THE BLOG
06/28/2007 03:56 pm ET Updated May 25, 2011

What if Starbucks Were a Web 2.0 Company?

I can't help noticing that, even as its Paul McCartney coup in the music
business soars, its stock continues to fall, hitting another 12-month low on Friday. The
market says Starbucks is worth about $9 billion. Meanwhile, over in
the Web world, Facebook, is a "Screaming Buy" for billions of dollars, And Rupert
Murdoch is looking to sell MySpace to Yahoo for the equivalent of $10
billion.

Starbucks sells about $800 million, and makes about $50 million in profits,
in an average month. Facebook sells $5-$8 million monthly and makes little to no profits. MySpace sells about $30 million per month,
and makes, well, nobody's talking about profits. But everybody's talking
about how Rupert Murdoch bought it two years ago for $580 million and
is trying to sell it for $10 billion. Those are Web-worthy profits,
like back in the dot-com boom days. Profits are from flipping it to
a higher bidder.

myspacevaluation.jpg

Starbucks owns -- and I mean owns, it's not a franchise -- about 13,000
coffee shops. There are 196 Starbucks locations within five miles of
the Huffington Post offices in lower Manhattan. Just adding a brief
lunch menu, earlier this year, means an estimated $30K per year per
store included, 4,800 of them so far. That's about $144 million per
year.

Is this a bubble? The new Web leaders have some fancy numbers of their
own. Facebook has 25 million users, growing 3% weekly, 100,000
new users per day. MySpace has 185 Million Registered Users and 350,000 new users per day. Facebook has
a new $100 million ad contract with Microsoft and 85% penetration among
college students.

StarbucksStockFalls.jpg

What's the difference between this and that last bubble, the dot-com
crash in 2000? Plenty. First, these and other highly-valued Web 2.0
sites can generate money. Maybe not as much as Starbucks, but money,
nonetheless; millions of dollars every month. They don't just dump money
into traffic. Second, they pull people into it. The key difference between
this Web 2.0 boom and the first dot-com boom is participation. People
don't read, they write, own, and customize their Web spaces. Third,
the economic platform. Facebook and MySpace have both become opportunities
for add-on providers to make money.

Is there any certainty? Hardly. You might remember Friendster, a previous
industry darling that failed. There's so much that could go wrong on
the way to the billion-dollar payoffs. One of my favorites is simply People will stop checking
their Facebook profiles when all their friends stop checking their profiles.
That one, by the way, is in a comment to a
good post, listing five things that could kill Facebook.

Which brings me back to Starbucks as Web 2.0. All they have to do is
get us to ignore those 13,000 stores and start talking about standard
Web measurements: visits and conversions:

Visits: hmmm, 13,000 stores, how many
customers per hour, per day, per week go into those stores? How many
repeat visits? How many minutes per visit? I'm not going to do that
math. I don't think Starbucks can hold up to Facebook or MySpace, but
they get a lot of visits.

Conversions: Wow! On the Web we look
for conversions as percentages of one percent, but the Starbucks conversion
rate has to be 80-90% or more, right? What percent of the visitors to
Starbucks actually spend money?

To some extent, the Starbucks visit
is what the Webmasters of the world drool for. People line up, wallets
in their pockets, waiting to spend money. Starbucks sells them an addictive
substance too, and it gets them waiting in line long enough to get interested
in the daily newspaper, the gifts, and -- back to the new Hear Music
label -- Paul McCartney's new CD.

In the Web world we watch how long people stay at a site. Generally
the longer the visit, the better. I wonder what the average visit in
Starbucks is. Retailers long ago discovered the advantages of giving
bored people waiting in line something to browse, and perhaps buy.

That's probably as far as we can stretch this Web metaphor for a coffee
shop business. I'm tempted to add in the online aspect of McCartney
CD sales, but that pulls away from the idea of selling to people waiting
in line.

Ultimately, despite the intriguing addition of downloadable music sales,
what makes the new Web look better in valuations is the approach to
infinity. As Starbucks talks about expanding those 13,000 stores to
30,000 and even 40,000, you have to imagine an amazing density of locations,
a lot of competition between them, and a lot of old-fashioned logistics
related to coffee beans, milk, CDs, etc. There's a limit to scale. With
Facebook and MySpace, on the other hand, they can multiply users until
they run out of people in the world with Internet connections, and not
have to deliver anything to the ally behind the store.