Here's Why Green Mountain Has to Ban Unlicensed K-Cups

The Keurig maker hit the headlines over plans to lock out unlicensed K-cups. But here's why Green Mountain has to try this strategy.

Mar 10, 2014 at 5:30PM

K Cups

Source: Michael Dorausch

Green Mountain Coffee Roasters (NASDAQ:GMCR) made headlines last week due to the fact that its future Keurig brewers won't work with unlicensed K-cups -- the store and generic brands that hit the market when the K-cup patent expired in 2012. Green Mountain is accused of employing digital-rights management, or DRM, an unpopular anti-piracy measure usually found in digital media products. And a lawsuit from Treehouse Foods (NYSE:THS) alleges the new Keurigs essentially force competitors to sign licensing agreements or leave the market.

But the aspect that's often overlooked is that Green Mountain itself is forced to at least try this route to keep its business alive. Why does Green Mountain need to maintain a firm grip on the K-cup market? 

The rise of unlicensed K-cups
Green Mountain operates under what's known as the razor-and-blades model. The company sells its brewing systems at minimal profits in order to reap the sales of K-cups. In the first-quarter report, K-cups -- or the packs segment -- accounted for more than 67% of total revenue.

Green Mountain has signed exclusive partnerships with a long list of big-name brands, including Starbucks and Dunkin' Donuts. The early licensees had no choice but to sign up because Green Mountain had the K-cup patent. But latecomers continue to sign agreements to take advantage of Green Mountain's well-positioned distribution services. 

But now Green Mountain plans to release new Keurig machines this year that won't work with any unlicensed pods.  That has ticked off competitors that justifiably feel bullied into signing up for agreements. In its lawsuit, Treehouse Foods accused Green Mountain of "...abus[ing] its dominance in the brewer market by coercing business partners at every level of the K-cup distribution system to enter into anticompetitive agreements intended to unlawfully maintain Green Mountain's monopoly."

And Treehouse Foods has a point. But there's two important factors to remember. Keurigs aren't the only single-pod brewing system on the market: Starbucks has the Verismo. Nestle has the Nespresso. And Brunn has the MyCafe, which stands out because it's compatible with any type of K-cups.  The second fact is that Green Mountain has to try and squash the unlicensed competition as much as possible. 

Green Mountain feels the pinch
In the first-quarter conference call last month, Green Mountain execs said that unlicensed packs accounted for about 14% of the K-cup pods used, and it expects that number to grow during the first half of 2014. That number would presumably grow even higher if Green Mountain wasn't releasing the Keurig 2.0 system within the next year.

Green Mountain needs K-cup sales to stay in business. If the company lost a significant share of the market, Green Mountain couldn't afford to create any more brewers. So the company has to try and earn more licensing agreements while staving off the competition -- at least until the Keurig Cold launches sometime next year. The Keurig Cold might bring along a new batch of patent protections, and has, at the very least, already attracted a superstar partner in Coca-Cola.

Is the Keurig lockout DRM?
DRM typically applies to electronic media, where copyright owners use methods such as encryption or watermarks to ensure that the material isn't copied and distributed illegally.  So there's a spirit of DRM in the planned Keurig 2.0 lockout. 

But the reasoning remains closer to that razor-and-blades model. The name refers to how personal-grooming companies sell the razor at cost and the replacement blades at a stiff markup. But the model also includes the fact that the brand's razors will usually only fit with the brand's own replacement blades. 

Foolish final thoughts
Some customers won't buy any more Keurig-related products in the future, either from protest of the lockout or just because they prefer the off-brand K-cups. But plenty of customers will carry on with Keurig. The forcing of licensing agreements is a bit shady, but Green Mountain has to try something to keep its K-cup market share from eroding to a fatal point. 

Want to brew up a bolder stock?
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers