Starbucks and HP to Offer Custom CDs

An awful lot of people, especially music fans over, say, 30, aren’t particularly eager to give up CDs, but they also like some of the advantages of the Internet digital jukebox, especially purchase-by-the-song (these used to be called “singles”). On Tuesday Starbucks will announce a new service where customers can download songs and create their own CDs right on the premises:

Here’s a deal: Sip on a mocha latte while using headphones to listen to any of 250,000 songs you call up on a computer. Then order the ones you like — burned on your own CD — to go. Who’s the dealer? Starbucks.

….on Mar. 16, the Seattle coffee giant will unveil an in-store music service allowing customers to do just that, using Hewlett-Packard (HPQ ) tablet computers to make their choices. The first musical Starbucks opens in Santa Monica, Calif., and the service will expand into 2,500 stores over the next two years.

….KEEPING UP. With 30 million weekly customers who trust Starbucks not just for its many beverages but also for its ability to create an attractive lifestyle brand around upscale coffee culture, execs think they see a huge market for selling music. “We have a unique opportunity to leverage the trust people have in the brand,” Schultz says.

….The coffee chain already has licensing agreements with most of the major record labels that will give it the ability to offer everything from Britney Spears and The Polyphonic Spree to Yo-Yo Ma and Ray Charles, as well as everything in between.

If Schultz is right, the ramifications could be huge. The company thinks the service will significantly add to its $4.1 billion in annual revenue while enhancing its brand. As for the music industry, still reeling from digital piracy and sharply declining sales of CDs at brick-and-mortar record stores, Starbucks could make shopping for music both legit and fun again.

….The transition to all-things digital is still at least five to ten years off, however. Starbucks foresees its music-customer base centered among middle-age javaholics, many of whom don’t even go to music stores, let alone download songs. Prices will be comparable to Apple’s (AAPL ) iTunes service: $6.99 for five songs, the minimum purchase. Albums will cost $12.95. To appeal to a younger set, Starbucks will ultimately offer wireless downloads to laptops or portable players.

Starbucks execs also tout this as an opportunity to introduce people to new and more obscure music and artists. At the very least, being able to listen or buy music in a Starbucks café will enhance the company’s core business and keep customers coming back. “The time it takes you to order a latte, you could have any CD burned on demand for you,” says Don MacKinnon, vice-president for music and entertainment for Starbucks. “That’s truly transformative and unlocks for so many people a need that’s not being served — making it easier to learn about music, easier to get it, and easier to create your own compilations.”

….MacKinnon believes people want a place they trust to help them discover and choose new music. With partner Hewlett-Packard supplying the high-powered CD burners, the special printers for the CD covers, the tablet PCs, the digital storage, and the army of servers, Starbucks figures it is taking the best of the digital world into the coffee shop. Says MacKinnon: “This is training wheels for digital.”

Music execs love the idea. “They are creating another way to recommend music to people and target a specific music buyer, bridging the gap between the digital and the physical,” says Jimmy Iovine, chairman of Universal Music Group’s Interscope, Geffen, and A&M labels. “Starbucks isn’t just adding music to their stores. They’re adding culture to the stores. They’re enhancing the customer experience.” [BusinessWeek]

Although I think the prices too high (as always), I think the concept is brilliant and with Starbucks already drawing a huge number of customers everyday, this is a way to provide them with another “lifestyle” element to their store experience – sampling (key) and purchasing music, and a way for Starbucks to increase their revenue-per-customer ratio significantly. And it fills in the space between digital downloads and CDs. Very interesting.