First the Music, Then The Coffee

Starbucks' new chain of Media Bars is grabbing customers by the ears

When an album of Ray Charles duets, Genius Loves Company, hit stores in the late summer, music fans eagerly scooped up the CDs. Then the album went platinum. It was sweet validation for the issuing label, Concord Records -- but also for its distribution partner, Starbucks Corp. Starbucks shoppers were responsible for one-third of the CD sales -- more than any other retailer.

Starbucks (SBUX ) has never been primarily about the coffee. Its pell-mell growth, which last year earned it the No. 25 ranking on the BusinessWeek 50 list of top-performing big companies, has always been about selling an experience. Now the Seattle company is making a major push to add new ways of listening -- and buying -- music for its 35 million weekly customers. Collaborating with record labels is just one element of that strategy. In October, Hear Music, an alternative record retailer that Starbucks bought five years ago for $8 million, launched a satellite radio station that plays the kind of adult-oriented jazz, blues, and alternative rock that Starbucks has long featured in its stores. The company is also installing kiosks, called Media Bars, in its shops that let customers listen to digital music, create their own compilations, and purchase them while waiting for their grande double latte.

The next step: Starbucks is investing in new retail outlets that will be music stores first and coffeehouses second. The first two Hear Music Coffee Houses are already operating in Santa Monica and Berkeley, Calif. "This is not a gimmick, and this is not an approach to take to sell more coffee," says Kenneth T. Lombard, president of Starbucks Entertainment, the unit overseeing the music efforts. "This is a firm commitment to take advantage of our unique platform to discover and acquire music."

Many Starbucks customers, of course, fall into the baby boomer demographic that tends to have both disposable income and a fear of the technology involved in finding and downloading music from the Internet. Those people also have drifted away from the traditional music business in recent years. But early on, Starbucks co-founder and Chairman Howard Schultz noticed that customers, while waiting for a mocha frappuccino, would ask about that catchy tune playing in the background. That got the chain selling CDs from the same artists at the cash register.

Now, with the in-store kiosks, it's possible to mix and match. You sit down on comfortable lounge chairs and use a stylus to click through different genres of music, picking out a single song or up to a dozen. You select from a choice of generic packaging. The bill -- 99 cents a song -- is paid with a Starbucks card or credit card. Hit a button, and a CD burner spits out your disk in less than 10 minutes. The kiosks are in 45 stores in Seattle and Austin, Tex., and are rolling out nationally.

For those who don't have time to sip and browse, Starbucks launched its XM Satellite Radio subscriber service. Staffers program the music and will do live concert broadcasts with some of the musicians. In addition, the channel will become the new house music for all Starbucks outlets.

So far, record labels are letting Starbucks sell some of the music from their catalogs -- partly because they see it as a chance to crack the market for new adult music that they have largely ignored. Music sales make up less than 1% of Starbucks' total revenues, and it might be years before they turn a profit. That's not a problem, since Starbucks' earnings rose 44%, to $288 million, through the first nine months of this year, on revenues of $3.8 billion, up 28%. Still, with more than 3,000 of its stores offering wireless Internet access, Starbucks may create its own portal for music downloads. That would put it into competition with, iTunes, and other digital music powers.

When that day comes, Schultz could be in for a fight. But for now, he sees music as another way to signal that his baby won't be pigeonholed. "We are much more than a retail store. Much more than a coffee store," Schultz says. "We are becoming alternative distribution." By cup, disk, or airwaves, the Starbucks lifestyle marches onward.

By Stanley Holmes in Seattle

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