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PayPal is going public. This is the first Internet IPO in I don't know how long. So let's both celebrate it and analyze it.

Just for a few minutes, let’s party like it’s 1999.

PayPal is going public. This is the first Internet initial public offering (IPO) in I don’t know how long. So let’s both celebrate it and analyze it.

According to Hoover’s, PayPal, like all the great start-ups of the last century, is not making money. The blame falls on SG&A (selling, general, and administration) Expenses, $33.9 million for the June quarter on revenue of $19.9 million. Investors are betting that ratio will reverse.

Before you grab your power tie, please be aware that Salomon Smith Barney has not yet completed the prospectus, which will have updated figures. Those numbers, and investors’ interpretation of them, will tell whether this deal makes sense. With that caveat, let’s continue.

We’ll start with what PayPal does. PayPal, originally called Confinity, is a bit like a Western Union for the Web. Users pay into it, and merchants pull money out of it.

PayPal competes with credit card payments based on the fact that the money comes in before merchandise goes out. With credit cards, money flows into the merchant’s account before the customer pays the credit card bill. This means there is a “discount” paid by the merchant, as there’s a credit risk for the bank.

Since there’s no loan with PayPal, the seller gets a better deal.

I expect analysts to view PayPal as a stalking-horse for eBay. eBay leveraged its “first-mover advantage” (remember that term?) into undisputed market leadership in online auctions. Competitors can’t get a toehold because eBay has all the buyers and sellers, hence the best price for both.

This is the way the Internet was supposed to work, and it’s why so many venture capitalists (VCs) ploughed so many billions into start-ups. This is the story everyone told, but eBay is the only outfit that’s made it come true.

PayPal and eBay have a symbiotic relationship, although PayPal is the far more dependent party. Analysts will want to assume that PayPal will benefit from eBay’s continued growth (revenues have doubled every year since 1997) and that it will find niches beyond auctions where its business model can work.

Once PayPal executives get a chance to talk again, they’ll mention their money market accounts, their ATM/Debit Card, and the fact that, unlike credit card processors or banks, its “float” consists of cash (not debt) held by its system until both sides are satisfied (no chargebacks).

Unlike those old 20th century IPOs, many of PayPal’s executives arrived with practical experience from firms such as McKinsey, Citibank, and Accenture (once Andersen Consulting).

PayPal’s growth plans are based on $90 million it got early this year from a variety of overseas banks, along with $10 million from Providian of San Francisco (which handles the Debit Card). Threats include Citibank and Wells Fargo, both of which have launched me-too products — and a relationship with eBay that is neither official nor guaranteed.

If you paid more attention to the second half of the paragraph above than the first half, you understand the real challenge facing PayPal and why I’m writing about it.

This is a time of fear, not greed. But if PayPal can succeed in its IPO and do well by investors, it will be doing all of us in Internet commerce a great favor. Let’s wish it well.

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