Keurig's plan to DRM-lock its single-serve coffee is a market misread: Peter Nowak

Keurig single-cup coffee maker

When you think of the term digital rights management (DRM), e-books and DVDs generally come to mind. Those little technological locks, protected by law in both the United States and Canada, are what content creators use to prevent people from making copies of their goods.

It’s unusual, then, to see DRM extending to goods that are literally consumed, which is why there’s some hubbub over Keurig doing exactly that with its coffee-making machines. As parent company Green Mountain Coffee Roasters revealed during a recent earnings call, the new Keurig 2.0 machines – available later this year – will lock out unauthorized capsules so that only its own K-cups can be used.

Generic capsules have been on the rise ever since some key patents expired in 2012, a trend Green Mountain hopes to stop in its tracks with DRM. By locking down its machines, the Vermont-based company is looking to bring what it calls “unlicensed” capsule makers into the fold by forcing them to sign licensing agreements. Those fees are, after all, where the company makes its real money since this is a business that is based on the razor-blade model, where the machines are relatively cheap, the refills less so.

It’s a risky strategy because there are a couple of ways this could go down. In a best-case scenario for Green Mountain, competitors follow suit and similarly lock down their machines. With no other options to turn to, coffee pod makers will have no choice but to pay licensing fees. The fear, then, is that the coffee market would come to resemble the inkjet printer market, where refill prices are nothing short of ridiculous.

That’s unlikely, though, mainly because of Keurig’s rather dominant position. Estimates figure Green Mountain makes up about 60% of sales of the single-serve coffee market, which means competitors are facing an uphill battle in winning customers. They won’t be able to steal from Keurig if they engage in the same consumer-unfriendly tactics. If they did do something that illogical… well, that’s the sort of move that attracts the attention of anti-trust watchdogs.

The DRM move is also risky given how much competition there is for coffee in general. Keurig isn’t just competing with other single-serve machines, it’s also fighting against regular ground coffee makers and a whole host of cafes, restaurants and fast-food joints. While all of those provide somewhat different experiences, they do essentially keep each other in check because if prices in one segment get too high, customers will certainly migrate over to the others.

Lastly, there is also Keurig’s existing install base – north of 16 million homes in the U.S. alone – to compete with. The older machines will continue to brew unlicensed cups, which means Green Mountain is going to have a heck of a time convincing customers to “upgrade” to a more restrictive product.

The company is promising that Keurig 2.0 will have “game-changing functionality,” but is remaining tight-lipped about specifics at this point (the ability to brew cold drinks such as Coca-Cola products is rumoured). Even if the new machines offer some appealing new features, it’ll only be a matter of time before competitors incorporate them as well into their own unlocked machines.

It’s hard to see a scenario in which Green Mountain comes out of this a winner. The company is overtly trying to flex its muscle, but in this hyper-competitive market, no one is really all that strong to begin with.