work with PayPal also offer other solutions, such as Google and Amazon. So, as PayPal brings in new merchant clients, it may pave the way for competitors to follow quickly. This may be the future of eBay . . . but it's a business everyone wants to be in, too.

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Last updated: November 26, 2009: 04:57 AM

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