Keurig Fights the Pod Snatchers

Photographer: Scott Eells/Bloomberg

Today in kitchen gadget news: Keurig's new line of coffeemakers apparently have digital-rights-management technology in their cartridges to keep you from using unlicensed single-serve cups. Cue the arguments about the superiority of French press, or Chemex, or your favorite coffeemaker; cue the outraged complaints about companies who want to keep you from doing what you want with your property. I'm more interested in the business question: Will it work?

You can see why Green Mountain Coffee Roasters Inc., Keurig's parent company, would want to keep you from using unlicensed pods. And no, not just because it's evil. The best business model with something like the Keurig is the one used for printers and razors: Sell the machine cheaply and the consumables (blades, ink, coffee pods) expensively. According to the company's latest annual report, "portion packs," not brewers, constitute the bulk of net sales:


Of course, if someone else comes in and sells the consumables for less, that business model breaks pretty quickly. That's why printer manufacturers have been waging a long war against knockoff toner cartridges. Most people think that this is a case of companies trying to "gouge" you on the ink, but from the firms' point of view, if they can't make it on the consumables, they have to charge more for the printer, which consumers hate.

However, the reason that printer manufacturers have been waging such a long war against knockoffs is that it's hard to win. "Educate" the consumer all you want about the benefits of genuine Hewlett-Packard Co. ink; a lot of them still want to save a few bucks.

So how will consumers react to new Keurigs that won't let them use cheaper cartridges? Will they cave to Keurig's imperious demands? Or defect to more open competitors?

My money's on Keurig. I heard a lot about how Kindle was going to fail because of all the DRM, and the iTunes Store was going to fail because of DRM, and people seem to use those things just the same. (The counterevidence is the new XBox; hard-core gamers freaked out at the suggestion that it would have strong DRM, which seems to have given Sony Corp. an early edge in the latest console wars. But hardcore gamers are a much more technical audience than consumers of printer cartridges or K-Cups.) Will Keurig lose some customers who go back to an older model or a regular brewer? Sure. But if the money's in the consumables, who cares?

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    (Megan McArdle writes about economics, business and public policy for Bloomberg View. Follow her on Twitter at @asymmetricinfo.)

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