It's also a potential huge competitor for PayPal.

However, from a consumer / vendor perspective, paypal acts more as a regular payment processing. In that market, the vendor is the client, most of the features you enjoy as a user of services like Paypal or VISA (protection, credit, free transaction, ...) is paid for by the vendor. So their point of view is what matters and right now, they are not happy.

Of course as you noted, Bitcoin on its own is not a competitor to anything except "mailing a check" type transaction. But it can enable creating competing services much more easily than before.

As you suggest, they would continue to provide their service, but instead of PayPal accounts being funded through Visa/MasterCard (X% txn fee) they could be funded through Bitcoin (0% txn fee).

(disclosure: I currently own some eBay Inc stock)

Sometimes you go for what most of your customers already know or want, or you go for whats easier and handier, or you go for what is a known quantity and wont have legal or other problems down the line, you go for what's less volatile, etc etc.

The only reason a big company like PayPal would ever use something like Bitcoin as it is today, is not to "take advantage of what it offers", but as a "early adopter marketing ploy", to get some tons of free press and publicity (while still relegating it safely to 1/10000 of their actual businesses).

I don't think PayPal would go out of their way to push BTC. They're almost certainly taking a "wait and see" approach. The primary thing I unsuccessfully was trying to get across was that PayPal probably does not particularly fear or seek to undermine Bitcoin. It's likely to be upside for them.