eBay 2004 Annual Report Download - page 14

Due to the Ñnancial nature of the PayPal product, we seek to oÅer a high level of data security in order to
build customer conÑdence and to protect our customers' private information. We have designed our PayPal
security infrastructure to protect data from unauthorized access, both physically and over the Internet.
PayPal's most sensitive data and hardware reside at the Denver and Equinix data centers. These data centers
have redundant connections to the Internet, as well as fault-tolerant power and Ñre suppression systems. Due
to PayPal's special security needs, we house our PayPal equipment in physically secure areas and we tightly
control physical access to our systems. PayPal's systems and operations are vulnerable to damage or
interruption from earthquakes, Öoods, Ñres, power loss, telecommunication failures and similar events. They
are also subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruption if the
operators of these facilities have Ñnancial diÇculties. For more information regarding these risks, see the
information in Item 7 under ""Risk Factors That May AÅect Results of Operations and Financial Condition Ì
System failures could harm our business.''
Multiple layers of network security and network intrusion detection devices further enhance the security
of our PayPal systems. We segment various components of the system logically and physically from each other
on our PayPal networks. Components of the system communicate with each other via Secure Sockets Layer,
or SSL, an industry-standard communications security protocol, and require mutual authentication. Finally,
we store all customer data we deem private or sensitive only in encrypted form in our PayPal database. PayPal
decrypts data only on an as-needed basis, using a specially designated component of our PayPal system that
requires authentication before fulÑlling a decryption request.
Competition
We encounter vigorous competition in our business from numerous sources. Our users can Ñnd, buy, sell,
and pay for similar items through a variety of competing channels. These include but are not limited to, online
and oÉine retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order
companies, classiÑeds, directories, search engines, products of search engines, virtually all online and oÉine
commerce participants (consumer-to-consumer, business-to-consumer and business-to-business) and online
and oÉine shopping channels and networks. As our product oÅerings continue to broaden into new categories
of items and new trading formats, we expect our competition to continue to broaden to include other online
and oÉine channels for those new oÅerings. We also compete on the basis of price, product selection, and
services. For our PayPal service, our users may choose to pay through a variety of alternative means, including
other online payment services, oÉine payment methods such as cash, check or money order, and traditional
online or oÉine credit card merchant accounts. To compete eÅectively, we may need to expend signiÑcant
resources in technology and marketing. These eÅorts may be expensive and could reduce our margins and
have a material adverse eÅect on our business, Ñnancial position, operating results, cash Öows and reduce the
value of our stock. We believe that we will be able to maintain proÑtability by preserving and expanding the
abundance and diversity of our users' online community and enhancing our user experience, but there can be
no assurance that we will be able to continue to manage our operating expenses to mitigate a decline in
consolidated net income. For more information regarding these risks, see the information in Item 7 under
""Risk Factors That May AÅect Results of Operations and Financial Condition Ì Our industry is intensely
competitive.''
Seasonality
Our results of operations historically have been seasonal because many of our users reduce their activities
on our websites with the onset of good weather during the summer months, and on and around national
holidays. We have historically experienced our strongest quarters of online sequential growth in our Ñrst and
fourth Ñscal quarters. PayPal has shown similar seasonality, especially in the fourth Ñscal quarter. We expect
these patterns of seasonality to continue as our websites gain acceptance by a broader base of mainstream
users. In addition, as our business matures, transaction activity patterns on our websites increasingly mirror
general consumer buying patterns, both online and oÉine.
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