How Apple and iTunes Spat in Your Green Mountain Coffee

PORTLAND, Ore. (TheStreet) -- A company built around hardware with functional obsolescence decides to enclose its ecosystem by using digital rights management to limit the use of its fairly interchangeable software.

Why are we seeing this flawed plotline again in 2014 when we learned how the story ends in 2009?

Mostly because Green Mountain Coffee Roasters (GMCR) thinks that turning its Keurig business into iCoffee is just about the only way it can keep third-party suppliers from cutting into its take. According to a report earlier this week from TechDirt, Keurig has been striking proprietary agreements with its suppliers that will make their K-Cup coffee pods exclusive to new Keurig machines that the company will introduce in the fall. A lawsuit filed by Treehouse Foods against Keurig found that the company is working with the coffee-equivalent of DRM to not only make third-party and refillable pods unusable in its new machines, but to lock its new K-Cups out of older, more open-source Keurig models.

Where would Green Mountain get a nutty little idea like this? About 10 years in the past, when Apple's (AAPL) iTunes was still selling songs laden with DRM and the restrictions that accompanied it. Back in the bad old days, you could only play your purchased song on five approved computers and could only be played on either iTunes-enabled computers or iPods. It gave Apple the appearance of a locked ecosystem, but all it really did was spur the development of DRM-stripping software and the rise of digital music competitors, including Amazon (AMZN).

Steve Jobs, for his part, hated it. The DRM tracks clamped down on potential music revenue and only further weakened iTunes in the eyes of music lovers who were already less than enamored of its m4p file format. With the iPhone debuting in 2007, Jobs went to work knocking down DRM restrictions and getting the labels to play ball. It still took until 2009 to get everyone to comply and to get rid of DRM once and for all.

Green Mountain, however, seems perfectly content to let that whole cycle play out again the coffee world. Green Mountain CEO Brian Kelley not only readily admitted adding DRM to licensed K-Cups and locking out third-party competitors, but told investors it would result in "game-changing functionality."

Nothing about Green Mountain's game has changed but the revenue streams. Brewers and accessories only accounted for $375 million of Green Mountain's $1.3 billion in net sales in 2013. Though brewer sales have increased, the prices of those brewers have dropped as their presence on store shelves increases. Meanwhile, its sales of K-Cup packs accounted for $931 million in Green Mountain sales last year, an uptick of 8% from the year before thanks largely to volume increases.

Those packs represent Green Mountain's only growth, and even that's down from 21% growth a year before. Revenue from Keurig coffeemakers decreased 2.2% from 2012, while Green Mountain's $80 million standard coffee business fell a whopping 18% from the year before. Unlicensed K-Cup makers undercut Green Mountain's packs on cost by 5% to 25% and made up 12% of all K-Cups sold in 2013. Green Mountain is laboring under the belief that, without cheaper options to flock to, Keurig owners will simply buckle and keep K-Cup revenue in house.

If only that were true. K-Cups have been a sore spot for Green Mountain before, as the New York Times' Dealbook called its accounting practices and K-Cup sales figures into question. The Securities and Exchange Commission is still looking into how the company handles its books and our own Herb Greenberg, after hearing the news that Coca-Cola bought a 10% stake in Green Mountain for $1.25 billion, noted that its accounts receivable were five times the company's sales while its cash flow decreased 42%.

If slapping DRM on its core product made Green Mountain forget its woes and feel like an indestructible part of the iUniverse for a moment, it may want to recall that the top-selling device operating system isn't iOS, but open-source Google Android. While it's off playing Apple, it just turned competitors like Tassimo, Nespresso, Starbucks' (SBUX) Verismo and every other coffeemaker on the market into Android and Linux products.

Given the Keurig's penchant for failure and the product's limited one-year warranty, the jump to a version that not only nullifies the owner's current supply of K-Cups, but knocks out the cheaper brands, looks like an iffy prospect. Were it just a bit smarter, Green Mountain would have modeled its new Keurig less on early 2000s Apple and more on modern-day Starbucks. We mentioned that company's Verismo single-serve coffee machine earlier, but didn't mention that the megabrewer has managed to keep all its options open. It renewed a K-Cup contract with Green Mountain about a year ago, still sells its Via single-serve packets and has introduced Verismo to carve out its own portion of the single-serve coffeemaker market.

Why? Because all coffee money looks the same. By going with DRM to lock out 12% of its K-Cup market, Green Mountain is gambling a roughly equivalent share of its overall Keurig market as well. Instead of emphasizing the enhanced quality of its current products, Green Mountain is content to sacrifice consumers and market share just to keep the cheaper guys and refillable pods out.

The problem with Green Mountain's printer and razor model for its Keurig is that there are always cheaper printer ink and razor cartridge options available. In an effort to claw back a few pennies, Green Mountain is pushing away the $100+ entry fee most Keurig buyers pay just to have a cup of coffee in its single-serve universe. By turning those customers away, Green Mountain is making Keurig look as disposable and unrecyclable as the K-Cups the company covets.

-- Written by Jason Notte in Portland, Ore.

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Jason Notte is a reporter for TheStreet. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, the Boston Phoenix, the Metro newspaper and the Colorado Springs Independent. He previously served as the political and global affairs editor for Metro U.S., layout editor for Boston Now, assistant news editor for the Herald News of West Paterson, N.J., editor of Go Out! Magazine in Hoboken, N.J., and copy editor and lifestyle editor at the Jersey Journal in Jersey City, N.J.

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