Electronic Business and Commerce

Class 16


Topic:
Payments
Class Plan:

Payments represent one of the crucial links in electronic commerce, and in the United States, it is fundamentally broken. PayPal set out to fix this link, but can it do it profitably? In this class we analyze PayPal's business model in an attempt to understand why it became one of the most successful public offerings of the past two years. We then examine what the company should do going forward: is the eBay acquisition a good idea?
Required Readings:
  • PayPal (Stanford Case).
  • Payments in the United States (Stanford Note). This is a detailed note describing the structure of the U.S. payment system. For this class, it is enough to know how payments work without going into details; focus on the discussion of the Automated Clearing House (ACH) (basically pages 12-14).
Study Questions and What to Hand In:
    1. Study PayPal's business model and find what are the key drivers of the company's profitability. What are the key revenue drivers? Cost drivers? What are the implications of those? You should conduct a detailed analysis and hand it in. Try to perform the analysis without putting together a spreadsheet, although it's OK to use a spreadsheet if you want.  The results need not be perfectly accurate: the objective is to understand the business rather than to make accurate projections.  To perform the analysis, identify the main components of revenue and cost for PayPal, then break those components down so you have a few underlying components of revenue and cost. Think of a relation like: Profit = Revenue - Cost = a x b - c x d - e x f ..., and use it to find the key revenue and cost drivers. Your group should hand in a Microsoft Word document showing (a) your analysis of the profitability drivers (i.e., the analysis that leads to (b)); (b) a listing of the key factors that drive the company's profitability, and (c) suggestions on concrete steps that PayPal can take to increase or sustain its profits.  This is a group assignment.
    2. What are the different factors that helped PayPal grow as fast as it did in the different growth phases? 
    3. What factors provide PayPal competitive advantage? Is it sustainable? 
    4. What should PayPal do next? What areas should it grow into?
    5. Does the acquisition of PayPal by eBay make sense? Overall, does it create value for eBay + PayPal?