Thinking Outside The Cup

Surprise! Starbucks barista-in-chief Howard Schultz is making a big, bold push into the music business. He aims to transform the record industry — and turn Starbucks into the world's biggest brand, period.

So this girl walks into a bar. She holds a tall iced coffee in one hand, and her blond hair is piled high in a ponytail, neon bikini strings peeking out from her tank top. At this bar, however, headphones hang above the stools, and computer screens are embedded in the countertop. The girl looks at the "bartender" quizzically. "So you can burn music here and it's, like, legal and everything?" she asks. The bartender smiles and nods. "Omigod, so you have, like, every song, ever?" Well, not every song, but quite a few: approaching 150,000 — about 20,000 albums' worth. The girl settles onto a stool and grabs a headset, taking a long drag on the straw in her drink as she starts tapping away on a screen. "That's awwwesome."

It's awesome indeed, this new-concept music store on the trendy Third Street Promenade in Santa Monica, California. It's a beautiful space with warm lighting and wood paneling — a place where you can buy regular old CDs, or linger with a drink while you listen to music and sift through thousands of songs stored in a computer database to create your very own personalized, mixed-CD masterpiece. In about five minutes, a freshly burned CD, complete with your chosen title and funky artwork on both the disc and the jacket (plus liner notes!) will be ready to take home. It all happens very smoothly, and yet it's a novel and startling experience. But what's most startling about this remarkable new place to buy music is this: It's a Starbucks.

The Hear Music Coffeehouse, as it's known, opened last March as the first of several fully integrated cafe-music stores that Starbucks is launching with its wholly owned subsidiary, retailer Hear Music. This August, Starbucks will install individual music-listening stations, with CD-burning capabilities, in 10 existing Starbucks locations in Seattle. From there, the concept rolls out to Texas in the fall, including Starbucks stores in the music mecca of Austin. With the help of technology partner Hewlett-Packard, Starbucks plans to have 100 coffee shops across the country enabled with Hear Music CD-burning stations by next Christmas, and more than 1,000 locations up and running by the end of 2005. Think iTunes meets Tower Records. With lattes.

"Great companies recognize who they are and who they are not. But they must have the courage to examine transformational opportunities."

Chairman and chief global strategist Howard Schultz's ambitions for this new business operation are vast; it's not just about selling a few CDs from a coffee shop (Starbucks has been doing that, successfully, for about five years already). Schultz wants Starbucks customers to make their own CDs, yes, but he also thinks they will someday use Starbucks' enormous Wi-Fi footprint to buy and store music from the network on any device imaginable — from laptops and iPods to phones and PDAs. He hopes record labels will develop proprietary material just for the Starbucks network. And that Starbucks itself may help break new artists and develop original material. Indeed, Howard Schultz plans nothing less than to turn the entire music industry upside down. "We are the most frequented retailer in the world," he says. "With hundreds of thousands of songs digitally filed and stored, these Hear Music coffeehouses combined with our existing locations can become the largest music store in any city that we have a Starbucks in. And because of the traffic, the frequency, and the trust that our customers have in the experience and the brand, we believe strongly that we can transform the retail record industry."

There's something even more intriguing going on here, though. This push into music is the start of a daring effort to reinvent one of the world's best-known brands. It is an experiment that asks whether that brand is powerful enough, and Starbucks' relationships with the 30 million customers who pass through its 8,000 stores every week durable enough, that they can be used to completely transform the business.

"Great companies are defined by their discipline and their understanding of who they are and who they are not," Schultz says. "But also, great companies must have the courage to examine strategic opportunities that are transformational — as long as they are not inconsistent with the guiding principles and values of the core business." And so Schultz finds himself on a precipice, at the edge of just such an opportunity, where he celebrates coffee as both the origins and the core of his business, and yet has dreams of transcending those origins to become something much more.

In effect, Schultz is asking the question famously posed by Theodore Levitt, the Harvard Business School professor and father of modern marketing: What business are you really in? Levitt explained that the once-powerful railroads, for example, were blindsided first by automobiles and then by the airlines. It happened because they had defined themselves too narrowly as being in the railroad business rather than the transportation business. As railroads, they were entrenched and invulnerable; as transportation, they were wide open to attack. Theirs was a failure of imagination — the inability to reconceive themselves based on the business they were really in.

Over the years, a handful of companies have taken Levitt's words to heart, reimagining the very definitions of their businesses and their industries each time they reached a critical turning point. Disney was once a little studio that turned out cartoon shorts. Then Walt Disney opened a theme park unlike anything anyone had ever known. Now his company develops, produces, and distributes films of all kinds; has a network of theme parks; and runs a vast media empire. Virgin's Richard Branson turned a little music magazine into a music superstore, then launched an airline, and, most recently, a cell-phone company. And before her ImClone disgrace, Martha Stewart was among this select few: Her home-catering operation became a series of cookbooks, then gave birth to a multimedia company and a lifestyle-products line that sold everything from hand towels to patio furniture at Kmart.

In each case, as the company reached a plateau in one industry category, a visionary leader looked past the original product or service to redefine, in the broadest terms, the business it was in. Disney, Branson, and Stewart reimagined their cartoon, magazine, and food-service operations as entertainment enterprises. Then, when entertainment itself became too constricting, they blew apart traditional industry characterizations altogether. Now what they really sell is a lifestyle. Disney and its idealized view of wholesome, all-American family life; Virgin and its vision of youth, sexiness, adventure, and exuberance; Martha Stewart and her promise that you, too, can lead the elegant, good life. They sell you the dream, then the full suite of products, services, and experiences to achieve it.

And Schultz would like Starbucks to join them. He aims to achieve what so few are able to do — to reimagine his company as something bigger, better, and more significant than it has ever been. In fact, forget joining them. Schultz plans to surpass them all. "We have the potential to become the most recognizable and respected brand in the world," he says flatly.

That may be hubris, or it may be an attainable goal. Either way, Schultz must still answer Levitt's question: What business is Starbucks really in? Clearly, it's more than coffee shops. Like those other successful marketers, Schultz is selling his own lifestyle dream, one of affluence and comfort, a forward-looking but not-too-trendy community experience wrapped around a steaming cup of coffee in a cozy living room that exists on every block between home and work.

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