A new revenue drip for Starbucks

By G.F. | SEATTLE

ON A recent visit to a Starbucks near my office, I asked about the signs of ongoing construction inside the store. Why not close for renovation? The baristas explained the outlet was far too busy to shutter. This is Seattle, after all, and I can walk to five other chain and independent stores within seconds. Instead, when store employees checked out for the evening, contractors would arrive and work through the night. Every day was a new adventure, the employees said. The renovation is now complete. The store has replaced carpet with tile, high counters with low, and made room for a long communal table in the middle. My Starbucks is begging me to stay a while.

I now know what I'm expected to stay for. Starbucks launched its Digital Network on October 20th. While in the café, using the free in-store Wi-Fi, customers now gain digital access to content they'd otherwise have to pay for.The Wall Street Journal opens up full access to its $103-per-year Web site, and the New York Times provides its $240-per-year Web app reader for free. Kids' entertainment giant Nickelodeon lets the rugrats in to the paid Nick Jr. Boost, a subscription that costs about $100 per year. Apple will give away free music and videos. (And Starbucks is using iPhone- and iPad-friendly video and browsing standards.) Several American publishers will provides access to excerpts and the full text of books as part of the Bookish Reading Club. Starbucks gets a piece of subscription signups and sales. All these offers seem designed to fill the store with happy, stationary readers, much like Barnes & Noble did before it lost all of its comfy seating.

This isn't Starbucks' first foray into tying digital elements into its stores. In 1999, the company suggested that it would set up an internet division, only to see its stock plummet. The suggestion was withdrawn; modest dotcom investments in Kozmo.com and others fizzled. Starbucks first rolled out Wi-Fi in 2001, when it promised local information through a Microsoft partnership. That local information never fully materialised, and its first Wi-Fi provider went bankrupt late in 2001, replaced by T-Mobile. Later, Starbucks experimented with audio CD burners that would let users create custom albums. Those got the boot before rollout. For a while, it had its own music label, and stocked a limited set of CDs, DVDs, and books; the label shut down in 2008, and most media was shuffled off.

The only remnants of those plans are its Wi-Fi service and the ongoing relationship with Apple. A Starbucks executive told me in February 2008, when the firm switched its Wi-Fi provider from T-Mobile to AT&T, that the company was raring to go with in-store media served wirelessly. But the timing was off. In the intervening two-and-a-half years, Starbucks shut down hundreds of underperforming stores opened during an unwise expansion, changed out its espresso machines to allow baristas and customers to see eye to eye, and introduced cheaper drip coffee. Starbucks now faces heavy pressure from fast-food restaurants, notably McDonald's, which invested in coffee and specialty caffeine drinks during Starbucks' time in the wilderness. Even Starbucks' switch to an all-free Wi-Fi system from a convoluted mix of free (for AT&T customers) and limited service (for stored-value card-holders) appeared following McDonald's decision to do the same. (AT&T operates Wi-Fi service for both chains.)

But the coffee chain still has its advantages. Many McDonald's stores post prominent signs in the restaurant and parking lot asking patrons to remain for no more than 15 or 30 minutes. The restaurant's booths and chairs can be charitably described as tolerable. The noise and lighting isn't conducive to working longer stretches. And McDonald's stores have several peak times each day. Starbucks and other coffeeshops typically have their busiest times between 5 am and 9 am; the rest of the day is relatively calm. Filling the store during those periods, even with seat squatters, can enhance revenue. Giving such surfers free content with enticements to purchase subscriptions and media items could turn into a constant drip of incremental revenue.