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Pressure is on: eBay needs to deliver after PayPal's spin-off

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

eBay has a lot to prove.

The online auction house and e-commerce company announced Tuesday that it will spin off its PayPal payment service into a separate company next year. The move is designed to let both companies 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 on its own without PayPal as its growth engine for revenue. A pioneer in Internet e-commerce through online auctions, the 19-year-old eBay has struggled in recent years to hold on to share of the market, with Amazon luring away sellers and sales.

Analysts see the spin-off as a chance for eBay to regain its footing and find ways to grow its business. eBay's e-commerce businesses had sales of $7.69 billion last year, up from $6.93 billion.

"This spin-off makes strategic sense," Robert W. Baird analyst Colin Sebastian said in a research note. The split creates "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."

The deal also appeases one influential investor, billionaire activist Carl Icahn, who has been calling for the past year for eBay to spin off PayPal but backed off earlier this year after eBay added one of Icahn's candidate picks to its board. Icahn holds 0.82 percent of eBay's shares.

"The mere fact that it will get Carl Icahn off their back means that eBay management will be less distracted," 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 he was happy 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. "It also continues to be my belief that the payments industry, of which PayPal is an important part, must be consolidated - either through acquisitions made by PayPal or a merger between PayPal and another strong player in the industry."

There is keen interest in how the faster-growing PayPal (from 2012 to 2013, sales have grown there 18 percent, versus 11 percent at eBay) would fare as an independent company. The split lets PayPal maneuver through the payments industry, which is undergoing a massive transition into mobile services. Several companies, including Google, Amazon and, most recently, Apple, have increased their mobile payments investments. 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.

Risks and rivals

In returning to its roots, eBay will need to demonstrate it can continue to dominate in e-commerce, which is also going through changes because of the explosion of mobile shopping and the rise of online marketplaces like Amazon and China's Alibaba Group.

"The key thing is for eBay -- is it nimble enough?" Angel said.

Amazon presents the biggest risk to eBay's ambitions. The online giant, which pulled in revenue of $19.34 billion in the second quarter, continues to expand, recruiting sellers who are drawn to 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 the number of visitors to eBay fell 4 percent in August, according to a Cowen & Co. survey of 2,500 US customers.

Additionally, the split could take away investors' confidence in the eBay. Moody's downgraded its rating for eBay, saying the smaller company now has weaker credit and marking it as a potentially risky investment.

eBay has tried to innovate in recent years under CEO John Donahoe, who has been at the helm since 2008. The San Jose, Calif.-based company has focused 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 image as a digital flea market.

Donahoe has even tried to boost its image by attracting fashion brands, promoting its eBay Local same-day delivery service at Fashion Week and creating a boutique-like experience for specialty fashion brands on its marketplace.

eBay''s marketplace revenue did rise by 9 percent, to $2.17 billion, in the second quarter, despite a cyber attack on user data, prompting the company to urge customers to change their passwords. 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.

For eBay to show that it can grow without using PayPal as a crutch it will need to focus on what made it successful in the first place: being a good platform for commerce, with eager, loyal shoppers and retailers who see opportunities to grow.

Says Gartner analyst Jeff Roster, "Now it comes down to execution."