Starbucks to Offer iTunes Access

Starbucks Corp.’s agreement to offer a special Apple Inc. music downloading service helps the Seattle coffee giant tap into the fastest-growing part of the music business.

The new service, which Starbucks announced at an Apple media event in San Francisco on Wednesday, will let customers buy music using iPods in several hundred Starbucks cafes before the end of the year.

The service will allow customers with iPods that have wireless Internet access, such as the new iPod Touch or iPhone, to browse, search and preview for free, as well as buy, millions of songs on Apple’s iTunes Wi-Fi Music Store. Customers with PCs or Macs will be able to use the service too. Users won’t have to pay a wireless connection fee to shop in the iTunes store like they currently do when they access iTunes from a Starbucks.

(Read more¹ on Apple’s new iPods.)

One aspect of the service will answer a question that customers often ask Starbucks’s baristas: the name of the song playing inside the store. Now, when a customer walks into a Starbucks that has this new iTunes service, the customer’s music device or computer will tell them the name of the song that’s currently playing and allow them to buy the song in what Starbucks describes as a “seamless” transaction.

“I’ve said for years that an unexploited asset was this wireless network,” Starbucks Chairman Howard Schultz said in an interview. “The big payoff is the sense of discovery that will exist.”

The move is Starbucks’s latest effort to stretch its brand beyond coffee by integrating music, film, books and other forms of entertainment into its cafes. Starbucks has been successful in selling exclusive CDs and reviving older artists by placing their new albums next to its cash registers. Last year Starbucks put its Hear Music catalog on iTunes under a Starbucks-branded area.

Starbucks has for years been trying to branch its CD business into music downloading inside its cafes. In 2004, Starbucks said it would install several dozen so-called media bars in cafes under its Hear Music brand that would allow customers to burn a selection of 200,000 songs onto compact discs, but later backed away from that strategy.

“We didn’t get it right the first time,” Mr. Schultz says. He says the chain spent two years negotiating this deal with Apple. The companies declined to say how they’ll share revenue from songs purchased inside Starbucks but Mr. Schultz said of the arrangement: “It’s beneficial to both of us.”

Starbucks plans to launch the service Oct. 2 at 600 cafes in New York and Seattle, then add it to 350 stores in San Francisco in November, 500 stores in Los Angeles in February, 300 stores in Chicago in March and in more U.S. cities later next year. The price of the songs will be the same as in the traditional iTunes store, which is currently 99 cents per song. The service will run on the T-Mobile HotSpot Wi-Fi network. Customers will continue to have to pay to access sites outside iTunes while inside Starbucks.

September 5, 2007 11:47 a.m. EDT 
 
  
Steel Says Uncertainty Has Spread
Beyond Subprime-Mortgage Sector
By DAMIAN PALETTA
September 5, 2007 11:47 a.m.

WASHINGTON — Uncertainty in how credit markets appraise risk has spread from the isolated subprime mortgage sector into much broader segments of the economy, such as securitized products and buy-out transactions, Treasury Department Under Secretary for Domestic Finance Robert K. Steel said Wednesday.

“Valuation became extremely difficult as a no-bid environment seized certain segments of the market,” Mr. Steel said in testimony to the House Financial Services Committee, according to prepared marks. “This reappraisal has spread across the credit market spectrum, first affecting residential-mortgage backed securities and then spreading to other asset classes and, particularly, securitized products.”

Mr. Steel called the risk reappraisal “normal” and said it “typically follows periods of widely available credit when markets have undervalued risk.”

This summer, credit markets froze in certain sectors as concerns grew about credit performance, exacerbated by growing problems in the performance of both subprime- and jumbo-mortgage products. Several large lenders scrambled to find liquidity. Federal Reserve, White House and Treasury Department officials have worked to calm the jittery markets with limited impact.

“I do want to caution policy-makers that this process is far from over,” Mr. Steel said. “It will take more time to play out and certain segments of the capital markets are stressed.”

Mr. Steel’s appearance at Wednesday’s hearing, alongside federal bank and securities officials, marked the first Congressional hearing on the matter since Congress returned from its August recess. He said the “ultimate impact of these events on the economy has yet to play out.”

Erik Sirri, director of market regulation at the Securities and Exchange Commission, said questions about credit and risk appraisal have had a broad impact on a wide range of participants.

“As liquidity for structured products diminished, market participants needing to raise funds to meet margin calls and investor redemptions sold less complex financial instruments such as equities and municipal securities, placing downward pressure on prices in those markets,” Mr. Sirri said. “Overall, these dynamics have significantly impacted a wide range of market participants, from individual investors to systemically important financial institutions.”

Mr. Steel, Federal Deposit Insurance Corp. Chairman Sheila Bair and Comptroller of the Currency John Dugan all said weakened underwriting standards fueled problems in mortgage markets as liquidity prompted lenders to develop new products.

“To satisfy…demand and their excess capacity, some mortgage originators relaxed their underwriting standards, lending to individuals with a lower standard of documentation and selling mortgage products, which for some borrowers would become unaffordable,” Mr. Steel said.

Mr. Dugan, whose agency supervises national banks, said the most severe credit market issues have occurred outside of the commercial banking sector.

“The national banking system remains safe and sound,” he said.

Mr. Dugan also said that the current strain on the banking system could end up having a positive impact as the industry reprices and reevaluates risk.

“While recent market conditions have certainly been painful, and may continue to be so for some time, we believe they are likely to cause some positive changes in the longer term as markets reevaluate and re-price risk,” he said.

Ms. Bair said the uneven mortgage industry standards created a dangerous backdrop that is now having a widespread impact.

The mortgage industry is overseen by a patchwork of state and federal regulators, which some Democrats in Congress are trying to overhaul this year.

“Failure to uphold uniform high standards in these areas across our increasingly diverse mortgage lending industry has resulted in serious adverse consequences for consumers, lenders, and, potentially, the U.S. economy,” Ms. Bair said. She said credit concerns have now extended to leveraged commercial lending.

Mr. Steel said Treasury officials shared the Fed’s view that “recent market developments pose downside risks to economic growth.” Still, he said the “underlying strength of the economy” should fuel further growth.

He said the President’s Working Group on Financial Markets planned to study the broad market issues related to recent market events, including the roles of securitization and the credit rating agencies.

Mr. Steel said the U.S. Department of Housing and Urban Development planned to propose new settlement procedures this fall, a process that the agency has long struggled to finalize because of harsh turf battles between different industries involved in the mortgage closing process.

Mr. Sirri said issues in the subprime and credit markets have prompted the SEC to begin a review of the credit rating agencies services, potential conflicts of interests, disclosures, and rating performance, among other things.