Companies such as eBay and Google, which began by serving online auction bidders and web searchers respectively, have grown to become innovators establishing the world of e-commerce.

With the recent introduction of the '˜Checkout' pay system from Google, the Internet search leader is treading into territory where eBay's Paypal previously served as Web's most common payment platform.

A Tale of Two Companies

Ebay has seen phenomenal success since its start in 1995. From its beginning as a marketplace for small businesses and individuals, the site has turned into a mainstay with revenues reaching nearly $1.4 billion in its second quarter of 2006.

While eBay turned into the powerhouse of today's online auctioning culture, another company was emerging with its sights apparently set far from the realm of online sellers.

While still Ph.D. candidates at Stanford University, Larry Page and Sergey Brin established Google with the goal of "providing the best search experience on the web. One IPO and billions of dollars later, market researcher comScore reports that Google now handles 43.1 percent of all queries across the internet.

Both companies have grown at a furious pace, making the internet more accessible and easier to use. More importantly, they have secured the gains in their isolated markets.

However with shareholders calling for ever expanding profits, customers demanding innovation, and vision for growth expanding, the $200 billion online retail market isn't as big as it use to be. Recent initiatives at both sides have set each company on a converging course.

Ebay: Capitalizing at Each Step

As recently as the second quarter of 2006, eBay's online marketplace has allowed for its 200 million+ registered users across the world to freely list nearly 600 million items for auction, the whole process isn't free. EBay has set its sights on capitalizing on each step of the buying and selling process.

There is the eBay sellers' fee. When the item finally sells, eBay takes another cut, charging an associated commission off the final price of the auction. The company's easy-to-use infrastructure has contributed to that success.

In addition, eBay is attempting to generate even more revenue per transaction. It recently purchased online company Skype, integrating its web phone services into its auction site.

Expanding from traditional e-mail communication, users can now also interact with a person live, through voice interactions. The added convenience costs a few cents per minute. Ebay has seen $45 million in revenue in 2Q'06 from Skype alone.

However among the most convenient and useful features are payment systems that don't work well on one site but facilitate transactions among various online sellers and retailers.

A number of companies have seen the opportunity but many have not made been able to capitalize.

Western Union's BidPay, CitiBank's c2it, and Yahoo!'s PayDirect service have all closed shop. Early in its history, eBay conceded its BillPoint service had not been up to the task.

One system

However in 2002, eBay found the system it was looking for through Paypal Inc. The system had garnered a massive following, and by the time eBay had purchased it for nearly 2 billion in 2002, it was already used in over 50 percent of eBay listings.

The purchase was well worth it. Paypal is now used in 96 percent of all its auction listings in the US, and brought in $334million in revenue from Paypal for the company's second quarter in 2006.

That figure represents 20 percent of eBay's total revenue. However, only 2 percent of PayPal's income came from purchases unrelated to its auctions. While the PayPal solution can work independently of eBay, only 2 percent of the income generated through the payment system took place apart from eBay auctions.

A more universal payment platform hasn't been successfully developed yet.

Enter Google

Google has evolved from being a search-only company to becoming a firm that seeks the ability process all available data online. Last week it set its sights on capturing the Internet payment market, offering a '˜Checkout' product that can work even across multiple websites.

Google Checkout was introduced in January. It is designed as a shopping cart checkout system. In contrast, PayPal is primarily a payment system for individual transactions. Another of Checkout's features is that it can easily be integrated into other websites.

Despite PayPal's near ubiquity on eBay, the competition could be heating up. EBay retailers are not anchored to PayPal.

"Google Checkout is a potentially significant competitor to PayPal,' Citigroup analyst Mark Mahaney wrote in a July 5 note.

Checkout Checked out

In a study, Citigroup determined that Checkout could be easier to use. While the Google product typically uses a two-step process, using Paypal usually involves three to six steps.'

It is an entirely separate checkout process which requires that consumers with Google accounts enter their shipment and billing information once, and then pay on sites who also accept the Checkout platform. In addition Checkout also provides users with the ability to track all their orders from one central location even if the original order were place across various sites.

Mahaney adds that biggest competitive advantage could be the smaller fees Checkout charges merchants. He estimates it would offer an annual savings of 4 percent. Google even has plans to give Google customers using adwords a further discount "potentially bringing the savings up to 25 percent higher, under certain scenarios.'

On the flipside, he notes that PayPal offers various advantages, including more funding options, "almost certainly' greater trust and safety, broader acceptance by consumers and merchants, international payment processing and cross-selling opportunities that Checkout does not. He estimates that at least for 2006, eBay's revenues will not be affected by Checkout.

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