Google Steps More Boldly Into PayPal's Territory

"I think it's fantastic," Steven Grossberg, who sells video games in Wellington, Fla., said of Checkout. "I'm selling the product. Google is getting tons of customers to sign up for Checkout."

By MIGUEL HELFT
Published: December 20, 2006

Steven Grossberg, who sells video games online from his home in Wellington, Fla., recently sent an enticing offer to 20,000 customers: $10 off any purchase over $30 using a new payment service, Google Checkout.

Traffic on his site more than tripled, and best of all, he said, Google picked up the tab for the promotion.

"I think it's fantastic," he said. "I'm selling the product. Google is getting tons of customers to sign up for Checkout. Customers are happy because they are getting a monster deal."

And Google is not charging merchants any processing fees through the end of 2007.

As a result, getting customers to use Checkout will increase profits, Mr. Grossberg said.

So starting next year, he plans to take some of the money he spends to list items on eBay and try a new marketing strategy: placing ads alongside Google's search results.

That is exactly what Google wants to hear.

When Google introduced Checkout in June, it was seen as a formidable rival to PayPal, eBay's online payment service. And with Google aggressively promoting Checkout during the holiday season and beyond, its use with some merchants has already surpassed PayPal's.

But Google's plan for Checkout has always been about more than online payments. The service is a calculated effort to expand Google's base of advertisers, which provide the bulk of the company's revenues.

And Google has made a substantial financial commitment to the service's success. Goldman Sachs estimates that Checkout promotions will cost Google about $20 million in the current quarter.

The campaign to promote Checkout also says something else about Google: As rivals Yahoo and Microsoft are working on getting the basics right in their search and advertising systems, Google is racing ahead to consolidate its lead.

"I believe that Google's advantage is widening with time and this is one example," said Scott Devitt, an analyst with Stifel Nicolaus & Company. "Checkout could be a game changer, and the competitors are doing nothing of the sort."

Unlike PayPal, a full-fledged payment system that can be used to transfer money between individuals and can draw funds directly from bank accounts, Checkout merely offers users an easy way to use their credit cards. Checkout users enter their credit card information, shipping and billing address into Google's system. Then, they can pay with Checkout at participating stores without having to enter their personal information again and again.

Google says thousands of merchants are using the service. That is dwarfed by PayPal, which has millions of merchants and 123 million users around the world. In the most recent quarter, PayPal processed $9.1 billion in transactions, up 37 percent from a year earlier. While most of those were payments between eBay buyers and sellers, the number of PayPal transactions outside eBay rose 59 percent, to $3.3 billion.

Google has not released figures on the number of Checkout users. Still, there are signs that with the heavy promotions, the service is making significant inroads.

GSI Commerce, a company that runs about 60 online stores, including toysrus.com, levis.com and timberland.com, said that one in five holiday sales at its partners' stores through the end of November were completed with payment systems other than credit cards, which include PayPal, a service called BillMeLater and Checkout. Of the three, "Google is the biggest by far," said Michael Rubin, chief executive of GSI Commerce.

At StarbucksStore.com, Checkout transactions topped PayPal transactions by about a third, said Tracy Randall, president of Cooking.com, which operates StarbucksStore.com.

Checkout's gains have not necessarily heralded a PayPal decline. A Goldman Sachs report this week said that based on conversations with various merchants, Checkout appeared to be making gains against traditional payment options and that PayPal's share of online transactions was also growing.

Regardless, it is clear that the promotions have played an important role in Checkout's quick adoption.

When Google introduced Checkout in June, it charged merchants 20 cents plus 2 percent of the purchase price for every transaction. (PayPal charges 1.9 percent to 2.9 percent plus 30 cents a transaction, while credit companies typically charge about 1.95 percent and 30 cents for every purchase.)

Yet, to lure merchants to its advertising system, Google offered them $10 worth of free transaction processing for every $1 in advertising they spent on Google.

But Google recently got more aggressive. On Nov. 8, it waived transaction fees for all merchants, regardless of whether or not they were Google advertisers, through the end of the year. Then, on Nov. 27, it began offering Checkout users $10 off $30 purchases at many e-commerce sites and, in some cases, $20 off $50 orders. And on Dec. 5, it announced that transaction processing would remain free to merchants through the end of 2007.

In other words, Google plans to lose money on every Checkout transaction for more than a year. Yet the company believes it will be worth it.

"It's a way to incentivize more merchants to join our network," said Benjamin Ling, a product manager for Checkout. "We want everyone who sells online to be a Google advertiser."

The incentives offered by Google could benefit merchants and the company in several ways, according to online marketing experts.

Consider first that the ads of stores who accept Checkout are highlighted with an icon - a Checkout shopping cart. That increases the likelihood that users will click on those ads, which creates revenue for Google. What's more, once users click on an ad, the availability of Checkout makes it more likely that they'll complete a transaction.

In other words, Checkout generates more sales leads for online retailers - what online advertisers call click-through rates - and more of those leads turn into actual sales.

But the system offers merchants ancillary benefits, said Scot Wingo, the chief executive of ChannelAdvisor.com, an e-commerce services company that helps independent store owners sell on multiple online marketplaces, including eBay, Amazon and their own Web sites.

Google ranks ads based on a secret algorithm that combines factors like the price advertisers are willing to pay and the click-through rate of a particular ad. The idea is that ads that are clicked most frequently are those that users find more relevant.

So by having a Checkout icon that increases click-through rates, over time advertisers will have to pay less to get the same ranking for their ads. Or, they could pay the same amount for more ads with better placement, Mr. Wingo said.

"When you factor all of these together, it can have a pretty significant impact on your economics as a retailer," Mr. Wingo said, adding that many merchants are likely to plow any savings back into Google.

There are other ways in which Google could benefit from Checkout, according to analysts. Checkout gives Google detailed knowledge of its users' buying habits, which the company could use to customize the delivery of ads or search results to specific users.

And the system could make it easier for Google to develop a new advertising model in which advertisers pay only when a user completes a transaction, rather than every time a user clicks on an ad. This model, known as "pay-per-action," could bring additional revenue to Google.

Mr. Ling said Google had no plans to tie search results to buying habits or to use Checkout to move to a cost-per-action ad model. But he added: "If there is a service that is of value to consumers, we will consider it."

Not everything has been smooth sailing for Checkout. In the middle of the holiday shopping season, the electronics merchant J & R suspended the use of Checkout, telling customers that it was experiencing delays in processing orders due to the popularity of the system. And Ms. Randall, of Cooking.com, said there had been some "operational issues" with Checkout at StarbucksStore.com, but that Google had worked quickly to resolve them.

Google acknowledged the problems. "We have experienced some growing pains," said Douglas Merrill, a vice president of engineering at Google who is responsible for Checkout. "Whenever we find issues, we drop everything else to fix them."

That is in part why laptopsforless .com, a retailer in Anaheim, Calif., chose to expand payment options by implementing PayPal first, said Jeff Gardner, vice president for marketing and e-commerce. "We feel like we want to wait until the bugs are worked out before jumping into it," he said about Checkout. But come next year, he added, "it is our intent to offer our customers both."