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Betting on Cyberlattes

February 12, 2008 – 6:16 pm

Posted in strategy

Starbucks announced today that it was switching its store wi-fi service from T-Mobile Hotspots to AT&T Broadband. It will allow customers to have 2 free hours of access with a drink purchase. Existing subscribers of AT&T Broadband or U-Verse will get unlimited access. Alternatively, customers can purchase a two-hour session for $3.99 (might as well buy a latte) or a monthly membership would cost $19.99. This is a substantila reduction from T-Mobile Hotspot pricing, which started at $9.99 per day and ranged between $19.99 and $39.99 per month.

Let’s examine some of the strategy behind their reasoning:

To receive the free wi-fi, customers must purchase their drinks with a prepaid starbucks giftcard. This will obviously increase the number of cards sold and tie customers to spend more of their “coffee dollars” at Starbucks. Giftcards are basically forward selling future lattes — that is Starbucks gets cash upfront without having to deliver the goods until later. The revenue generated from giftcards can be used as investments and Starbucks can benefit greatly from the interest. Imagine if Starbucks sells a million gift cards with an average of $10 on each card. That would give Starbucks $10M in capital to invest. If they received a conservative annual return of 5%, that’s an instant $500,000 in added revenue.
Starbucks is also builing on the Apple, iTunes, and now iPhone connection. Everyone is probably aware that the iPhone is currently solely on the AT&T Wireless network. Some tie-ins must be in the works. Last fall, Starbucks had already given free wi-fi access to iTunes and offered customers the ability to instantly purchase music playing in Starbucks stores and other special Starbucks music collections. With nearly 36 million unique users of iTunes, having a strong tie with the customer base is probably a good idea. They target similar demographics and Starbucks desperately needs to gain some of its fashionable charm after going quite mass market.
Starbucks is also hoping that free wi-fi also means that coffee house goers with sit on the couch longer and buy more lattes. Maybe they’ll average 1.5 lattes a day versus 1. This could add up to quite a nice bump in sales.