Checkout Checkout:Google's attacking PayPal, but where is Amex?

There are few things in the world of commerce that I find more beautiful than the creation of a strategic itch that your main competitor can't scratch. Today's New York Times article on how "Google Steps More Boldly Into PayPal's Territory" with its Checkout payment service, that Google gives away (for the foreseeable future) is a jugular-aimed assault on PayPal's (a division of eBay) dominance of peer to peer payments (with over 120 million PayPal users). However, eBay is unlikely to retaliate because at a P/E multiple over forty and a stock price that lately performed like the second half of the Sisyphean task, the idea of cutting into the $340 million in quarterly revenue (23% of their October 06 quarter total revenue) by answering Checkout's free price point would take Herculean courage on the part of eBay CEO Whitman. Also, PayPal is growing at 42% while the auction business is growing by only 24%, so denting the trajectory of their fastest growing service seems unlikely. Google's move is reminiscent of the attack by MCI on AT&T with the friends and family plan, which AT&T watched in horror. How will it play out? My prediction is that the primary demand for peer to peer payments will continue to increase as every media device becomes interactive and peer to peer connections increase globally. Both Checkout and PayPal will grow for a while. Eventually, the game will slow and margins will compress, but it will be years before that happens, because end users and merchants will innovate, sometimes even in ways which may seem silly to "rational" observers. For example, it is irrational to buy a gift card which trades an infinitely flexible currency for a more restricted one. Yet, gift cards are growing like topsy. So too, we will see innovations and new "currencies" in peer to peer interactions.

What is more interesting to me than the battle between these on-line titans, is the question: Why does American Express remain on the sidelines? Amex is uniquely positioned to create its own peer to peer payments network because unlike most other participants in the credit card market they are both a credit card issuer and processor. This means that they could create "on-network" transactions. For example, if you and I both have an Amex card, we should be able to do a PayPal-like transaction -- peer to peer. Not only this, but Amex has credit assessment capabilities for both parties, a global trusted brand, and relationships with all major financial services institutions in the world, and the governments to boot. Peer to peer payments will continue to explode, and it is in the interest of all parties, consumers, governments, merchants, and other financial services institutions, to make sure that the bulk of those payments are legitimate, within legal frameworks, and brokered by significant institutions. It gets better. Due to Amex's strong business presence, they could make business to business, peer to peer transactions that much easier -- domestically and globally. They could issue stored value products and ride the wave of gift cards, and prepaid cards for everything from phones to food.

Can they afford it? Well, last quarter they earned net income of $987 million, which is 67% of eBay's quarterly revenue! so they have plenty of market presence, power and cash to create such a strong, global, peer to peer network. However, it is my belief that Amex will not pursue this opportunity for they are fundamentally a hub and spoke organization. Control in a credit card company flows from center to the edges (e.g. you get a card) and transactions return to the center (e.g. approval), etc., etc. But peer to peer payments are an edge phenomenon, and even though at an analytic level the appraisal and management of risk can be centralized, and its accurate assessment is well within the competencies of this great global firm. Yet, I expect the cultural challenges to be insurmountable, as were the cultural challenges in the AOL/Time Warner merger. AOL/Time Warner could have done everything that Google and eBay have done and more, but they could not alter their business models, control structures, and cultures. Too bad.

Desperately Seeking Certainty: Redstone should come to praise YouTube, not to bury them!

If Only Software Would Rust...