Starbucks Says Wi-Fi A Success
By Carlo Longino, Wed Jul 07 14:15:00 GMT 2004

The coffee peddler says it now has Wi-Fi in 3,100 stores, and is seeing some good user behavior stats. But can't they show us the money?

The financial success of Starbucks' T-Mobile hotspots has been questioned before, with most of the numbers coming from T-Mobile, even though they've been the most general of figures and required significant analysis to come up with anything beyond total revenues. Starbucks continues the trend, saying, "The T-Mobile HotSpot Service at Starbucks is proving to be very successful." How does the company back that up? "With millions of customer accesses since the August 2002 launch..."

The company completely ignores any hard figures on the number of connections, users or revenue, focusing on user behavior: T-Mobile subscribers visit Starbucks an average of 8 times per month, more than non-users, spend more time -- about an hour -- and make more than 90 percent of their connections after peak hours end at 9 a.m. Note that the Starbucks press release is specifically talking about "subscribers", which T-Mobile said in March was about two-thirds of users. It stands to reason subscribers would visit more often and spend more time than casual users, since they're paying the lowest cost and don't incur any per-minute charges.

These figures mirror the benefits from other restaurants providing Wi-Fi service: it can generate extra visits and entice users to stay longer -- meaning more sales. But, of course, unlike many of its competitors, Starbucks' hotspots aren't free. I surmised back in March that T-Mobile's hotspots were generating about $400 per month. I don't know what cut, if any, of those revenues Starbucks gets -- but at some small percentage of $400 per month per store, it's not getting rich from the hotspot business.

But they are getting hotspot users in 8 times a month, and I'll assume those users buy at least a cup of coffee every time they come in. At Starbucks' prices, I'm certain that they're generating more revenues from that additional foot traffic than the $13 per day Glenn Fleishman of Wi-Fi Networking News estimated the hotspots generate. So clearly the company is seeing some benefit, in increased food and beverage sales, from offering Wi-Fi -- but wouldn't those sales would increase even more if they made Wi-Fi free?

Simple economics says that the demand for a product increases as its price decreases. It also says that as demand for one product increases, demand for complementary products increases. In this case, Starbucks coffee is the complement to Wi-Fi: it's a safe bet that Starbucks will see more Wi-Fi users if it were free, and that it stands to gain more from increased sales than it would lose by giving up its cut of that $13 per store per day.

Without clear user and revenue figures, it's difficult to clearly evaluate Starbucks' and T-Mobile's success, and their relative silence on this front fosters the assumption that things aren't going so well on the revenue-generating front, making it hard to defend the position that Starbucks has more to gain from charging customers for Wi-Fi than by offering it for free.