Why PayPal Paid $240 Million for Zong

PayPal has spent the past 13 years making payment easier for anyone who has an email address.

But in today’s world, where cellphones are outnumbering computers, that sounds increasingly archaic.

To bridge that gap, the eBay-owned payments company announced yesterday it was acquiring Zong, a mobile payments provider that allows charges to appear on a consumer’s carrier bill.

One could imagine a future in which PayPal could accept payments from anyone with a 10-digit number, switching its focus after all these years from email to phone numbers.

PayPal needed to buy Zong for $240 million in order to do this quickly — it did not have the time to go and build partnerships with 250 carriers in 45 countries around the world.

“The payments industry has never been more competitive than it is today,” said Dana Stalder, a former PayPal executive who is now a general partner at Matrix Partners, which invested in Zong. “PayPal has never had greater momentum in its business than it does today. It was a smart acquisition, and they pick up some unique capabilities that are good for digital payments.”

As part of the deal, PayPal will gain a team of 70 employees, at a time when hiring people with payments expertise is competitive.

In May, PayPal filed suit against Google and two of its former executives, claiming that the company and employees misappropriated trade secrets and violated contracts involving recruiting agreements.

The two executives named in the lawsuit are Osama Bedier and Stephanie Tilenius, who directly oversee Google’s new payments initiative.

Google is one of many companies treading in the broad digital payments space once dominated by PayPal.

Google launched a mobile payments initiative that allows people to use their phones to make payments at the register. Charges appear on a credit card associated with that account.

PayPal is preparing to test similar in-store technology later this year, but it has clashed with Google once before. In the lawsuit, PayPal details that it was close to signing an agreement with Google to handle payments on Android Market when it fell apart.

In the meantime, Google has worked hard to ink deals directly with the carriers. While it still has a long way to go, it is currently working with T-Mobile USA, AT&T, Sprint and Japan’s Softbank, KDDI and NTT DoCoMo.

It’s a painstaking process that PayPal clearly did not want to duplicate.

Other companies are also fiercely competing with Zong, so PayPal won’t be alone there. Others in the space include BilltoMobile, mopay, Boku, Billing Revolution and more.

PayPal estimates the digital goods market to be worth $20 billion today, with dramatic growth prospects ahead. “Digital goods” may include music, movies, news, books and games. It’s important to make payment for these as easy as possible, because any additional required steps may lead to fewer purchases.

Zong’s emphasis is on allowing a consumer to pay for digital purchases on his or her mobile phone or computer using their phone number. Zong first verifies the number and then clears the payment on the mobile phone bill.

While this process is described as easy for the consumer, on the back end it is not.

Carriers are reluctant to allow miscellaneous charges to appear on the bill, fearing additional customer service costs when someone complains that they don’t remember what they bought.

Because of the potential for confusion, companies like Zong have had to share an incredibly high cut of the revenue — between 10 and 40 percent — with the carrier. High rates make it impractical to charge anything of value, like physical goods.

That won’t change overnight for PayPal, which will have to reopen talks with wireless carriers to get things to change.

If it can’t get them to budge, spending $240 million on Zong could be a waste.

However, there are a couple of fairly interesting scenarios that may get the wireless carriers to reconsider.

PayPal could potentially rely on its Bill Me Later division to instantly approve a consumer’s request to borrow money on credit when they submit a payment over the phone. In that situation, the carrier could help to identify users and their credit histories, but would only get a small cut, since it was taking on much less risk.

If that were to happen, the market could grow much faster.

In a blog post, PayPal president Scott Thompson wrote, “When we started meeting with the folks over at Zong, it became immediately clear to us that they share our vision for commerce and payments. We’re all about helping retailers of all sizes compete globally, and helping consumers shop for whatever they want…anytime, anywhere, on any device.”


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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik