How significant do you believe Green Mountain's patent standing is compared to factors like customer loyalty in shaping its competitive stance?

What impact do you foresee from the expiration of Green Mountain's patents on its share of the K-cup market?

How might this affect the profit margins on its sales of K-cups?

Brand partnerships Einhorn questioned the economics of GMCR's licensing deal with Starbucks. Einhorn estimated that no matter who ultimately sold the K-Cups, Starbucks and GMCR would split about $0.22 of operating profit, and that Starbucks would earn about two-thirds of that profit, making the Starbucks K-Cups less profitable for GMCR than their own brands, which earned them an average of $0.15 per K-Cup. Einhorn argued that sales of Starbucks K-Cups could cannibalize sales of GMCR's other higher margin K-Cups. Expiring patents GMCR held two patents that were scheduled to expire in September 2012. GMCR had been unsuccessful in its attempts to patent improvements to the K-Cup that would extend the life of the patent. For example, a patent for a K-Cup with a fluted (rather than smoothsided) filter was rejected by the U.S. Patent and Trademark Office. Once the patents expired, explained Einhorn, competitors were free to introduce lower-priced K-Cups and advertise them as compatible with Keurig brewers. GMCR had also been working on a new Keurig brewer that would use a different K-Cup, but the company explained that it was designed for the higher end of the market, rather than as a replacement for its current line of Keurig brewers. Einhorn questioned this strategy, asking, "Why would a consumer abandon the soon-to-be open Keurig platform to 'upgrade' to a new closed platform that offer[ed] less product choice and enforce[d] GMCR's monopoly pricing?" He concluded that the company's razor-razor blade business model would fall apart once GMCR could no longer make a high margin on its razor blades (K-Cups). Once the K-Cup patent expired, Einhorn imagined that private labels would increase in popularity as major retailers, who had expressed a desire to offer low-priced K-Cups, were able to do so. Einhorn explained that private labels could offer a greater price differential with K-Cups than they could with traditional coffee, perhaps increasing their share of the K-Cup coffee market to as much as 20%. Acquiring licensees Related to the patent issue, Einhorn explained GMCR's practice of acquiring its licensees. He believed that the company was buying its licensees to prevent them from becoming competition once GMCR's K-Cup patents expired. Because their licensees roasted and packaged coffee in the same way that GMCR did, Einhorn estimated that they had similar fixed investments to GMCR and could begin producing K-Cups and selling them cheaper as soon as the patent expired. "The most valuable asset the licensees held was the license to produce K-Cups," explained Einhorn. Once they were owned by GMCR, however, that license lost its value. As a result, GMCR had to overpay to acquire these companies and allocated a high percentage of each of the purchases to goodwill and/or intangibles (see Exhibit 7). All of the company's acquisitions, funded by debt, combined with high levels of capital expenditures, had led GMCR to have negative free cash flows since at least 2006 when it completed the acquisition of Keurig (see Exhibit 8). The high goodwill allocation raised concerns among investors about GMCR's subsequent earnings