Lawrence Gee | Marketing, Internet, Creativity, Strategy

Betting on Cyberlattes

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.

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Why iTunes Should Be Worried

Yesterday, Amazon.com unveiled their new digital download service called amazonmp3.

Simply, this is great for consumers and troublesome for Apple.  The competition is great for the industry as it will create more incentives to be price competitive.  Consumers will benefit from lower prices, more promotions, and more innovation from both companies to keep or take away business from each other.

Amazon has positioned their product for success and it’ll be interesting to see Apple’s reaction. 

• Amazonmp3s can work with both iPods and other MP3s — will Apple finally succumb and allow iTunes music to be played on other non-Apple players?
• Amazonmp3s are DRM-free — this means that the files can be burned and transfers without restriction.  iTunes currently limits the number of times the file can be used and burned to CD.
• Amazonmp3 has 2 million songs right now - this is much less than the 6 million songs that iTunes currently has but record labels will be wise to negotiate deals with both companies.
• Amazon.com has a trustworthy name and the capital to keep this service going — unlike other failed mp3 sellers, Amazon has the money and branding to pull this off.  If purchasing music is as easy as iTunes, they can likely be a threat to Apple.

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