Free Wi-Fi! The Starbucks Freemium Strategy

Are you looking for a free wi-fi hot spot to surf the web? Look no further! Last week, Starbucks announced that they will soon provide customers with unlimited free access to the internet at all of their American company operated locations.

Not impressed? Are you looking for more free internet services? Believe it or not, Starbucks will also offer free access to the full content of USA Today, the New York Times, and the Wall Street Journal, the three most widely circulated newspapers in the United States. The free availability of the Wall Street Journal is particularly noteworthy, considering that it routinely charges its subscribers over $100 per year for access to its web site.

Starbucks is promising that many more exclusive web services will be offered as well; in fact, they intend to maintain an entire Starbucks Digital Network of proprietary and public content, free and unlimited for any patron. But how can they possibly earn profits while giving away such valuable services?

Leapfrogging The Competition

At first glance, this new Starbucks policy might appear to be perplexing, in view of the fact that many other coffee houses have begun limiting or eliminating free internet access. Tired of patrons who buy small cups of coffee and then spread out across large tables for hours at a time, many shop owners have decided to banish wi-fi freeloaders from their establishments.

Starbucks itself has experimented with various wi-fi policies during the past few years. At times, it has only allowed paid users of the AT&T and T-Mobile wireless networks to utilize its services. And even though it has recently offered two free hours of daily wi-fi access to owners of Starbucks debit cards, it has required those customers to purchase at least one drink each month to qualify for the service.

Thus, by now offering unlimited free wi-fi service, as well as a network of digital content, Starbucks has decided to do far more than simply match the offerings of its competitors. Instead, it has actually leapfrogged the competition and has decided to give away more services for free.

What’s The Catch?

Such a drastic move may, at first blush, reek a bit of desperation. Like AOL’s sudden decision to give away free email service after years of charging premium prices for it, one might suspect that Starbucks’ offer represents a sign of crisis at the firm. But its stock price has soared beyond $25 per share after having dropped below $10 per share as recently as March 2009, and the firm’s market capitalization remains many times larger than those of rivals like Caribou Coffee and Peet’s Coffee.

Thus, the new Starbucks internet policy is no act of desperation. Nevertheless, there must be a catch, a clever strategy by which Starbucks can enhance its profits despite incurring additional costs. But what is this catch? Are there hidden fees, for instance, that users will be forced to pay?

No, there aren’t any mandatory out-of-pocket usage fees per se, but any user of Google or Facebook will certainly understand the strategy that Starbucks will employ to enhance their profits. Many Google users, for instance, use the search engine for free, but a sufficient number of Googlers click on the paid advertiser’s links to generate a flood of revenues for the firm. Likewise, many Facebook users never spend a penny to maintain their accounts, but a sufficient number of them purchase applications from third party vendors, who then remit a portion of their proceeds to the web service.

It’s Not Free, It’s Not Premium … It’s Freemium!

This strategy is called a freemium policy; in many industries, it has been employed to great effect for many years. Accountants and consultants, for instance, often give away their expertise by making complimentary business presentations at trade conferences, hoping that a few new clients found in the audience will justify the costs of their appearances. And consumer banks often give away basic checking account services, earning profits by lending out their customer deposits to organizations that require capital.

Furthermore, those same accountants and consultants will often charge appearance fees when organizations ask them to make highly customized presentations on very complex topics. And banks will often charge special fees for premium services such as overdraft coverage and illustrated vanity checkbooks.

So is Starbucks likely to give away free access to the internet, and to its proprietary Digital Network as well, without charging for any bells and whistles? Not likely! Instead, look for the firm to offer paid advertisements to third party vendors on its network, much as Google does via its highlighted links. And look for it to offer fee-based premium content, such as music and video downloads, as well.

In other words, not all users will gain access to all of Starbucks’ network content for free. But not all users will want anything more than free access to the internet. And that is fine with Starbucks; they are opting to implement a freemium strategy, and if it succeeds, they might well earn more profits on internet services than on sales of their own caffeinated beverages.