Overview

We have three reportable business segments: Marketplaces, Payments and GSI. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online trading platforms, such as our online classifieds businesses and StubHub. Our Payments segment is comprised of PayPal, Bill Me Later and Zong. Our GSI segment was added upon the completion of our acquisition of GSI Commerce, Inc. (GSI) on June 17, 2011. The results of our GSI segment have been included in our consolidated results of operations from the acquisition date.
In 2012, net revenues increased 21% to $14.1 billion compared to $11.7 billion in 2011, driven primarily by increases in net revenues from each of our business segments. We achieved an operating margin of 21% in 2012 compared to 20% in 2011. Our diluted earnings per share decreased to $1.99 in 2012, a $0.47 decrease per share compared to 2011, driven primarily by the gain resulting from the sale of our remaining 30% equity interest in Skype in 2011, offset in part by growth in 2012 net revenues and a lower effective tax rate. We generated cash flow from operations of approximately $3.8 billion in 2012 compared to $3.3 billion in 2011.

Our Marketplaces segment total net revenues increased $756 million, or 11%, in 2012 compared to 2011. The increase in total net revenues was driven primarily by an increase in GMV (as defined below) excluding vehicles of 12%, which was attributable to strong growth across all regions, partially offset by the negative impact of foreign currency movements relative to the U.S. dollar. Our Marketplaces segment operating margin of 39.8% for 2012 remained flat compared to 2011.
Our Payments segment total net revenues increased $1.2 billion, or 26%, in 2012 compared to 2011. The increase in total net revenues was driven primarily by a year-over-year increase in net TPV (as defined below) of 22% due to the expansion of our global footprint with international net TPV increasing 26% in 2012 versus 2011. Our Payments segment operating margin increased 2 percentage points in 2012 compared to 2011, due primarily to a higher take rate and lower transaction processing costs.
Our GSI segment had total net revenues of $1.1 billion in 2012 and a segment operating margin of 11.8%. Net revenues attributable to the GSI segment for 2011 are reflected from June 17, 2011 (the date the acquisition of GSI was completed). Accordingly, comparisons with GSI's net revenues for 2012 to 2011 are not meaningful.
In 2011, net revenues increased 27% to $11.7 billion compared to $9.2 billion in 2010, driven primarily by a 29% increase in PayPal net TPV and a 13% increase in Marketplaces GMV excluding vehicles, as well as the impact from GSI, which we acquired in June 2011. We achieved an operating margin of 20% in 2011 compared to 22% in 2010. This reduction in operating margin was driven primarily by the impact of acquisitions. Our diluted earnings per share increased to $2.46 in 2011, a $1.10 increase compared to 2010, driven primarily by a gain resulting from the sale of our remaining 30% interest in Skype and growth in net revenue, partially offset by the impact of a loss on a divested business, acquisitions and a higher tax rate. We generated cash flow from operations of approximately $3.3 billion in 2011 compared to $2.7 billion in 2010.

Some key operating metrics that members of our senior management regularly review to evaluate our financial results include net promoter score (NPS), market share, GMV, GMV excluding vehicles, number of sold items, net TPV, Merchant

Services net TPV (as defined below), on eBay net TPV (as defined below), net number of payments, penetration rates, active registered accounts, funding mix (the mix of payments vehicles, such as credit cards, debit cards, bank accounts and PayPal accounts, used by customers to make payments through our Payments networks), global ecommerce (GeC) Merchandise Sales (as defined below), same store sales, free cash flow (a non-GAAP measure, which we define as net cash provided by operating activities less purchases of property and equipment, net) and revenue excluding acquisitions and foreign currency impact (also a non-GAAP measure).
We define GMV as the total value of all successfully closed items between users on our eBay Marketplaces trading platforms (excluding eBay's classifieds websites, brands4friends and Shopping.com) during the applicable period, regardless of whether the buyer and seller actually consummated the transaction. We define net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the applicable period, excluding PayPal's payment gateway business. We define Merchant Services net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the applicable period, excluding PayPal's payment gateway business and payments for transactions on eBay Marketplaces and GSI platforms. We define on eBay net TPV as the total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks during the applicable period for transactions on eBay Marketplaces and GSI platforms. We define GeC Merchandise Sales as the retail value of all sales transactions, inclusive of freight charges and net of allowance for returns and discounts, which flow through the GSI ecommerce services platform during the applicable period, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee.

Results of Operations

Summary of Net Revenues

We generate two types of net revenues: net transaction revenues and marketing services and other revenues. Our net transaction revenues are derived principally from listing fees and final value fees (which are fees payable on transactions completed on our Marketplaces trading platforms), fees paid by merchants for payment processing services and ecommerce service fees. Our marketing services revenues are derived principally from the sale of advertisements, revenue sharing arrangements, classifieds fees, marketing service fees and lead referral fees. Other revenues are derived principally from interest and fees earned on the Bill Me Later portfolio of receivables from loans, interest earned on certain PayPal customer account balances and fees from contractual arrangements with third parties that provide services to our users.

