PayPal + Where set to take on Square

eBay announced today its purchase of Where, a mobile location service. Where has been in the mobile location space for a long time — well before today’s media darlings. (See my initial Where story from 2007.) While others have sucked up much of the media oxygen, Where has been the little engine that could, hitting 4 million unique users per month.

It has a large installed base of users across not only smartphone platforms like iPhone and Android, but also featurephones. Where has gone through a number of incarnations, including a local portal, local platform provider, mobile ad network and buddy finder. Its current consumer product offers a wide array of location-based services. Where has also been experimenting with Groupon-like deals.

The combined resources of Where and PayPal would give eBay a terrific way to attack the multibillion-dollar untapped local opportunity that Square has been gunning for.

As I’ve written before, payments processing isn’t the end game for Square — it’s an entry point into the much more lucrative demand-generation space.

Payments processors generally take between 1% and 3% of the sale. Demand generators, like Groupon, are currently taking 50%. (I expect that this will drop dramatically, but there’s still a lot of room in between.)

At its current pricing, Square is likely to be losing money on each transaction because it no longer charges a fixed rate per swipe.

Square’s merchant offerings are excellent. It offers a dead simple way for small and micromerchants to take credit cards. Its recently announced presence in Apple retail stores makes signing up for Square even simpler than it already was.

But we haven’t seen much activity on the consumer side. Consumers get an elegantly formatted receipt, but there’s no other mechanism for interacting with them. (Square is undoubtedly amassing a mailing list to do this in the future.)

A combined Where and PayPal would give eBay the ability to offer both payments processing and demand generation. With an existing base of more than 4 million users, Where is a good way to prime the pump. Local merchants who take PayPal could be highlighted in search results. They could have ads placed automatically across Where’s ad network.

The key thing to remember about local merchants is that they are incredibly pressed for time. A simple, integrated offering would have tremendous appeal.

Have doubts about eBay’s ability to succeed in mobile? Erase them. They’re already claiming to generate nearly $2 billion in mobile purchases a year.

See previous coverage of Where.

Disclosure: I have consulted for Where in the past. I know the team, including Walt, Dan and Ivan. Congratulations, guys!