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TheStreet Open House

Why Square Coming to Starbucks Is a Big Deal (Update 2)

Starbucks did $3.3 billion in revenue in the third quarter, with a healthy portion of those transactions being credit and debit-card sales. Starbucks does not break down the percentage of payments.

Starbucks has been at the forefront of the mobile payment revolution with its own mobile payment app, but this puts the mobile payments industry on another level. "Starbucks has scale with ~7,000 U.S. stores (~4,000 licensed), and the partnership will likely be a key reference case for awareness of mobile retailing," JPMorgan wrote in a research note discussing the deal.

According to data from Ernst & Young, mobile payments are expected to be big business, with the market reaching a massive $245 billion by 2014. This deal with Starbucks puts Square in a position to capture a significant portion of that market, as the shift in payment methods continues to move away from credit cards, debit cards and cash to smartphones, tablets and other mobile devices.

This deal might even impact Apple (AAPL), which announced its Passbook app at its Worldwide Developer Conference earlier this year, showcasing Starbucks as part of the presentation. An Apple spokesman could not be immediately reached for comment.

Morgan Stanley analyst Glenn Fodor opines that this deal has a wide scope of companies it might affect, with most of the reaction being "mixed", "negative," or "mixed to negative," including PayPal, which is currently in the Starbucks mobile app. "This could have been a great partnership for PayPal/PayPal Here," Fodor wrote in the report. However, he does mention that it would take a while for for Square to take a "PayPal-like 'ach'" strategy (ACH stands for automated clearing house.)

"Furthermore, if PayPal's experience is any indication, it takes a long time to transition consumers off the 'rewards-oriented' rails of traditional networks," Fodor noted.

In an email obtained by TechCrunch, Dorsey wrote, "By embracing Square, Starbucks has validated these ideas as powerful tools -- not just for small businesses, but for smart businesses."

With this deal, the mobile payments industry might be coming to a consensus on how it is used, Sterne Agee analyst Greg Smith wrote in a recent research report. He said "the payment itself is becoming commoditized; it is therefore the functionality you wrap around the payment or embed in the mobile wallet that will differentiate the winners from the losers."

It looks like Square and Starbucks are poised to be in the winners column.

Interested in more on Starbucks? See TheStreet Ratings' report card for this stock.

Check out our new tech blog, Tech Trends. Follow TheStreet Tech on your wireless devices.

-- Written by Chris Ciaccia in New York

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