September 27, 2007, 12:00 AM

Google and PayPal collide at the checkout

Google and PayPal are competing for checkout share with offers of free payment processing and discounts on search advertising campaigns.

Jon Kuhlmann has had a front row seat as that competition unfolded.

Kuhlmann, whose company Grapevinehill.com sells discount footwear, had been taking PayPal for years, largely to service the eBay Inc. customers that account for 80% of his revenue. And when Google Checkout came along he added that payment option to his eBay store and his own site.

But eBay, which owns PayPal, was having none of it. “For the first few days we took Google Checkout for some eBay transactions, but that was quickly stopped by eBay,” he says.

A year later, eBay was still banning Google Checkout, saying it is unproven. And Kuhlmann was on hand in Boston when Google’s attempt to poke fun at that ban badly misfired.

Party crashing

Google invited merchants attending the annual eBay Live event in June to attend a Revolutionary War-themed party billed as “a celebration of freedom of choice.” Unamused, eBay, one of Google’s largest advertising customers, canceled its ads. Google sheepishly called off its party and eBay restored most of its ads the following week.

“It was all about Google Checkout,” Kuhlmann says of the spat. “It’s definitely a competition.”

It’s a competition that’s raged for 15 months now, with Google and PayPal wooing merchants with tens of millions of dollars in discount coupons that drive consumers to retail web sites, free transaction processing, attention-getting icons on paid search ads and new services. And there are no signs of a let-up.

“They both have really deep pockets and they want to win this space, so I don’t see any end in sight,” says Scot Wingo, CEO of online marketing firm ChannelAdvisor Corp.

The battle is important to Internet retailers because it could affect not only their payment processes but also their marketing programs in that both Google and PayPal are offering incentives to merchants that include search advertising discounts on Google or, in PayPal’s case, Yahoo.

It also could affect marketing in another way: A Google Checkout transaction ends on a Google page, altering the customer experience and in some cases masking the customer’s e-mail address. Retailers are watching to see how Google addresses those concerns.

From search to buy

Google executives say they designed Google Checkout to encourage consumers to shop online by making it easier to search for a product, find a reputable merchant and pay-without revealing a payment card number or other personal information to the merchant. “We felt we could provide more information about places to shop and, when consumers went to buy, save them time,” says Tom Oliveri, marketing lead for Google Checkout.

That improved search-and-buy experience, and added privacy protection, will make consumers more willing to shop online, especially at little-known merchants, Oliveri says.

To use Google Checkout a consumer registers a payment card and billing and shipping address with Google Checkout, then clicks the Google Checkout button at a participating web site and enters a user name and password to complete the payment on a Google Checkout page.

Google Checkout directly competes with PayPal Express Checkout, a service introduced in 2005 that, like Google’s system, allows a consumer to store card, billing and shipping details in an online wallet and then pay by entering a user name and password.

Express Checkout, of course, is just part of PayPal’s portfolio. The original PayPal payment service lets users pay by debiting value stored in their PayPal accounts or their bank accounts. PayPal also acts as a payment card processor for online merchants.

The game is on

But it is the competition between the two checkout services that has embroiled four of the biggest success stories in the short history of the Internet. Besides Google and PayPal, that includes PayPal parent eBay and Google’s closest competitor among search engines, Yahoo Inc.

Those four companies have plenty of cash and lots at stake in the tussle over online payments.

Google is Wall Street’s darling, with a staggering market capitalization of $164 billion and net income of $3.1 billion last year on revenue of $10.6 billion, almost all of it from advertising.

EBay and Yahoo are no slouches, either, though their combined market value is only half that of Google. EBay reported net income of $1.1 billion on $6 billion in revenue in 2006; Yahoo’s net income was $751 million on revenue of $6.4 billion.

For eBay, PayPal is an increasingly important part of its business. PayPal produced revenue of $454 million in the second quarter of this year, a quarter of eBay’s sales. And PayPal grew by 34% while eBay’s core auction business grew only by 26%.

PayPal, which started in 1998 as a way for acquaintances to exchange money through their Palm Pilots but gained traction among eBay buyers and sellers, is growing especially fast off-eBay. Non-eBay transactions accounted for 42% of PayPal’s business in the second quarter, up 57% from a year earlier.

It’s these businesses that are threatened by Google Checkout. Any purchase that goes to Google Checkout does not go to PayPal, either as a PayPal payment or as a PayPal-processed card transaction. (Chase Paymentech processes Google Checkout transactions.)

Building a roadblock

For its part, Yahoo has aligned with eBay and PayPal to try to slow Google’s robust growth. Google accounted for 53% of all U.S. searches in July and its search volume was up 49% over the prior year, according to Nielsen/NetRatings. Yahoo had just over 20% of the search market in July and had grown at a much slower rate of 16%. Now, Yahoo and PayPal have come up with a deal offering merchants that accept PayPal Express Checkout nine months of free transaction processing and a $100 credit toward Yahoo search advertising-if they maintain a search advertising program on Yahoo.

Yahoo is also promoting PayPal to merchants that use its e-commerce hosting service. And, like eBay, Yahoo does not allow its online retailers to accept payments through Google Checkout.

For Google, Google Checkout is another way to tie consumers to Google and to learn more about them. Consumers use the same user name and password to sign on to Google Checkout as they do for such services as their Gmail e-mail accounts and iGoogle personalized home pages. Thus Google Checkout transactions provide Google more data about those purchasers, allowing Google to deliver them more relevant ads-enhancing Google’s core advertising business.

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