Is Starbucks a Retail, Media, Networking, or Internet Stock? (SBUX)

Rafat Ali, editor of must-read media site PaidContent.org, writes:

Lo Behold, Starbucks Is a Network: (reg, req.) What a concept: have wi-fi in-store, will offer downloads. Anyway, at Starbucks' annual meeting in Seattle yesterday, chairman Howard Shultz spoke about, among other things, digital media. He said that the company has the largest Wi-Fi footprint of Internet hotspots in its stores, but it has yet to adequately leverage the service.

While he said the CD business "has a very long life," having Wi-Fi gives Starbucks a "unique proprietary competitive advantage...We understand the cultural relevancy of digital fill-up. I can't say when, but it’s in our future."

He wouldn't provide many specifics but said the company may partner with entertainment or Internet providers to create a proprietary network. "Starbucks is a network," Schultz said.

While Starbucks may have a future as a WiFi network, its more immediate impact is on the media industry. This long-ish quote from Starbuck's most recent conference call (full transcript here), from "Chairman and Chief Global Strategist" Howard Schultz, is necessary reading for any investor in music or movie related media stocks:

...Today, I’m going to focus my comments on a very exciting and evolving segment of our business, entertainment.

Before I talk about where we are today, I would like to take a step back and revisit the road Starbucks has taken in our evolving music and entertainment strategy. As many of you know, music has always been an essential part of the coffee house culture. For Starbucks our musical journey began in 1995 when we first introduced CD sales into our stores, as a result of a very popular in-house music program created by one of our store partners.

A natural extension from that was our 1999 acquisition of Hear Music, a San Francisco based music retailer known for the innovative way it helped consumers discover great music. This acquisition helped boost our in-store music selection and propelled us forward in creating the musical coffee house environment. Our role in music then moved beyond just the sale of CDs and extended to music programming at Starbucks stores worldwide.

Music compilations, a 24-hour music channel with XM satellite radio, an innovative collaboration with music labels to produce, market and distribute both exclusive and non-exclusive music followed. From there, Starbucks has evolved to become a significant presence in the music industry. For example, collaborations with record companies such as Concord Records for the release of Ray Charles’ Genius Loves Company, the final recording by the gifted artist, went on to an Eight Grammy and subsequently hit the number one position on the BillBoard sales chart. More recently, Herbie Hancock’s Possibility CD which we co-released with Hancock Music and Vector Recordings has received Two Grammy nominations. Not only has Possibility drawn the attention of the recording academy, it has also been the most successful debut in Mr. Hancock’s career, selling more than 42,000 copies in the US alone in its first week of sales. Possibilities also debuted at No. 22 in the BillBoard 200 Albums Chart.

In addition to offering music in our traditional stores, we also introduced Starbucks Hear Music Coffeehouse, a wonderful unique land of music store and coffeehouse which provides customers a venue to enjoy one of our hand crafted beverages while exploring a wide selection of CDs and digital music.

Our flagship Santa Monica store was recently joined by second Starbucks Hear Music Coffeehouse, which opened in San Antonio, Texas in December of ’05. A third Starbucks Hear Music Coffeehouse will open in Miami Florida later this month. Each store offers a vast selection of more than 1 million digital tracks to sample; listen, burn and print, truly transforming the way consumers discover and acquire music. A sale of CDs at Starbucks locations has provided record labels with a broad new channel of distribution and a powerful cost-effective in innovative way to connect with an expanded untapped customer basis at Starbucks.

Our approach today with music has been precisely executed changing how consumers discover great music while at the same time, generating a profitable revenue platform for the company. As we continue to seek and capitalize on emerging opportunities, we are taking our entertainment strategy to the next stage, films. As we have demonstrated over the last few years Starbucks has become a market maker in the music industry and now similar to music we are seeking to be an innovator in the marketing and distribution of film. Our strategy is to bring relevant and unique entertainment to the forefront utilizing our expansive retail footprint.

