Coffee Shop Economics

At a typical coffee shop, a customer, in exchange for purchasing at least one item on the menu, typically for $3 or more, gets:

1. High priced, quality, expresso based coffee drinks and/or expensive snacks and specialty drinks, and
2. A comfortable private place to hang out for rather longer than it takes to drink a coffee, and
3. Free Wi-Fi.

A large part of what customers pay for when they go to a coffee shop is a free Wi-Fi equipped living room to hang out in for a while. A large share of customers have a coffee, sit down, open their computers, and do their work or studying or simply catch up on their personal agendas in a comfortable spot at a convenient location away from the clutter of home or the office.

The market has decided that Wi-Fi is like bathrooms and overhead lighting which are part of overhead, and rather than constituting another product to be hawked for a price.

If you have your own living room with free Wi-Fi already, making comparable coffee drinks with the very same ingredients and a decent expresso machine costs about $1 per 12 oz glass, plus a bit of labor whose cost per glass depends upon what you pay your baristas and how much volume you handle.

This model applies unless, of course, that coffee shop is Starbucks. Starbucks, unlike almost every other coffee shop made in its image on the planet, does not offer free Wi-Fi. Some idiot in corporate struck an exclusive detail for paid Wi-Fi with T-Mobile through January 4, 2009, subject to some limited transition promotions. The result is that Starbucks has seen its stock price drop 50% in 15 months.

Naturally, Starbucks is trying to get out of this suicidal contract that emperils a large share of its business. But, these efforts have drawn, naturally enough, a lawsuit for breach of contract from T-Mobile.

I don't know how much money T-Mobile makes from its deal with Starbucks. I can't imagine that it is much. I rarely see Starbucks customers using T-Mobile service for coffee shop LAN service. They either have Wi-Fi via a Blackberry type connection in their computer that runs over the cell phone network, or they go elsewhere, if they want to connect to the internet.

On the other hand, Starbucks has 15,000+ locations in 44 countries, not all of which have the same density of free Wi-Fi coffee shops found in Denver.

The solution, it seems to me, is for Starbucks to buy out the T-Mobile deal for the value of the profits that they will lose over the next seven months. I can hardly doubt that they have tried and been rebuffed, which is why they are in court right now.