At one point in time simply being Starbucks (SBUX) was enough of a distinction to draw crowds into the company’s stores. That’s not quite the case anymore, as competition has made being little more than a trendy, and often expensive, coffee shop somewhat passé. In fact, Starbucks even competes with itself with its line of Via take home instant brew packets.
This isn’t a new phenomenon at Starbucks, since competitors like Green Mountain Coffee Roasters (GMCR) and even McDonald’s (MCD) have long been in the coffee market and are formidable challengers. However, the need for differentiation does help explain Starbucks’ move to offer free Wi-Fi in its stores. That said, the plan might seem like a catch up play, since McDonald’s and others, such as Panara Bread (PNRA) and Borders (BGP), already offer free connections.
Historically, some Starbucks patrons have been able to get a limited amount of free web time, but many were required to pay for the service. The decision seems counter to the trend seen at some places of limiting Internet access to stop customers from “squatting” valuable seating space. That is an issue for restaurants and similar establishments, but not quite as large a concern for a company like Borders, where people milling around might actually increase sales over the long term. However, Starbucks notes that, on average, laptop customers use about an hour of web time when visiting their coffee shops and doesn’t expect a material increase in usage time. Presumably, a far larger number of customers never stop to use the Internet, or the establishment’s tables and seats, at all.
Taken from that perspective, this may be a non-event for the company operationally, but a potentially large publicity benefit as the story has been splashed from blogs to The New York Times (NYT). So, from a cost/benefit standpoint, the move seems like a winner for the company on the publicity front. However, Starbucks has gone further than just making web surfing free, it’s also going to provide customers with “special” content in a partnership with Yahoo! (YHOO) that will be called the Starbucks Digital Network.
The most notable content is The Wall Street Journal, which is owned by Rupert Murdoch’s News Corp (NWSA), to which customers will have free web access. Murdoch has long voiced the opinion that web denizens will eventually have to start paying for the free content they now enjoy as if it were over-abundant manna from heaven. Allowing free access to The Journal would seem counter to Murdoch’s push to force customers to pay, unless Starbucks is footing the bill in some way. According to Starbucks, however, how the content is being paid for is classified information.
Although there are any number of possible payment schemes, the most likely are outright fees paid to the content providers or some sort of revenue share. This is where the free Wi-Fi goes from an interesting news story to an interesting business question: Can Starbucks make any money from this initiative?
The answer is a clear yes, if it drives enough customers to the coffee chain’s stores. However, management doesn’t view this just as a customer acquisition and retention tool. The long-term goal appears to be a new sales platform. Indeed, included in the free content will be media such as music and video clips, including a partnership with Apple’s (APPL) iTunes, which, at this point, seems to sell anything that can be digitized. It is a short hop from giving some stuff away for free to getting people to buy that song they just heard for free so they can listen to it later on their iPod or iPhone, or use it as a cell phone ringtone on a less web savvy device.
If the move is based on a revenue share model, then it could turn into another way to push content onto customers. At first, this sounds eerily familiar to the company’s efforts to sell music CDs many years ago. Although that didn’t turn out to be quite as important a revenue source as some might have hoped, the content/Wi-Fi package could have some legs.
Hawking CDs in your shops, even if they have your imprinter on them, is a far cry from pairing up with some of the Internet industry’s heaviest hitters (Apple and The Wall Street Journal online, for example). In fact, bringing in partners could even facilitate product sales, since these companies have different identities and, thus, to customers, it may not feel like Starbucks is pushing anything at all. Thus, this could be a win-win for both Starbucks and the content providers, which benefit from finding customers at a time when they historically wouldn’t have been thinking about buying things online.
Of course, it’s all about execution, and how this move plays out will be interesting on many levels, as it could lead to imitators in the restaurant and related space. It could also help to usher in Murdoch’s coveted age of paid web content—even if the payments don’t come directly from the end customers. At the end of the day, however, shareholders shouldn’t get thrown off by the nice headlines the Wi-Fi move has garnered. The real question is “How are they going to make money off of it?” It seems like Starbucks has a plan in place for that, now, as an investor, you just have to keep your eye on the execution of that plan.