Keurig didn’t learn a damned thing about DRM

You just don’t know what’s best for you

There was a lot of slapdash analysis when Keurig released their disappointing second quarter earning reports this week. Many people opined that Keurig’s earnings were bad because DRM is bad! Yay for our side, perhaps we are truly winning the war on DRM and bad coffee. But when you look closely, that’s not what Keurig’s management have taken away from this at all. In fact, they’re doubling down on DRM.

Many people who think that Keurig machines make shitty coffee or who are still mad about the Green Mountain Coffee name change or the pod waste or who hate the DRM that is built into the 2.0 coffeemaker models felt very “I told you so” after the lousy second quarter earnings were released. News stories pulled decontextualized “we were wrong” statements from the transcript of a long and boring shareholders’ call and crowed about how Keurig’s reaction showed that we could beat DRM and that Keurig felt bad about their choices. But is that what Keurig management said?

The Keurig coffee makers are the one-hitters of the coffee world. Put in a pod, and make one okay cup of coffee. The pods cost 50-75 cents. The first versions of the coffee makers took either these pods or a thing that Keurig produced called My K-cup. The My K-cup, a $13–20 plastic item resembling a menstrual cup, allowed users to use their own coffee in a Keurig machine. Aftermarket filters flooded the market at much lower prices once the K-cup patent expired.

Example pod by frankieleon on Flickr.

The 2.0 model of the coffee machine which was released last year included the addition of a built-in sensor that can tell if you are using an “authorized” pod or not. You have to use a pod from an approved vendor. The machine reads a code on the coffee pod and either makes coffee or refuses to function. People viewed this as Keurig’s strategy to use the coffee makers as a loss leader to lock you in to buying more overpriced coffee pods who they would have licensing agreements with. And no more DIY options. The old My K-cups or aftermarket reusable filters wouldn’t work in the new machines. The DRM system was quickly determined to be hackable, but people still bristled at the imposition and the DRM-like competition-lockdown situation.

So when the earnings news came out, along with the news that Keurig would be bringing back the My K-cup, people cheered. Down with DRM and crappy coffee! Up with consumer choice and limited DIY opportunities!

Except it’s not that simple. Keurig blames their customers, and not themselves, for their current financial woes. Instead of removing the poorly-thought out DRM from their 2.0 coffee makers, they’re going to double-down on consumer (re)education and teach us all to love Big Coffee.

Here are some excerpts from the earnings call about what Keurig thinks Keurig did wrong.

Brian Kelly — CEO: With any new product introduction they are always challenges that are front end loaded and our transition to 2.0 was particularly complex…. Some of this was due to consumer confusion around pod compatibility which we’ve mentioned in the past…. beginning in June of this year 2.0 brewer packaging will more prominently communicate the fact that the Keurig 2.0 brew is more than 500 varieties across more than 70 brands, including the top 10 brands. We expect this to help clear up the misperception the system only brews Green Mountain or Keurig owned brands.

Translation: our customers misunderstood the DRM and thought that they had to buy OUR coffee. Actually they can buy any coffee from an approved vendor. We need to make this clearer to our customers. They will thank us for it.

Fran Rathke — CFO: Pod volumes were also affected by lower installed base growth due to weaker brewer sales and somewhat higher than expected consumer price elasticity at retail.

Translation: We couldn’t sell the 2.0 coffee maker at a low enough price point (the 2.0 version is more expensive than the 1.0 version, must be all that technology) so people bought less coffee to put into them. (they didn’t mention the Canadian product recall of their MINI brewer which was supposed to be the lowest price point model)

Brian Kelly — CEO: [T]he Green Mountain company and the Keurig company had two distinct websites, two completely different programs or pods, two completely different processes for the consumer to move through it…. [When] we had to move to one system and that changed, it changed the consumer pattern of how to order because one of them had changed the way they went through it and that’s hard for consumers, when you change the digital path that they have to follow and the click stream that they have to follow in order to order pods, you’re going to lose some of that pod business and that’s what happened in digital it’s really that simple.
And so we’ve been in the process of … building up and improving those satisfaction ratings these consumers get more and more satisfied.

Translation: we took people’s website away and that confused them. They had to learn how to click their way through a new website and didn’t want to. We’re going to get those people back … somehow.

Brian Kelly — CEO: My K-cup was and will be, what it was, was a terrific addition for the consumer wasn’t used a lot….
And so it was a nice convenient for a lot of our very, very loyal and heavy user. They didn’t use it frequently, but they used it and importantly it gave them the ability to brew any brand they wanted.
And so when we took it away and we took it away because that particular My K-cup wasn’t going to work with a new system as the new system had to identify the pod versus a carafe, so we took the My K-cup away and quite honestly we’re wrong.
We missed, we didn’t — we underestimated, it’s the easiest way to say, we underestimated the passion that consumer had for this. And when we did it, and we realized it, we’re bringing it back because it was we missed it. We shouldn’t have taken it away, we did. We are bringing it back.

Translation: we have some hardcore users who were inconsolable when the My K-cup option went away. So we’re bringing it back to work in our 2.0 coffee makers, but it will only work with our 2.0 machine. And there won’t be any lower-cost reusable filters available until that patent expires. This solves the problem for us but indicates we’ve totally misunderstood what people were saying.

Be careful what you wish for. Keurig users get their My K-cup back but it will have DRM just like everything else that functions in a 2.0 Keurig coffee maker, a coffee maker that is not changing at all. Keurig as a company gets to look contrite and appear to be making compromises, but the worst part of their business strategy is intact and will be pushed harder than ever.