July 8, 2002 3:10 PM PDT

Billpoint failure a lesson for eBay?

eBay's acquisition of PayPal on Monday follows a long, costly and ultimately futile attempt to make its first bill payment system succeed.


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Three years ago, the online auction giant bought Billpoint, a nascent payment provider, with the intent of using it to create its own payment service. But despite having high-profile partners such as Wells Fargo and Visa, Billpoint lost out to PayPal.

eBay will shut down Billpoint later this year as part of its agreement to acquire PayPal for about $1.5 billion in stock.

Analysts say Billpoint failed because of a poor business plan, aggressive competition from PayPal, and hostility from eBay sellers.

"You would have expected, given its pedigree, given that it was part of a major banking company, that Billpoint would have taken off," said Alan Alper, an analyst with research firm Gomez. "But they were slow to get out of the gate, didn't have the right name, the right connections or the right marketing plan."

eBay and Billpoint representatives did not return calls seeking comment.

When eBay bought Billpoint, nearly all of the auctions on eBay were conducted with paper checks or money orders. The acquisition was meant to help eBay speed the closure of auctions by allowing buyers to use credit cards to pay for their purchases. Up to that point, only sellers who had pricey merchant accounts with banks could accept credit card payments.

To help speed adoption of its service, eBay brought in Wells Fargo as an equity investor in Billpoint in March 2000 and teamed up with credit card giant Visa to promote the service later that month.

The company also repeatedly promoted Billpoint to its customers. Last year, for instance, eBay offered to credit listing fees to customers who sold items using Billpoint. Later that year, the company encouraged buyers using its controversial Checkout feature to purchase their items using Billpoint.

All of these efforts had little effect. In a recent regulatory filing, PayPal estimated that while more than 70 percent of eBay auctions accepted its payment service in the first quarter of this year, only 27 percent accepted Billpoint. Meanwhile, the number of customers signed up with Billpoint was a fraction of those signed up with PayPal. And while PayPal posted a profit in the first quarter, Billpoint was losing $10 million to $15 million per year.

In part, Billpoint was the victim of the same forces that propelled eBay to success, analysts say.

Like eBay in consumer auctions, PayPal, not Billpoint, was the first mover in person-to-person payments. PayPal thus benefited from the same network effects that helped eBay; sellers offered to accept PayPal because it was what buyers wanted to use, and buyers wanted to use PayPal because more sellers accepted it than other payment services.

"The network effect was huge," said Avivah Litan, an online banking and payments analyst with Gartner. "The first reason users liked it better was that everyone had it."

And despite Billpoint's high-profile backers, PayPal simply did a better job of marketing its service, analysts say. The company used its own customers to sign up new consumers, paying $5 to $10 for each new person they signed up. That type of grassroots marketing encouraged thousands of Net users to try out the service to send money to friends and to close online auctions.

Poor business moves also stunted Billpoint's growth, analysts say.

Although eBay bought Billpoint in May 1999, it was slow to launch the service to consumers; eBay didn't test it on its site until the fourth quarter of that year, and the service wasn't available to all customers until the second quarter of 2000. By that time, PayPal had already entrenched itself as the No. 1 way for online auction sellers to accept credit card payments.

Meanwhile, after purchasing Billpoint, eBay moved to focus the service on its site alone. Just months after it acquired Billpoint, for instance, eBay scuttled a deal Billpoint had with Excite@Home that allowed Excite@Home customers to accept Billpoint in the company's auctions and classified ads. Although eBay allowed sellers to use Billpoint off of eBay, the company didn't promote that usage and, in fact, made it difficult for sellers, analysts say.

"It was very difficult to actually find out how to send or create invoices outside of eBay," said Scott Devitt, an associate analyst with Legg Mason. "It wasn't user friendly."

PayPal has had its own problems with customers, many of whom have accused the company of illegitimately freezing their accounts. The company is now battling several class-action lawsuits related to the practice. But the suits have not been enough to stop the company's rapid growth.

Fearing total control
Meanwhile, Billpoint had something else going against it: its association with eBay. While some analysts saw that as an asset, many sellers worried about eBay extending its dominance in auctions to online payments as well. Many were reluctant to rely even more on eBay than they already did and rejected eBay's more heavy-handed attempts to promote the service, such as last fall when it required sellers to use Billpoint in its Auction for America charity effort.

"Customers just didn't want to use the eBay-owned service," Devitt said.

That could spell problems for eBay after it acquires PayPal. Already some sellers are talking about abandoning PayPal, worried that with it, eBay will become too powerful.

"I don't want to get rid of PayPal, but I may have to down the road because I just don't think it's right," said Donna Pelletier, who sells books and collectibles on eBay. "My auctions are supposed be my business. I don't want eBay having total control of it."

Meanwhile, some analysts question whether eBay has learned its lesson from Billpoint. If the company once again focuses its payment service on its auction site alone, it could stifle even PayPal's growth, they say.

"If eBay tries to accomplish the exact same thing as it did with Billpoint and keep (PayPal) within the walled garden of eBay, it won't see a significant return on its investment beyond one year," said Jim Van Dyke, an analyst with Javelin Strategy and Research.

But like Billpoint, other competitors such as Citibank's c2it have had little success in besting PayPal and sellers may find they have little choice but to continue with the service. Still, some hope remains for such sites in the wake of the eBay-PayPal merger and with eBay's history with Billpoint.

"If there ever was a point in time where there was an open door for competition, it would be now," Devitt said.

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eBay ruined Billpoint
Troy Wolverton got off to a good start when he wrote, "Analysts say Billpoint failed because of a poor business plan, aggressive competition from PayPal, and hostility from eBay sellers", but he failed to examine these analyst claims in any detail. The first two are false: no one has found any specific fault with the business plan, other than that it was poorly administered -- PayPal used the same business plan with better administration, and quickly achieved roaring success -- and when eBay acquired Billpoint in May 1999, there was no competition from PayPal whatsoever, because PayPal did not begin operations until six months later, in November.

That leaves the third claim of "hostility from eBay sellers", which went unexplored except for a comment from one analyst that "It wasn't user friendly". If either this analyst or Wolverton had bothered to ask any Billpoint user why it wasn't "user friendly", they would have gotten an earful of how eBay had taken a good working system in May and remade it into a treacherous monstrosity by the end of the year. Hence the hostility, and the overnight success of PayPal, an imperfect but much better alternative; a success made certain by eBay's clumsy tinkering with Billpoint.
Posted by tucowed (2 comments )
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