A few years back, Starbucks founder and CEO Howard Schultz sat in on one of Steve Jobs’ keynote speeches, presaging a vital computer/caffeine partnership. It wasn’t long before those little iTunes download cards starting showing up on the Starbucks counter, and iTunes was featuring a specially designated iTunes + Starbucks feature. iTunes cards often feature music of the month and the download cards are for a full album. It’s saved a vast amount of space and made the search for music an entirely different experience. The larger the selection of iTunes cards, the more Starbucks will seem less like a coffee shop and more like a record store of the past. But that’s not the end of the story; it becomes even further intertwined when a third party comes into the mix.

Around the time of the launch of the first generation iPhone, Apple decided upon AT&T to provide wireless service. It was highly publicized that Apple was looking for a company that would allow them to get royalties off monthly cell phone payments on the iPhone. As we all know, Apple priced the iPhone at $599, with no savings by signing on for two years. Without a doubt, Verizon Wireless missed the boat here when they declined the opportunity to work with Apple, citing that they could make a phone of their own, without having to pay third party royalties. And so it evolved that Apple and AT&T teamed up to provide service for the iPhone.

Perspective consumers were dismayed when discovering that the device would be running on AT&T’s slower “EDGE” network, known for having notoriously abysmal data service. Add into the equation that 3G technology was already working and delivering close to Wi-Fi speeds. In preparation for the major launch of the original iPhone, AT&T prepared their EDGE network lines and markedly boosted speeds. Without a doubt, these preparations were all tailored for the iPhone.

Eventually, AT&T’s CEO (and rumors around the blogosphere) acknowledged the development of Apple’s next iPhone: the iPhone 3G. AT&T delivered again, by upgrading the EDGE network to 3G. Apple was now ready to release the iPhone 3G on the network.

Right before the announcement of the new iPhone 3G on June 9th, Starbucks was in hot water with T-Mobile, which initiated a lawsuit as a result of Starbucks’ sudden jilting of T-Mobile, in preference for AT&T. Starbucks was preparing to have iPhone/iPod Touch + Starbucks content and music ready for their Wi-Fi consumers. And who does Schultz choose for cafe wireless? None other than AT&T. The new AT&T wireless internet at Starbucks allows 2 hours of free internet when connected to a Starbucks Rewards registered card account. Registration is free, and has made a trip to Starbucks even more appealing.

There have already been a number of rumors about iPhone users receiving unlimited free Wi-Fi service inside every Starbucks. Now more than ever, the probability of the two products working in tandem seems a given. Apple, AT&T, and Starbucks are collaborating so closely these days that one can envision these three companies developing an even closer partnership to serve their niche consumers.

sat-u-ra-tion (sāch’ə-rā’shən) - “The flooding of a market with all of a commodity that consumers can purchase.”

It was never hard to see why people clamored over the coffee. It was good, and more importantly it was consistent. The ambiance and general feel of the stores was unique, and yet easy to be attracted by the soft music and warm pictures. Overrun by an overzealous and greedy board of directors, Starbucks (SBUX) has transformed into just another average company.

Nowadays, consumers enjoy having a coffee place that’s right around the corner and worth the price. Unfortunately, Starbucks took the demand of the consumer a step too far, by over saturating the market with stores.

One of the best examples of over saturation can be found in a strip mall in Colorado. Exactly three Starbucks locations can be found, no more than 750 ft away from one another, and two of the three stores are only 200 ft away from each other. By flooding the market with spots for coffee, Starbucks has been wasting growth potential, and opting for current market optimization. Unfortunately, the optimization is becoming wasteful and hurting the brand image.

In a number of press releases, Howard Schultz, Chairman and Founder of Starbucks, has mentioned the loss of original roots associated with becoming a chain store. The focus on coffee shop ambiance was the root to Starbucks’ success, but somewhere along the line the company lost the entrepreneurial spirit.

On May 3rd, 2007, Starbucks announced an in-line quarter of 19 cents per share. Revenue increased 20 percent, while same-store sales climbed 4 percent.

“Looking ahead, the company said it plans to open about 2,400 new stores worldwide in fiscal 2007. In the U.S., Starbucks expects to open about 1,000 company-operated locations and 700 licensed locations. Starbucks said it is targeting total revenue growth of about 20% for the full year and same-store sales growth of 3% to 4%. The company continues to forecast earnings of 87 cents to 89 cents a share for fiscal 2007.” (SOURCE)

Obviously, both investors and the company felt confidant in the quarter and its numbers. Shares in SBUX promptly climbed 2.9 percent in after-hours trading that day.

The optimism quickly faded and the bull run disappeared, and now SBUX is down about 30 percent from the 52 week high of $40.01. In the past, shares have traded down just under $29 per share, and rallied up from support. Now, shares have broken through that support level and are now trading near the low-$28s. Shares may have entered a short-term oversold territory, but the relatively high P/E of 35x earnings are still dissuading investors from buying in now. Based upon price-to-earnings for the year 2008, Starbucks will still be trading at an expensive 26x earnings, but if shares continue to pullback, a purchase may be necessary. In the short-term, shares in SBUX should continue to pullback, but look to buy in at the low $20s.

Disclosure: No conflicts.