Beyond Burgers: McDonald's Tests CDs, Photos, Rings

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Did somebody say ringtones?

McDonald's Corp. is testing digital-media kiosks that allow customers to burn custom CDs from a catalog of 70,000 hit songs, print digital photos and download ringtones for mobile phones. The test reflects a greater movement as chains like Starbucks Coffee Co. put entertainment on the menu to create a special aura, draw in more consumers and lure them into lingering longer.

In the case of McDonald's, which gets 60% of its business from the drive-thru, some even expect to draw incremental traffic from the kiosks, such as someone who stops in simply to print a photo but ends up leaving with fries and Coke. But don't expect a widespread industry movement just yet, as the machines are expensive to install and update, and don't generate much of a profit for fast-feeders.

"They're just trying to find new things that are going to be raising the value add that they're offering to their clientele, said Tom Moseman, senior VP of Envirosell. "What's going to make it or break it is the bottom line. ... Is it paying off for them in increasing incremental sales for core products? ...Is it paying its own way in its installation and operational costs."

Based on the success of 27 kiosks, created by Digital Transaction Machines, rolled out last fall at a McDonald's in Munich, Germany, U.S. management decided to try one machine at a newly refurbished McDonald's/McCafe company-owned store near its U.S. headquarters in Oak Brook, Ill.

Since they were installed five months ago in Germany, McDonald's machines have dispensed 35,000 CDs, printed 5,000 photos and downloaded thousands of ringtones, said Jonathan First, chief operating officer of Digital Transaction Machines. The cost to the consumer is $1.06 per song plus a 64¢ fee for the disc and packaging, and sales tax. Photos cost 29¢ each to print.

But it's difficult to gauge how much the machines have affected store traffic or sales. "McDonald's wants the kids hanging out in the parking lots to hang out in McDonald's," he said.

Though McDonald's gets a small percentage on net sales from the Munich system, the U.S. unit is strictly for "foot traffic, customer loyalty and entertainment value" said Mr. First. The selection machines cost $4,000 to $6,000 and the production centers cost between $15,000 and $20,000 per unit.

Digital Transaction Machines is preparing additional applications, including electronic ticketing and video-game and motion-picture downloads. In Germany, Mr. First said McDonald's is planning to use its World Cup sponsorship to offer exclusive game tickets on the systems, he added.

Starbucks hasn't disclosed the financial model for its HearMusic media bars or its revenue, but the music sideline makes up less than 1% of Starbucks sales, according to analysts. Starbucks executives have stressed that it's not about revenue, but rather a way of changing how customers discover and acquire music.

In addition to the likes of Apple, Yahoo and Hewlett-Packard, dozens of startup companies are rushing into on-demand downloading stations, including Mediaport Entertainment, Mix & Burn, ClearSky Mobile Media and eMusicLive.

David Parkman, chief operating officer of eMusic, said that digital music is a low-margin business. "It's a volume business or it's meant to support or subsidize another business. You can justify the investment on different levels." Despite the promise, he does have concerns about the sizable financial investment it takes to install kiosks, manage connectivity and keep up with the ever-changing technologies. "The pace of technology change is so rapid and the upkeep to keep these devices at the cutting edge ... is a nontrivial task. If you buy new equipment and McDonald's doesn't support that one, the whole experience is useless."

"To me it sounds like a novelty, not to say that it doesn't have value," said Erik Thoreson, research analyst for Mintel. "McDonald's is seeing the need to reposition itself and this at least symbolically represents that."

But he's not certain it's a long-term business proposition for McDonald's. "The need for [more CD burners and photo printing] doesn't seem to be out there but it is one of those unexplored territories that a company like McDonald's should be in because they are a leader," he said. "I'm really interested to see if this takes off. ~ ~ ~

Digital dominance * Two of five households globally own a standalone digital camera
* One-third of mobile phones are equipped with a digital camera.
* Two of three Internet users globally have sent digital pictures or videos over the Web.
* Two-thirds of the estimated 154 million music downloaders live in the U.S.
* At least one third of Internet users have downloaded a music file. More than half paid for at least one download and 27% paid for music downloading in the past 30 days.
* 40% of the 7.7 billion digital prints to be made in the U.S. this year will be made at retail stores, up 31% from 2004
* Downloadable music ringtones sales will double to $4 billion by 2008.

Sources: Ipsos-Insight; Photo Marketing Association International; Strategy Analytics

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