Why eBay and PayPal are Struggling to Innovate

Blue Nile co-founder Ben Elowitz authored a critical piece in paidContent today entitled “How Paypal [sic] Can Help Save Media—And Itself.” Elowitz, who worked for John Donahoe at Bain & Co, writes that the eBay CEO seems out of his element: “Overall he looked staid, the way eBay and Paypal [sic] now look to me—entangled by their legacy, unable to cut the cords to freely enjoy the new boom around them.” He goes on to offer suggestions about how PayPal should emulate the iTunes check-out process for purchasing content and virtual goods.

Former eBay CEO Meg Whitman

I explored the topic of what PayPal needs to do to become the de facto Web 2.0 payments provider in a couple of blog posts last year (here and here), and I contributed to a recent Quora discussion on Facebook Credits vs. PayPal, so I won’t revisit the issue of tactics today. Rather, I’m going to focus on an important observation that Elowitz is making: eBay has lost its innovative edge.

As I wrote in my book, The PayPal Wars, when eBay acquired PayPal it was pretty obvious that the auction company had a different culture than the one that Peter Thiel and Max Levchin created at PayPal:

…Even though the maturation of the company inevitably slowed down the speed with which we could implement changes, PayPal’s nearly 800 employees were still empowered by a flexible system and encouraged to act like entrepreneurs.

eBay’s, however, were not. Inside the auction giant it seemed as if nothing got done without a face‐to‐face meeting—or possibly several, if you were unlucky. And holding a meeting was never as simple as just sending an Outlook “meeting request” and sitting down with key stakeholders. eBay employees seemed trained to make phone calls to everyone who might have even the remotest interest in the matter and invite them to the yet‐to‐be‐scheduled meeting. After at least two dozen invitations had been extended, a meeting time and location would be scheduled about a week in advance. The following day, like clockwork, the meeting would be rescheduled because of a calendar conflict of a peripheral stakeholder. After several rounds of schedule shuffling, attendees filing into the summit would be handed a thick set of PowerPoint slides filled with bullet points, tables, and an aphorism or two laid out neatly under a cover page that featured the eBay mascot—a mustachioed cartoon apple‐man that bore a striking resemblance to Mr. Potato Head. The duration of the meeting would then be devoted to wading through the voluminous set of slides, with the usual outcome being an agreement to set up a follow‐up meeting so that the issues raised by the slides could be further discussed.

This merry‐go‐round pattern of meetings immediately began to grate on PayPal employees. Whereas our company’s e‐mail‐centric culture had provided us with long stretches of unscheduled time to reply to messages, brainstorm new ideas, and otherwise address pressing issues, eBay meeting requests soon began to fill our calendars as our days were spent driving the thirty minute route between the two offices…

eBay’s corporate culture stifled its ability to innovate. Once again I’ll quote my book:

On the whole, this look under eBay’s hood certainly helped explain why Billpoint had been unable to match PayPal’s innovations over the years—our nimbler processes, combined with talented personnel who were encouraged to think boldly, had translated into a competitive edge. These traits manifested themselves in the form of faster product development cycles and well‐synchronized campaigns.

Although eBay’s culture had hindered the company’s ability to compete with PayPal, eBay evidently was a swifter, more entrepreneurial place when it launched under the guidance of Pierre Omidyar. When [Meg] Whitman assumed control, she implemented a practice of hiring MBAs and former consultants and the company began to change. Written accounts of its early days, corroborated by conversations I had with many of my eBay counterparts, lend credence to this hypothesis. Whether or not it’s correct, Omidyar’s brilliant online service—the beneficiary of first‐mover advantage—snowballed and continued to pick up speed, oblivious to any bureaucratic transformation being implemented by the company’s management.

Enjoying a monopolist’s clout meant that eBay no longer had to rely on innovation to generate growth—foreign acquisitions expanded the company’s worldwide reach while the domestic part of the business was placed on autopilot. Hence, when PayPal’s unexpected appearance complicated eBay’s plans to graft an in‐house payment service onto Omidyar’s platform, the company found itself ill‐prepared to respond…

The market power that eBay amassed in the Web 1.0 world shielded it from the negative consequences of its corporatist culture—for a time. But as is often the case with monopolists, creative destruction ushers in new innovations and the market they previously ruled disappears.

PayPal remains in a much stronger position than eBay proper to fend off its competitors and leverage its massive platform in the Web 2.0 world, and its recent embrace of developers is an important step in that direction. But John Donahoe needs to do more than build an iPhone-style interface for PayPal transactions. He needs to overhaul the culture that Meg Whitman brought to eBay Inc.

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