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Starbucks Deal Brewed with AT&T Has Hints of Apple

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I'm not an oenophile, but I do like wine. I've never mastered the vocabulary of oaky, brawny, tannic, and so forth. But I do know a whiff of fruit when I smell it. The recent announcement that Starbucks would switch its in-store Wi-Fi provider from long-time partner T-Mobile to AT&T had a strong smell of Apple about it. (You can read my coverage of this event at my Wi-Fi Networking News site, or in the article I filed for The Seattle Times.)

In fact, I think the putative 3G iPhone plays a part here as well, and that we'll see the 3G iPhone rolled out as part of a larger play that involves downloading movies in Starbucks over AT&T's new network. That puts the 3G iPhone launch between March and June of 2008. Let me back up a minute first.


AT&T Brings Millions of Subscribers to Starbucks -- The deal brings Wi-Fi at 7,000 U.S. company-owned Starbucks stores at no additional cost to 7 million AT&T DSL and U-Verse fiber subscribers - all DSL customers with 1.5 Mbps downstream or faster connections - and 5 million business customers who use a remote-access service from AT&T. It also offers free Wi-Fi for two hours a day for a period of 30 days starting each time you make a purchase of any amount using a Starbucks Card, the company's stored-value swipe card.

Pay-as-you-go service costs $3.95 for two hours, down from $6.00 per hour or $10.00 per day with T-Mobile.

Monthly unlimited service is also available, although that requires a little explanation. AT&T splits its hotspot network into Basic and Premier tiers. The Basic network currently includes McDonald's (8,500 stores), Barnes & Noble, and several airports; Starbucks will be added to that tier. Qualifying DSL and all fiber customers get Basic service for free.

The Premier tier adds access to roughly 1,000 locations in the United States, such as hotels, airports run by other providers, and convention centers, as well as to 53,000 international roaming locations. Premier costs $19.95 per month for everyone except the qualifying DSL and all fiber customers, who can upgrade to Premier by paying an extra $9.95 per month.

Subscribers to aggregator hotspot services like Boingo Wireless that already have a roaming relationship with AT&T will get Starbucks access at no additional cost, too. Boingo charges $21.95 for unlimited U.S. access, which includes pretty much all domestic airports and tens of thousands of other U.S. locations, making it the best bargain. (Boingo hasn't updated their software client for Leopard, but a company spokesperson told me some months ago that nearly all Boingo partner locations allow a Web page login with Boingo credentials.)

The rollout starts in the second quarter of 2008 in major cities, and will continue through the year. (This deal covers only U.S. company-owned Starbucks, not the kiosks found in airports or licensed purveyors in places like Barnes & Noble, and also doesn't affect T-Mobile's arrangements with Starbucks outside the United States.)

Starbucks has never publicly expressed dissatisfaction with T-Mobile, which purchased a bankrupt firm's assets and took over the Starbucks Wi-Fi buildout in early 2002. It's quite clear that the company made sure existing T-Mobile HotSpot subscribers wouldn't be disconnected when AT&T takes over: anyone with a T-Mobile data subscription that includes Wi-Fi or who uses their Wi-Fi/cell plan to place calls using special handsets has unlimited, long-term access to all Starbucks locations.

Rather, T-Mobile couldn't offer Starbucks anything particularly special, and couldn't further its relationship with Apple. When Apple announced that Starbucks would be a partner in a special branded service available on the iPhone and iPod touch and within iTunes to extend the iTunes Wi-Fi Music Store, the press release didn't mention T-Mobile or AT&T, Apple's multi-year exclusive iPhone reseller in the United States.


Overwhelming 3G -- AT&T operates a 3G (third generation) cellular network, and last week announced that the telecom firm would be expanding and upgrading that network this year. (See "More Mileposts Along Road to 3G iPhone," 2008-02-06.). The company also owns a huge amount of copper and fiber-optic cable in its territory stretching - with a southwestern gap - from California to Florida. (Qwest owns the Northwest, mountain time zone, and Midwest; Verizon, the northeast down to Virginia.)

The company is using Wi-Fi as a bridge between wired service, which increasingly includes fiber-optic connections to neighborhoods, and its wireless service. You can push a lot of data over copper and glass, and have essentially as much of that as you want to build. Wireless spectrum is finite, and there's never as much as you want.

The current set of auctions for retiring analog television frequency shows how much interest there is: $20 billion and counting for an excellent swath, which includes nearly $5 billion for a single set of national licenses suitable for broadband wireless. AT&T just finalized a separate purchase of about half the amount of national spectrum currently up for bid from a firm that bought it in a previous auction.