The following table sets forth the breakdown of net revenues by type and geography for the periods presented.

                                                                   Year Ended December 31,
                                                            2012               2011(1)           2010
                                                           (In millions, except percentage changes)
Net Revenues by Type:
Net transaction revenues
Marketplaces                                          $        6,078       $        5,431     $  4,800
Payments                                                       5,146                4,123        3,261
GSI                                                              850                  460            -
Total net transaction revenues                                12,074               10,014        8,061
Marketing services and other revenues
Marketplaces                                                   1,320                1,211          921
Payments                                                         428                  289          174
GSI                                                              233                  130            -
Corporate and other                                               39                    8            -
Total marketing services and other revenues                    2,020                1,638        1,095
Elimination of inter-segment net revenue (2)                     (22 )                  -            -
Total net revenues                                    $       14,072       $       11,652     $  9,156
Net Revenues by Geography:
U.S.                                                  $        6,778       $        5,484     $  4,214
International                                                  7,294                6,168        4,942
Total net revenues                                    $       14,072       $       11,652     $  9,156

(1) Includes data for GSI since June 17, 2011, the date the acquisition of GSI was completed.
(2) Represents net revenue generated between our reportable segments.

Revenues are attributed to U.S. and international geographies based primarily upon the country in which the seller, payment recipient, customer, website that displays advertising, or other service provider, as the case may be, is located.

Because we generated a majority of our net revenues internationally in recent periods, including the years ended December 31, 2012, 2011 and 2010, we are subject to the risks of doing business in foreign countries as discussed under "Item 1A: Risk Factors." In that regard, fluctuations in foreign currency exchange rates impact our results of operations. We have a foreign exchange risk management program that is designed to reduce our exposure to fluctuations in foreign currencies; however, the effectiveness of this program in mitigating the impact of foreign currency fluctuations on our results of operations varies from period to period, and in any given period, our operating results are usually affected, sometimes significantly, by changes in currency exchange rates. Fluctuations in exchange rates also directly affect our cross-border revenue. We calculate the year-over-year impact of foreign currency movements on our business using prior period foreign currency rates applied to current year transactional currency amounts.

For the year ended December 31, 2012, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $206 million (net of a $44 million positive impact from hedging activities relating to PayPal's net revenue) compared to the prior year. Foreign currency movements relative to the U.S. dollar for the year ended December 31, 2012 negatively impacted Marketplaces, Payments, and GSI net revenues by approximately $172 million, $33 million and $1 million, respectively, compared to the prior year (net of the impact of hedging activities, noted above, in the case of Payments net revenues).

For the year ended December 31, 2011, foreign currency movements relative to the U.S. dollar positively impacted net revenues by approximately $202 million (net of $26 million negative impact from hedging activities relating to PayPal's net revenue) compared to the prior year. Foreign currency movements relative to the U.S. dollar for the year ended December 31, 2011, positively impacted Marketplaces and Payments net revenues by approximately $167 million and $36 million, respectively, compared to the prior year (net of the impact of hedging activities, noted above, in the case of Payments net revenues).

The following table sets forth, for the periods presented, certain key operating metrics that we believe are significant factors affecting our net revenues.

                                                                           Percent Change    Percent Change
                                         Year Ended December 31,                from              from
                                     2012          2011          2010       2011 to 2012      2010 to 2011
                                                  (In millions, except percentage changes)
Supplemental Operating Data:
Marketplaces Segment: (1)
GMV excluding vehicles (2)        $  67,763     $  60,332     $ 53,532               12  %         13 %
GMV vehicles only (3)                 7,613         8,301        8,287               (8 )%          - %
Total GMV (4)                     $  75,376     $  68,633     $ 61,819               10  %         11 %
Payments Segment:
Merchant Services net TPV (5)     $  97,277     $  77,700     $ 57,232               25  %         36 %
On eBay net TPV (6)               $  47,660     $  41,058     $ 34,724               16  %         18 %
Net TPV (7)                       $ 144,937     $ 118,758     $ 91,956               22  %         29 %
GSI Segment:
GeC Merchandise Sales (8)         $   3,682     $   2,046     $      -              N/A           N/A

(1) eBay's classifieds websites, brands4friends and Shopping.com are not included in these metrics.

(2) Total value of all successfully closed items between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction, excluding vehicles GMV.

(3) Total value of all successfully closed vehicle transactions between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction.

(4) Total value of all successfully closed items between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction.

(5) Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the period, excluding PayPal's payment gateway business and payments for transactions on eBay Marketplaces and GSI platforms.

(6) Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks during the period for transactions on eBay Marketplaces and GSI platforms.

