Analysis: Digital Music Downloads at Starbucks from Zune?

Authored by Jay Baage on January 28, 2007 - 9:15pm.

Starbucks Chairman Howard Schultz last week gave some insight into the company’s future music strategy at a talk in New York, stating: "Within 12 months, probably, you're going to be able to walk into a Starbucks and digitally be able to fill up your MP3 player with music”. He also added that "over the next 6 to 18 months you will see us look at it, perhaps test it”. The question is - why would people buy their music at Starbucks in the first place?

It is fairly clear why it makes sense for Starbucks to sell music: diversification of revenue streams; increasing foot traffic and time spent in stores; as well as the opportunity to increase sales per customer. However, Starbucks removed CD-burning machines out of most stores that trialed them last year. It seemed like a natural step to replace those machines with technology for downloading music to MP3 players, since the general trend in the music industry is towards digital delivery - so far so good. But the question remains, why would people buy their music at Starbucks?

One reason might be if Starbucks were to give customers some kind of incentive to do so, perhaps a free song with your latte. So who might provide that free song? Apple seems like a prime candidate due to its existing involvement with Starbucks. However, Apple would not have any motivation to discount its songs, with such a strong market leadership position.

Note that Howard Schultz said "MP3" player in his informal prediction. Currently iTunes does not sell songs in MP3 format; consequently iPods are rarely referred to as MP3 players. The use of the word “MP3” is most likely carefully chosen language so that Schultz can keep his options open, since there are a number of candidates besides Apple that would be highly interested in a partnership with Starbucks.

The most obvious contender would be, of course, Microsoft's Zune, which also has another advantage to the current generation of iPods – its Wi-Fi support that in theory, could be used to conveniently transfer songs wirelessly to the player in Starbucks.

However, in Zune's existing form, the player can only temporarily share songs with its own kind rather than buy or download songs from a central location. But that is likely going to change, and if you read our interview with Zune’s Head of Artists Development, Richard Winn, Zune’s editorial voice would not be a bad fit with Starbucks. However, Zune is locked down with DRM-restrictions and its pricing is ridiculously complicated.

Two other WiFi alternatives for Starbucks, though doubtful, include: SanDisk's new Sansa Connect player and the little New York-based upstart Music Gremlin. Another alternative is for Starbucks to simply team with an independent MP3 store like eMusic or MTV’s Urge. But remember, no one is really making money from selling music online; the money is in the hardware or related services.

The Take Away: I think there are clear advantages for both sides (Starbucks and an established music retailer) in working together to create attractive offers for customers who want to experience new music with their coffee. However, iTunes is the 800lb Gorilla in the music downloads space and does not need Starbucks. A partnership of this type might seem like a no-brainer at first glance, but if you think about it, it does not make much sense. Instead, if the business development execs at Microsoft Zune simply got their act together and stop messing around with weird pricing, restrictions on sharing on songs that only lasts 3 days and open up to selling songs in MP3 format - they would be an ideal partner for Starbucks. Both parties would potentially have a lot to gain in form of marketing and co-branding.

But the question remains, why would people want to buy music at Starbucks? Unless the pricing just makes it a good deal, I don’t really see a good reason.

Joakim Baage

Related Links:
Microsoft's Plans for Winning Over Apple iPod Music Lovers with Zune
Schultz discusses MP3 potential for Starbucks (Seattle Times)
Starbucks visitors to sip iTunes downloads? (Apple Insider)
Microsoft Expects to Sell 1 Million Zune Players by June
Buzz Watch: Microsoft Launches a Full Scale Attack on Apple
www.starbucks.com
www.zune.net
www.itunes.com

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Comments

Consider this...

Submitted by careY (not verified) on January 30, 2007 - 7:49am.

Starbucks has maintained a decent relationship with multiple record labels due to their Hear Music program (www.hearmusic.com). While companies like Apple and Microsoft only profit from sales of machines, record labels profit from file sales. I would explore a direct relationship with record labels and companies like The Orchard, who does digital music cataloging. iTunes and the Zune may only sell files playable on their respective devices, these same devices can play regular mp3 files from elsewhere, n'est pas?

Why Wouldn't They?

Submitted by DNA (not verified) on January 30, 2007 - 7:30pm.

Well said careY. iPods absolutely do play mp3s and the device is quite regularly referred to as an mp3 player (try Googling the two terms).

I think the biggest argument for people buying digital music at Starbucks is the fact that they are already buying CDs there. If given the opportunity to buy directly to a portable device I don't think it is a given that consumers already migrating to purely digital formats will cease being interested in purchasing music because it's not on a CD.

Let's see what happens. I say good move Starbucks. D.N.A

why buy from starbucks

Submitted by PDS (not verified) on July 2, 2007 - 1:39pm.

People will buy from starbucks because they are standing in line waiting to get their jo it will be an impulse buy not everyone spends all day combing for music on the internet