The long debate over whether 3G or Wi-Fi is "better" ignores the fact that Wi-Fi has a far higher carrying capacity. While most hotspots backhaul no more than 3 to 6 Mbps downstream, and most are closer to 768 Kbps to 1.5 Mbps downstream, an 802.11g Wi-Fi network can push 20 Mbps across a single base station, and the new 802.11n standard tops out at rates over 90 Mbps. (The raw data rates for G and N are 54 Mbps and 300 Mbps, respectively; the rates I'm citing are for real-world throughput in close proximity to a base station.)

AT&T's current flavor of 3G, HSPA, can carry only 3.6 Mbps downstream and about half that upstream; each phone or device in range is likely to see the upper 100s of Kbps downstream and half that upstream, with higher peak rates for sustained transfers. And the more people using 3G connections, the less likely peak speeds will be achieved.

Reports state that when the current iPhone models were released, usage of EDGE - a moderate speed "2.5G" network standard that straddles second- and third-generation standards - tripled in cities like San Francisco. You can imagine that the release of a 3G iPhone might bring AT&T's still-expanding 3G network to its knees.

Which is where Starbucks comes in. AT&T and Apple clearly cut a deal where Starbucks benefits from becoming a digital media hub: It's going to be the place where people congregate to use Wi-Fi as part of the monthly service fee that they already pay AT&T - this wasn't announced yesterday, but it's absolutely coming - and where they download media from Apple.


It's Not about EDGE, It's about the Edge -- Here's where it all comes together. Starbucks already has media servers in its stores. These servers host the songs that Starbucks plays. But they aren't simply jukeboxes. They also have magic that allows a customer in a Starbucks cafe to purchase a song they just heard or that was recently played and have that song downloaded locally - not downloaded over the Internet from Apple's iTunes Store. That means that Apple is wrapping DRM (digital rights management) around songs that require that protection in each store. Neither Starbucks nor Apple had previously discussed this, but I interviewed Starbucks's chief technical officer Chris Bruzzo yesterday for The Seattle Times.

Even though there was no mention of Apple in this deal, Bruzzo and I spoke about the iTunes Wi-Fi Music Store arrangement in Starbucks. I asked him if there were any plans to stick media servers in the stores, and he said, "Right now in our stores that have the iTunes Wi-Fi Music Store, you go and buy the song that's playing directly overhead, and see how fast it transfers."

He wasn't being coy; the company isn't talking explicitly about this. But he said, compare the transfer speed between songs that were recently played and those available through Apple's broader iTunes catalog, and you can see the difference.

He noted of the iTunes Wi-Fi Music Store, "That's a great example of a location-based service that's highly contextual. And the ability to use the superior speeds of 802.11g to deliver a file that's relevant to a particular environment." This isn't very subtle. They have servers in the stores.

If you were to put, say, a server with a couple of terabytes of storage, which is now maybe a $2,000 to $3,000 expense, and load that with the 100,000 most popular songs and the 500 most frequently rented films and the few hundred most recent and popular TV show episodes, suddenly people can download those files at the local network's speed, not at the speed of the Internet connection.

If I'm downloading a 1.3 GB movie file on my home network at 3 Mbps downstream, it's going to take about an hour. Not bad. If I instead purchase and download it over an otherwise non-busy 802.11g network, it's suddenly more like nine minutes. If that network were upgraded by AT&T, say, to use 802.11n, and I'm downloading it to my fancy MacBook, MacBook Air, or MacBook Pro with 802.11n (Core 2 Duo versions), we're now talking about...wait for it...perhaps two minutes.

Did I mention that a 3G iPhone is likely to include a new low-power 802.11n chip as well? No? That's almost certainly part of the delay in producing it, as those chips are just hitting the market now.

The edge network, the network that feeds data locally at local network speeds, becomes extremely important in this scenario.


Your New Living Room -- Starbucks has always cultivated an artificial living room: a place probably more comfortable and convivial than most of our actual living rooms (if we had them); for Generation Xers, it's also an extension of the ranch house they might have grown up in but can't afford to rent now.

It's not at all a leap that Starbucks, already a big music producer and seller, and one interested in revitalizing its business after a few years of drifting from its core coffee mission, would embrace the idea of being the place people who don't even like their coffee come to fill up on media, use the network, and hang out.

All Starbucks stores in the United States are closing later this month for three hours to retrain the staff on making coffee better. The baking ovens for breakfast "sandwiches" have started to be ripped out. And this deal is now in place. It's no coincidence.

Starbucks is poised to be the launch partner for the 3G iPhone, and they're getting their living rooms cleaned up for the coming hordes.

 

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