Patent Expiration Doesn’t Prevent Green Mountain Coffee From Maintaining Its Buzz

(Cross posted on Project DisCo)

Keurig single-cup brewing systems, conspicuous contraptions found in offices and homes across America, are a convenient product for anyone who wants to make coffee a cup at a time, instead of a full pot.  These machines require special individual filter cartridges holding coffee grounds or tea leaves.  The innovative cartridges, known as K-cups, were patented, and the patents were owned by Keurig’s corporate parent, Green Mountain Coffee Roasters, Inc.  Green Mountain’s twenty years of patent protection for the main K-cup patents expired on September 16, 2012.  According to Seeking Alpha, one analyst gave a “now-famous ‘GAAP-ucino’ presentation” stating that in September, “patent 5,325,765 and patent 5,840,189 are set to expire, any aspect of the K-cup that was revealed in either patent falls into the public domain, and competitors will be able to produce K-Cups.”  So then, what?  Did the company lose its entire market share without those key government-granted monopolies?  No, far from it.  In its first quarterly results after its main patents expired, Green Mountain reported that its net profit and net sales were both up.  And while GMCR shares have ranged in price throughout the last year, last week Bloomberg Businessweek reported several promising market analyses by investors, which caused Green Mountain’s shares to go up.

This is because there’s a lot more than intellectual property protection that drives innovation and influences market share.  For the twenty years that these initial patents were in effect, Green Mountain was not just leaning on its patent exclusivity; it was cultivating its brand (which likely involves trademark protection), honing its supply chain efficiencies, and generally maintaining its dominance due to having the first mover advantage.  Its first mover advantage is particularly in the twenty-year head start perfecting the manufacturing of these cups.  And this is not an isolated case.  Scholars have done empirical research demonstrating other factors that drive innovation more than patent protection, such as “Private Protection of Patentable Goods” and “Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (Or Not)”.

It’s worth noting how different Green Mountain’s patent strategy is from the abuses that Patent Progress focuses on, where software companies use their abstract patents as a broad weapon to assert ownership on whole ideas and concepts.  To contrast, Green Mountain did not attack other single-cup brewing systems like Tassimo with its T Discs.  (Additionally, Tassimo has an amusing page on its site distinguishing its system from Keurig’s.)  Green Mountain has used its patents for the purpose the system intends.

The Wall Street Journal surmised that Green Mountain will keep its customers thanks to its wide variety of licensing partnerships with popular brands (which admittedly still involves intellectual property).  Additionally, the Journal noted that “the company is producing cups at a scale and efficiency that competitors will need to work to meet,” which refers to their manufacturing advantage.  Also, though its key patents have expired, “it still holds many unexpired patents” that its former CEO Larry Blanford asserted “will continue to offer important protection against non-licensed single serve packs.”

In late November, in Green Mountain’s first quarterly conference call after the main patents expired, CEO-at-the-time Blanford remained confident, and explained the positive state of its position in the market:

In this, our first conference call post patent expiration, I’m pleased to say that we’ve not seen any marketplace dynamics that have caused us to think differently about our outlook for single serve packs.

Blanford also confirmed the research I explained above, noting that even with competition, Green Mountain maintains advantages:

Consumers continue to choose Keurig brewers more often than they choose other brands.  The competition is growing, but that doesn’t change our outlook.

While DisCo often criticizes incumbents for using policy levers to disadvantage disruptive entrants in the marketplace, many businesses with dominant positions sustain their advantage by providing a superior product and maintaining a strong brand.  And that is exactly what Green Mountain is doing.