Ms. Wolk: We note a surge of interest in the online payments infrastructure, which should reduce friction in the shopping cycle and allow online retailers to close more transactions at a more rapid pace. Generally, these payment solutions eliminate the need for consumers to enter credit information for each individual purchase and instead enable one-click and impulse buys. In addition, online payment options like PayPal allow consumers to safely and privately transact business online, protecting their credit information from less scrupulous Web stores. Thus, online payment solutions are becoming more widely adopted as substitutes for credit card and other traditional offline payment formats. eBay (EBAY) is the leader in e-commerce payments infrastructure and we estimate more than 40% of online shoppers have used PayPal. Over the past two years, it has done a tremendous job of expanding PayPal beyond eBay sites and now claims more than 16 billion in transactions on independent e-commerce sites over the past year, up nearly 60%. Recently, there is some speculation in the market that PayPal may expand further into the credit markets, looking for ways to reduce 2% processing fees, which could be an additional catalyst for growth. Google (GOOG) entered the payments infrastructure market with its Checkout offering about a year ago and has made tremendous progress, although it is limited to just the US and UK, far short of PayPal's global reach to more than 50 countries. According to Zale, a GSI (GSIC) customer, Google Checkout accounted for 8% of all of its purchases during the period in which Google was offering a 10 rebate coupon for Checkout sales and 5% on a normalized basis. In August, Amazon (AMZN) entered the market and launched a new Flexible Payment Service to compete with PayPal and Checkout. Another major trend in infrastructure is the shift toward Software as a Service, known as SaaS. Historically, eBay, Microsoft (MSFT), Yahoo! (YHOO) and others have offered an array of e-commerce software, hosting and e-mail solutions for small businesses. Now major players like Amazon and Google are taking that a step further to offer e-commerce software, order fulfillment, customer service, shipping and data storage as a service. These SaaS services are sold on-demand, often with variable fees based on usage. Essentially, this dramatically reduces the barriers to entry for smaller online retailers and other online businesses as it enables them to leverage the bandwidth, servers and other infrastructure investments of the larger platform companies. We believe we are in the early stages of a major upgrade cycle in Website development and functionality. Firms like Razorfish, now a subsidiary of Microsoft as a result of its acquisition of aQuantive, have seen tremendous growth as Websites use their services to upgrade to Ajax and other Web 2.0 technologies. The result is a more compelling look and feel for consumers and a more seamless e-commerce experience. Rather than hopping from HTML page to HTML page, the consumer can simply roll over an area of a page with a mouse to see additional content. We've seen upgrades taking place at Yahoo, including a recast of the home page and similar upgrades underway at eBay and Expedia (EXPE). But this phenomenon is not restricted to the major Web retailers; it is a sweeping change. An outgrowth of this trend is that consumers are less quick to leave the Website because there is so much more content and functionality readily available to them. Another major outgrowth is that retailers are investing in their home pages as a marketing vehicle; the right home page can significantly raise a retailer's ranking in search results and drive more traffic to their sites. It is also slowly leading to a shift in advertising economic models as pricing per page view is no longer the right metric for impressions. As a substitute, we are seeing emerging adoption of price per action advertising models which may generate a premium for the Website as it truly captures the value generated for the advertiser.
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