(7) Total dollar volume of payments, net of payment reversals, successfully completed through our Payments networks, Bill Me Later accounts and Zong during the period, excluding PayPal's payment gateway business.

(8) Represents the retail value of all sales transactions, inclusive of freight charges and net of allowance for returns and discounts, which flow through the GSI ecommerce services platform during the period, whether we record the full amount of such transaction as a product sale or a percentage of such transaction as a service fee. Includes data for GSI since June 17, 2011, the date the acquisition of GSI was completed. Accordingly, the percent change in GSI's metrics between 2011 and 2012 is not meaningful.

Seasonality

The following table sets forth, for the periods presented, our total net
revenues and the sequential quarterly movements of these net revenues:
                                                       Quarter Ended
                                   March 31     June 30     September 30     December 31
                                         (In millions, except percentage changes)
2010
Net revenues                      $ 2,196      $ 2,215     $      2,249     $     2,495
Percent change from prior quarter      (7 )%         1 %              2 %            11 %
2011 (1)
Net revenues                      $ 2,546      $ 2,760     $      2,966     $     3,380
Percent change from prior quarter       2  %         8 %              7 %            14 %
2012
Net revenues                      $ 3,277      $ 3,398     $      3,404     $     3,992
Percent change from prior quarter      (3 )%         4 %              - %            17 %

(1) Net revenues attributable to the GSI segment are reflected beginning from June 17, 2011 (the date the acquisition of GSI was completed).

We expect transaction activity patterns on our websites to mirror general consumer buying patterns. Our GSI segment is highly seasonal. The fourth calendar quarter typically accounts for a disproportionate amount of GSI's total annual revenue because consumers increase their purchases and businesses increase their advertising to consumers during the fourth quarter holiday season.

Marketplaces Net Transaction Revenues
Marketplaces net transaction revenues increased $647 million, or 12%, in 2012 compared to 2011, consistent with the increase in GMV excluding vehicles of 12% in 2012 compared to 2011. The increases in net transaction revenue and GMV excluding vehicles were due primarily to strong growth across all regions, partially offset by the negative impact of approximately $118 million in foreign currency movements relative to the U.S. dollar.

Marketplaces net transaction revenues increased $631 million, or 13%, in 2011 compared to 2010, consistent with the increase in GMV excluding vehicles of 13% in 2011 compared to 2010. The increases in net transaction revenue and GMV excluding vehicles were due primarily to improvements in the shopping experience, foreign currency movements relative to the U.S. dollar and continued growth at StubHub. Net transaction revenues and GMV excluding vehicles increased in the U.S., Europe and Asia in 2011 compared to 2010.
Marketplaces net transaction revenues earned internationally totaled $3.4 billion, $3.1 billion and $2.7 billion in 2012, 2011 and 2010, respectively, representing 56% of total Marketplaces net transaction revenues in all three periods. The increase in the dollar amount of international net transaction revenues was due primarily to growth in our existing international markets.

Payments Net Transaction Revenues

Payments net transaction revenues increased $1 billion, or 25%, during 2012 compared to 2011, due primarily to net TPV growth of 22% and a higher take rate. The increase in net TPV was due primarily to growth in consumer and merchant adoption and use of PayPal both on and off eBay. Our Merchant Services net TPV increased 25% during 2012 compared to 2011, and represented 67% of PayPal's net TPV in 2012, compared with 65% in 2011. On eBay net TPV increased 16% during 2012 compared to 2011, and represented 33% of PayPal's net TPV in 2012. The increase in the take rate was driven primarily by foreign exchange income, gains from hedging activities and the full year impact from our acquisition of Zong (acquired in August 2011).

Payments net transaction revenues increased $862 million, or 26%, during 2011 compared to 2010, due primarily to net TPV growth of 29%. The increase in net TPV was due primarily to growth in consumer and merchant adoption of PayPal. Our Merchant Services net TPV increased 36% during 2011 compared to 2010, and represented 65% of PayPal's net TPV in 2011, compared with 62% in 2010. The increase in our Merchant Services net TPV was due primarily to an increase in the number of online merchants offering PayPal as a payment option.

Payments net transaction revenues earned internationally totaled $2.8 billion, $2.2 billion and $1.6 billion in 2012, 2011 and 2010, representing 55%, 53% and 49% of total Payments net transaction revenues, respectively. The increase in international net transaction revenues was due primarily to the growth of our Merchant Services business and increased penetration on eBay Marketplaces platforms internationally.

GSI Net Transaction Revenues

GSI net transaction revenues were $850 million in 2012 and $460 million in 2011. Net transaction revenues attributable to the GSI segment for 2011 are reflected from June 17, 2011 (the date the acquisition of GSI was completed). Accordingly, comparisons of GSI's net transaction revenues for 2012 to 2011 are not meaningful.

