Google Grabs The Starbucks Coffee From AT&T

Includes: GOOG, SBUX, T
by: Emmanuel Floriann Magto

A cup of Starbucks (NASDAQ: SBUX) coffee will now taste sweeter for Google (NASDAQ: GOOG) investors but not for AT&T (NYSE:T) shareholders. Starbucks will switch its Wi-Fi setup from AT&T wireless system to Google, which is said to be 10 times faster. The switch will potentially have some effects one way or another on the three directly-involved companies; it is obvious that AT&T gets the direct hit since this is tantamount to lost subscribers and potential revenue.

The planned switch is part of Starbucks' plan to upgrade its system in order to enhance its in-store services. This is expected to attract more customers considering that a significant percentage visits to the store are not just to relax but also to work and to study using the wireless internet. Customers will experience faster internet speed by ten-fold. If they are in a Google Fiber city area, then they can even experience 100 times faster internet speed.

Starbucks continues to provide value-added services as reflected by its strong third quarter earnings that beat analysts. The company posted revenue of $3.74 billion, up 13.33% year-over-year. It also reported the second highest EPS in the history of the company at $0.55 per share, beating analysts' expectations of $0.53 per share.

According to Starbucks' president and CEO, Howard Schultz, the company's third quarter performance was, by far, the best across-the-board performance in its 42-year history. There were 341 new outlets opened during the quarter alone, further expanding its global footprint that now totals 19,209 stores worldwide. This will partly support its future growth. Aside from that, Starbucks is forging strategic alliances with different companies to grow its channel development business that saw significant improvement.

The switch to Google for its WiFi system is a critical component for its future success. Many American customers are now lured by the firm's digital offers that include mobile payments.

Impact on AT&T

The upgrade will be rolled out to about 7,000 outlets across the U.S. This could also mean that AT&T will lose about the same number of wireless subscribers within the 18-month roll-out period starting August. Despite the expected loss of subscribers, AT&T maintains good business relations with Starbucks, stating that the coffee giant remains a valued customer of its other services, including its 4G LTE network that is considered as the most reliable and the fastest in the country today. Moreover, the loss will be offset by the addition of new subscribers.

During the latest quarter financial report, AT&T was able to add more than 2 million new wireline and wireless high speed broadband connections. The company reported the best 2nd quarter postpaid net adds in 4 years at 551,000 wireless postpaid net adds. It also added about 1.2 million new smartphone subscribers.

Impact on Google

Google, on the other hand, can expect an addition of 7000 new subscribers in the ensuing months. While the transaction is small compared to the overall business of Google, it is an important milestone for the business partnership of Google and Starbucks. In fact, it is just the start of the expected long partnership as both companies are working together in the development of the next-generation Starbucks Digital Network.

But what really drives the bulk of the company's revenue is Google websites. Based on its second quarter financial report, Google websites comprised about 68% of the total revenue. This is followed by Google Network Members' Websites (27%) and other revenues (5%). All three sectors reported positive year-over-year growth during the second quarter. The total consolidated revenue jumped 19% year-over-year and 1% quarter-over-quarter.

The Starbucks transaction was a triumph for Google. But it is just one of the many projects Google has laid out to grow its business. There are other projects that the search giant is currently working on to remain competitive in various aspects of its business.

One of them is the Chromecast, a USB-powered plugin device that allows users to stream videos from any device to a TV set. In other words, with Chromecast you can transform your mobile device into a TV remote control that lets you adjust the volume and the channel. Moreover, the company has recently partnered with Netflix (NASDAQ: NFLX) to improve the resolution of video streaming quality on Android 4.3. This is in line with Google's launch of its new Nexus 7 that is expected to boost the company's revenue.

Another potential growth catalyst of Google is the projected activation of 70 million Android tablets before the year ends, which is a huge jump from the 10 million tablet activation it achieved during the fiscal year 2012. This is based on the astounding performance of Google Play Store with 1 million apps and 50 billion downloads. If this number is achieved, this will help push the shares in upward trend.

In a nutshell, both Starbucks and Google will benefit from the strategic alliance, and it's a win-win situation for both companies. AT&T, on the other hand, may have lost the business with Starbucks to Google, but it also added new subscribers significantly more than the amount it lost.

All three companies have solid second quarter earnings. They have many things to keep their hands busy to further strengthen their positions in their respective markets.

Nonetheless, shares performance is given more focus on compared to dividend yield, in the case of these three companies. Starbucks and Google have bullish community sentiments in Nasdaq with 'Buy' to 'Strong Buy' consensus recommendation by its analyst firms. AT&T's consensus recommendation is 'Hold.' Thus, the alliance of Google and Starbucks creates good investment opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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