The Rich, Frothy Dream Is Over: XM & Starbucks Break Up

It seemed like a marriage made in corporate heaven. The deal that had Starbucks and satellite-radio company XM Radio working together to blend overpriced premium coffee with stylish adult alternative tunes has fallen apart, with XM giving $22 million of its stock to the coffee conglomerate in order to flee with a remnant of its dignity. So, what happened?

If you can believe it (and I have a hard time believing it myself), XM decided they didn’t want to make millions of dollars in payments to Starbucks for the next two years.

Things seemed to be going so well. Starbucks has Hear Music, its own commercial-free music station on XM, where it pumps out the same artfully jazzy tunes that fill the air in its java hubs. The companies also have spent the past few years cross-promoting CDs.

And even though Starbucks itself has been a shareowner disaster lately — it shed 42% of its value last year–it’s a growing force in music. Paul McCartney’s latest studio CD, which Starbucks released, was a runaway success.

But even though the relationship seemed symbiotic, XM was making payments to Starbucks as a partner. Now that XM has grown at a quicker pace than Starbucks — and since rival Sirius has grown even more quickly than both companies in that time — paying $22 million now is apparently a better business decision than to keep sending money to Starbucks until the original termination date in 2009.

It’s hard to conceive of any segment of the music industry that’s considered to be growing, but XM has found a way to pull it off, albeit not as successfully as Sirius. Regardless, it’s somewhat difficult to see what XM was getting for their money, since Starbucks seemed to pull little effort into plugging the radio station, instead focusing on the connection with iTunes and their own label, and the radio station did even less to return the favor, with the Paul McCartney and Joni Mitchell discs receiving only a few spins last year. At some point, the power of Feist prevailed and made the XM Cafe station powerful enough even without the Starbucks endorsement.

XM Spits Out Coffee [Motley Fool]