Marketing Services and Other Revenues

Marketing services and other revenues increased $382 million, or 23%, in 2012 compared to 2011, and represented 14% of total net revenues for both periods. The increase in marketing services and other revenues was due primarily to growth in our Bill Me Later portfolio of receivables from loans, as well as increased revenue from our advertising business.

Marketing services and other revenues increased $543 million, or 50%, in 2011 compared to 2010, and represented 14% and 12% of total net revenues in 2011 and 2010, respectively. The increase in marketing services and other revenues was primarily due to the acquisitions of GSI and brands4friends and an increase in revenues attributable to our classifieds business and advertising business, as well as interest earned on our Bill Me Later portfolio of receivables from loans.

Summary of Cost of Net Revenues

The following table summarizes changes in cost of net revenues for the periods
presented:
                                                                        Change from               Change from
                                  Year Ended December 31,              2011 to 2012               2010 to 2011
                               2012         2011        2010        in Dollars      in %      in Dollars      in %
                                                        (In millions, except percentages)
Cost of net revenues:
Marketplaces                 $ 1,273     $  1,210     $ 1,071     $       63          5 %   $      139          13 %
As a percentage of total
Marketplaces net revenues       17.2 %       18.2 %      18.7 %
Payments                       2,209        1,866       1,493            343         18 %          373          25 %
As a percentage of total
Payments net revenues           39.6 %       42.3 %      43.5 %
GSI (1)                          696          374           -            322        N/A            374         N/A
As a percentage of total GSI
net revenues                    64.2 %       63.4 %       N/A
Corporate and other               38           11           -             27        N/A             11         N/A
Total cost of net revenues   $ 4,216     $  3,461     $ 2,564     $      755         22 %   $      897          35 %
As a percentage of net
revenues                          30 %       29.7 %      28.0 %

(1) Cost of net revenues attributable to the GSI segment for 2011 are reflected from June 17, 2011 (the date the acquisition of GSI was completed). Accordingly, the percent changes in GSI's cost of revenues between 2011 and 2012 are not meaningful.

Cost of net revenues consists primarily of costs associated with payment processing, interest expense on borrowings incurred to finance Bill Me Later's portfolio of loan receivables, customer support, site operations and fulfillment. Significant components of these costs include bank transaction fees, credit card interchange and assessment fees, interest expense on indebtedness incurred to finance the purchase of consumer loan receivables related to Bill Me Later accounts, employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense.

Marketplaces

Marketplaces cost of net revenues increased $63 million, or 5%, in 2012 compared to 2011. The increase was due primarily to increases in our customer support costs and site operations associated with our GMV growth. Marketplaces cost of net revenues as a percentage of Marketplaces net revenues decreased during 2012 compared to the prior year due primarily to improved operating leverage in our site operations infrastructure, partially offset by investment in customer support programs.

Marketplaces cost of net revenues increased $139 million, or 13%, in 2011 compared to 2010. The increase during 2011 was due primarily to the impact of acquiring brands4friends during the first quarter of 2011 and increased customer support costs associated with our GMV growth. Marketplaces cost of net revenues as a percentage of Marketplaces net revenues decreased during 2011 compared to the prior year due primarily to improved operating leverage in our site operations infrastructure, partially offset by the impact of acquisitions. In addition, Marketplaces cost of net revenues as a percentage of Marketplaces net revenues in 2010 was adversely impacted by the settlement of a lawsuit and the establishment of a reserve related to certain indirect tax positions (recorded as a reduction in revenue).

Payments

Payments cost of net revenues increased $343 million, or 18%, in 2012 compared to 2011 due primarily to the impact of growth in net TPV. Payments cost of net revenues as a percentage of Payments net revenues decreased during 2012 compared to 2011 due primarily to a lower transaction expense rate driven largely by the impact of certain regulatory changes, primarily the Durbin amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Payments cost of net revenues increased $373 million, or 25%, in 2011 compared to 2010 due primarily to the impact of growth in net TPV. Payments cost of net revenues as a percentage of Payments net revenues decreased during 2011 compared to 2010 due primarily to a lower transaction expense rate. The improvement in our transaction expense rate was driven primarily by the impact of certain regulatory changes, new payment processing arrangements, a favorable mix shift to lower cost international markets and a small improvement in funding mix.

GSI

GSI cost of net revenues were $696 million during 2012 and $374 million in 2011. Cost of net revenues attributable to the GSI segment for 2011 are reflected from June 17, 2011 (the date the acquisition of GSI was completed). Accordingly, comparisons with GSI's cost of revenues for 2012 to 2011 are not meaningful.

Summary of Operating Expenses, Non-Operating Items and Provision for Income
Taxes

The following table summarizes changes in operating expenses, non-operating
items and provision for income taxes for the periods presented:
                                                                        Change from              Change from
. . .