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The split is a logical progression for PayPal, but eBay needs to show that it's also a smart decision for its core e-commerce business as Amazon lures away sellers.
It's time for eBay to focus on what it did best in the past: online shopping. Getty Images
Online auction house and e-commerce company eBay has a lot to prove.
The San Jose, Calif., company announced Tuesday that it will spin off PayPal into a separate company next year. The move is meant to enable both companies to operate more efficiently, without the distraction of an additional, and very different, business.
But the split also puts a magnifying glass on eBay's ability to compete in an increasingly rough-and-tumble online marketplace, when it will be unable to utilize PayPal as its growth engine. A pioneer in Internet e-commerce through online auctions, eBay has struggled in recent years to hold on to its share of the market, with giant e-tailer Amazon particularly adept at luring away sellers and sales. Analysts see the spin-off as an opportunity for eBay to regain its footing and find ways to grow its business.
"This spin-off makes strategic sense and will effectively create two large-scale Internet pure-plays, poised to benefit from scale, early leadership positions online, significant technology investments and the freedom to compete more aggressively in constantly changing markets," said Robert W. Baird analyst Colin Sebastian.
The deal also appeases one influential investor. "The mere fact that it will get Carl Icahn off their back means that eBay management will be less distracted by Mr. Icahn," said James Angel, associate professor of finance at the McDonough School of Business at Georgetown University. "That they can spend more time on the core business is a good thing."
Icahn said Tuesday that he was pleased with the planned split. "It is almost a 'no brainer' that these companies should be separated to increase the value of these great assets and thus to meaningfully enhance value for all shareholders," he said in a blog post.
Naturally, there was keen interest in how the faster-growing PayPal would fare as an independent company. The split will allow PayPal to maneuver through the payments industry, which is undergoing a massive transition into mobile services, with several companies, including Google, Amazon and, most recently, Apple, wanting a piece of the action. Without another layer of management to oversee its decisions, PayPal can develop it services faster, expand its role beyond the preferred payment method for any eBay competitors and take on Apple's upcoming mobile payment service, Apple Pay.
The core eBay business faces more questions. In returning to its roots, eBay will need to demonstrate that it can continue to dominate in e-commerce, which is also going through its changes because of the explosion of mobile shopping and the rise of other marketplaces like Amazon and China's Alibaba Group.
"The e-commerce space is one that is shifting rapidly," Angel said. "The key thing is for eBay -- is it nimble enough?"
Amazon presents the largest risk. The online giant, which pulled in revenue of $19.34 billion in the second quarter, continues to aggressively expand its marketplace, recruiting sellers with its extensive shipping and delivery network through Amazon fulfillment services. Boosted by its Prime subscription program, Amazon has had a 2 percent year-over-year increase in site visits, while eBay visits fell 4 percent in August, according to a Cowen & Co. survey of 2,500 US customers.
Additionally, the move could take away investors' confidence in the company. Moody's downgraded its rating for eBay, saying the smaller company now has weaker credit, marking it as a potentially risky investment.
eBay has tried to innovate in recent years. The company has focused its efforts on making its service easier to use on smartphones, started managing Web storefronts for different brands and tried to expand its reach by offering fixed-price purchases in addition to auctions to get away from its flea market image. It's even tried to elevate its platform to attract fashion brands, promoting its eBay Local same-day delivery service at Fashion Week and creating a boutique-like experience for speciality fashion brands on its marketplace.
The company's marketplace revenue did rise by 9 percent, to $2.17 billion, in the second quarter, despite a large security breach. But the bulk of eBay's growth has come from its PayPal unit. The payments unit's revenue rose 20 percent, to $1.95 billion, accounting for about 45 percent of eBay's total revenue.
eBay needs to show that it can grow without using PayPal as a crutch.
To do so, it can focus on what made it successful in the first place: being a good platform for commerce, attracting shoppers and helping retailers grow.
This would keep retailers happy and boost eBay's business, Gartner analyst Jeff Roster said -- if the company can pull it off.
With the split, "there's less to worry about," Roster said. "Now it comes down to execution."Donna Tam Donna Tam covers Amazon and other fun stuff for CNET News. She is a San Francisco native who enjoys feasting, merrymaking, checking her Gmail and reading her Kindle. See full bio