Over the past several years, the film industry has experienced a decline in box office receives while also realizing a significant increase in the cost to market new films. Starbucks has prepared to break that paradigm and changed the model of how new films reached the public. We are confident that the strength of the Starbucks brand coupled with our broad national footprints and be a catalyst for the industry by engaging our customer base the opportunity is there to generate higher box office proceeds and lower marketing costs associated with the premier of a film in a powerful and cost effective way.

What we intent to do is unlike any thing you have seen from other, Starbucks will not replicate the way in which fast food chains have co-opted their stores for the marketing of films, in order to sell more fast food. We are not entering into the venture with a sole purpose to sell more coffee, but instead to bring a inspirational uplifting story to our customers and to the public who may otherwise not have the opportunity to experience this particular film.

I’m speaking about the recent announcement of a truly transformational partnership in which Starbucks will participate in all aspects of the marketing and distribution of Landscape Entertainment’s new film Akeelah and the Bee. This next step is simply the natural evolution of our entertainment strategy and one we have been, been researching and exploring for quite some time. In our first quarter into this medium, it was critical to find the right film that would resonate with our customers and honor the trust they have place in us. Akeelah and the Bee is especially relevant with its inspirational story of a young girl who despite many social and economic obstacles advances from the inner city the scripts national splendid. This film which will be released in theatres on April 28th has the content depth and inspiration we were seeking and conveys the human touch that for fact, personifies the Starbucks brand.

I want to stop here for a moment and make it really clear that we are not investing in a movie and we are not getting into the movie business in a traditional way. What we are doing is leveraging our vast retail store footprint and the cultural relevancy of the Starbucks brand to bring film to the public in a new way during the time when the film industry has been challenged.

Starbucks will participate in all aspects of the marketing and distribution of this year film, and we will be an equity participant in the film’s success, not only at the box office but through the sale of the sound track and the DVD in all retail outlooks including our stores. The soundtrack will be available in early April and we will carry the DVD along with other traditional retails, when it becomes available later in the year.

Through this venture, we are creating an economic partnership with the film industry that mirrors the structure we created in music with the successful later trail CD. Through the power of the Starbucks brand, we will create awareness and drive new Movie Goers to the film, something movie producers could not do on their own. We will introduce the film through a truly innovative and interactive in store marketing campaigns, which will provide customers the opportunity to experience the fun and inspirational feeling of the movie. Many of our store partners will have a chance to view the film prior to its release and they along with strategic marketing materials with in the store will create enthusiasm in entries among our customers around the Akeelah and the Bee.

Starbucks has become recognized by entertainment authorities has a significant force in the music industry. Lending our trusted editorial voice and raising awareness of this film through our partnerships, through our powerful distribution systems to translate into Starbucks achieving a similar role in the film industry. While our core remains unchanged, we recognize that we have an opportunity to provide much more then the best cup of coffee. We offer our community gathering place where people come together to connect, explore and make new discoveries. We value the trust that our customers have placed in us and we are committed to providing high quality and relevant offerings as we take our entertainment strategy to the next stage.

Before I close I would like to share a quote with you, from a music reporter who seems to be as equally energized about Starbucks venture into entertainment as we are. According to Melinda Newman, the West Coast bureau chief for Billboard magazine, Starbucks and, Starbucks has become a power in the industry, they are forced to be recon with. If you are looking at Starbucks and saying, is this a project we will be best served by making a deal with Starbucks.

It’s exiting to share with these developments in our entertainment strategy. We are creating a truly transformational entertainment experience by providing our customers the venue to discover music and movies from a brand that they have come to trust. It all gets back to the basic, the foundation upon which we have build our company, it’s around a human connection and our passion to innovate and grew with new offerings, new sound and new experiences. While seeking unique opportunities to monetize our assets and in doing so increase shareholder value. We look forward to providing you with future updates as we build on this exciting venture. I will now turn the call over to Michael.