One of the most bizarre local business stories of 2014 involves hacking and coffeemakers.
But for this hack, you don’t need an intimate knowledge of security protocols or machine language — just a pair of scissors and a strip of Scotch tape.
Backing up: a Burlington company, Keurig, invented the quick-brewing coffee machines that have found a spot on 20 million US countertops. They also invented the plastic, foil-topped pods, containing coffee and filter, which you pop into the machines to produce your morning java.
When Vermont-based Green Mountain Coffee Roasters completed its acquisition of Keurig in 2006, you could buy a share of stock for about $3. Today, that share is worth about $138, adjusted for splits. Keurig has become such an important engine of its parent company’s growth that this year, the company changed its name to Keurig Green Mountain.
After the original patents on Keurig’s pod, the K-Cup, expired in September 2012, other companies like Treehouse Foods and Rogers Family Co. started to horn in on that business, putting their own product into Keurig-compatible pods. Giant retailers like Walmart and coffee roasters like Peet’s partnered with these companies to make their own pods for the growing number of Keurig machines.
This September, Keurig struck back at the pod people, releasing a line of “2.0” brewers. These have a built-in infrared sensor that looks for an invisible ink printed on the foil lid of the cup. If you try to use an unauthorized cup without that ink, the brewer’s screen says, “Oops! This pack wasn’t designed for this brewer.” Not a fun error message at 6 a.m.
But shortly after the brewers went on sale, a site called KeurigHack.com appeared, featuring a video that shows how to tape a piece of foil from an authorized K-Cup into the brewer so you can brew any pod you want in a 2.0 machine. (The video has more than 650,000 views.)
Rogers Family Co., a California firm, began distributing a free “Freedom Clip” that can do the same thing. Treehouse Foods, an Illinois company that is suing Keurig over what it alleges are “anticompetitive acts to unlawfully maintain a monopoly over the cups used in single-serve brewers,” in October began distributing its own pods that can circumvent the infrared technology. (Keurig Green Mountain says the lawsuit is without merit.)
Mark Wood, chief product officer for hot systems at Keurig Green Mountain, says the company offers 400 different varieties of authorized pods. As for the hacks and workarounds, he says, “We don’t think it’s of any real concern. The fact that someone wants to take a straightforward and convenient process and make it more complex and challenging — that’s certainly up to the consumer.”
So what happens next? Two analysts who follow Keurig Green Mountain’s stock both told me they expect the 2.0 backlash to blow over. Brian Holland of Consumer Edge Research says that in less than a year, because of deals with companies like Target, Kraft, and Peet’s, “more than 90 percent of all K-Cups in the market will be compatible with 2.0.”
What about people who liked loading their own coffee into a reusable pod, which is no longer compatible with the 2.0 models? Holland says those customers “were never profitable for Keurig,” because the company loses money selling brewers in order to make a profit selling disposable pods. (But yes, there are instructions on YouTube and Amazon about hacking the reusable pod so it works with the new brewers.)
Keurig is clearly taking a page from the Apple playbook here. Apple likes to make devices, and also take a vig from the sale of any media or apps that run on the device. (It’s possible to install stuff that isn’t sold through Apple’s iTunes Store, but, like hacking a coffeemaker, it’s a pain.) But before September, Keurig had more of an open ecosystem, with more options for consumers — like that refillable pod. And the shift from open to closed has clearly aggravated some loyal customers.
Does Keurig gain any new authority to raise pod prices from its 2.0 strategy? Probably, but that’s more because of its recent deals with the biggest and most broadly-distributed coffee brands — deals that Keurig may have sealed in part because those brands feared being shut out of Keurig’s new machines by the infrared sensor. The biggest downside from the 2.0 gambit, Holland says, will be negative reviews online, which may dissuade some consumers from buying a 2.0 brewer.
On many sites where the new brewers are sold, they have a two-out-of-five-star rating (Keurig’s older brewers tend to score four stars or higher). I asked Jill Avery, a former Gillette and Sam Adams executive who now teaches at Harvard Business School, to read some of the reviews. “Comments such as ‘just for their pocketbook,’ ‘greedy,’ ‘money-hungry,’ and ‘price gouging’ indicate the extent of consumers’ dislike for this posture, ” Avery says. In general, she says, “Keurig comes off as a bully.”
I don’t expect Keurig to back down from the 2.0 strategy, and the company says it will stop making the 1.0 brewers sometime next year. Also in 2015, the company will introduce its first machine for carbonated beverages, Keurig Cold. I’m already anticipating the 90-degree August day when I put capsule into it, and get the message “Oops! We can’t make your low-budget store brand root beer.”