Table of Contents
DECEPTIVE vs. NON-DECEPTIVE COUNTERFEITING
EFFECTS OF COUNTERFEITING
DEMAND FOR PIRATED AND COUNTERFEIT GOODS
THE RATIONALE FOR COUNTERFEITING AND ITS ANTECEDENTS
IP INFRINGEMENT AND THE INTERNET
EVIDENCE OF VICTIM FIRMS’ RESPONSES
Procter and Gamble
US Olympic Committee
ESTABLISHING ANTI-COUNTERFEITING STRATEGIES
LOBBY GOVERNMENT AUTHORITIES FOR IMPROVED LEGISLATION AND ENFORCEMENT
ANTI-COUNTERFEITING ADVERTISING CAMPAIGN
MOVING TARGET & AUTHENTICATION DEVICES
EDUCATION AND SUPPORT OF ENFORCEMENT AGENCIES
EDUCATION OF CHANNEL MEMBERS
USE OF TELEPHONE HOTLINES FOR CUSTOMER REPORTS
MARKETING & PRODUCT DEVELOPMENT
This study deals with the growing problem of piracy and counterfeiting successful companies have to face nowadays. The aim of the study is to recommend suitable strategies that victim companies should adopt in reaction to Intellectual Property Rights (IPR) infringement and trademark counterfeiting. In order to formulate appropriate strategies, one must first gain an understanding of the rationale behind counterfeiting for both producers as well as purchasers. It is also imperative to distinguish between different types of counterfeiting as some types certainly have a greater potential for harm. Each category requires a different approach. A look into buyer behaviour is necessary in order for firms to be able to formulate a successful anti-counterfeiting advertising campaign and to target the right audience as well as an investigation into the varying vulnerability to counterfeiting of different product categories.
Companies as well as society as a whole are plagued by a phenomenon that is clearly not yet receiving the attention it deserves. Theft is a problem for every employer. It occurs in shops where would-be customers shoplift but it does not stop there. Employees stealing company property is a much bigger problem. This does not merely refer to a company’s own workforce but also everyone at any stage of the supply chain. The trend toward outsourcing certainly has not helped as it is difficult enough to keep an eye on your own workforce without having the additional problem of policing the supply chain. Products can and do go missing due to theft. The phenomenon this study investigates is not conventional theft but rather theft of a different sort: theft of intellectual property and counterfeiting. Piracy and counterfeiting are not theft of finished products but of ideas, inventions, creations and discoveries, which are protected by trademarks, patents and copyrights.
The terms piracy and counterfeiting are often used interchangeably. Even though both terms refer to the unauthorised copying or imitation of copyrighted, patented or trademarked products, a distinction should be made. Whilst product counterfeiting is commonly defined as unauthorised copying of trademarked or copyrighted goods (Bloch, Bush & Campell 1993), piracy refers more specifically to the illegal copying of software, data, recorded music and films (Economist Intelligence Unit 2002). A Michael Jackson album copied to a blank CD is therefore a pirated version of the original. If it is the case that the CD is also made to look like the original with a cover and booklet in a proper CD case, one would speak of a counterfeit as illegal copies of labels, packaging and other brand identifiers are used (Economist Intelligence Unit 2002). This distinction is, however, not vital but merely helpful as these terms will be used accordingly throughout this paper. It is much more important to distinguish between deceptive and non-deceptive counterfeiting as will become apparent later in this paper. Prendergast, Chuen & Phau (2002) actually define counterfeit brands as identical copies of the original deceiving customers while pirated brands are non-deceptive copies in their view. Whereas their definition for pirated brands as non-deceptive copies holds true, counterfeit items are not necessarily deceptive although they are more likely to be so.
“As recently as the late ‘80s, US Companies were losing more than $50bn a year as a result of inadequate protection from foreign infringement of intellectual property rights” (Retsky 1997, p. 10). The problem dates back to before the Christian era and is as old as humanity itself. Anyone outperforming the rest always had to live in fear of being copied and facing increased competition. The Greeks and Romans applied crests and brands to valuable, crafted goods. As early as the 15th century, the term piracy could be found in law papers and by the 18th century it had found its way into the Oxford Dictionary describing piracy as the unauthorised exploitation of works or inventions of someone else for the purpose of profit. In those days, counterfeiting was crafts-based. Not too long ago, luxury brands were almost the exclusive targets for counterfeiters. “It [counterfeiting] mushroomed in the 1970s; then it seemed the only victims were manufacturers of overpriced consumer goods, such as apparel and luggage, and for the most part, the economic effects of counterfeiting went unnoticed” (Harvey & Ronkainen 1985, p. 37).
Today, the situation has somewhat changed. One could be naïve and assume that the problem has been successfully tackled in the meantime and maybe even eradicated. Unfortunately, quite the contrary is the case. Technological innovations and globalisation seem to have widely facilitated counterfeiting rather than the fight against it. The International Chamber of Commerce estimates that counterfeiting accounted for eight per cent of world trade in 1998 (Freedman 1999). Only three years prior to that, the corresponding figure had been five per cent resulting in an estimated global loss of $200bn (Nia & Zaichkowsky 2000). Not only has counterfeiting increased immensely in volume, it has also expanded into virtually all product categories. Originally a problem primarily associated with elite consumer goods such as Cartier jewellery or Calvin Klein jeans, counterfeiting today affects manufacturers of products such as fertilisers, aircraft parts and prescription drugs (Bush, Bloch & Dawson 1989). It would probably be easier to list products that have not been counterfeited than products that have. This proliferation of counterfeiting into almost every product category means that the negative effect of counterfeiting is not only measured in terms of revenue lost to the rights owners, but may also result in deaths.
Brand equity today is more important than ever. In a world with vastly increased product offerings and a growing number of foreign products available outside their home markets, confused consumers look to familiarity to aid them with their purchasing decisions. This is where a powerful and recognisable brand name is advantageous. Brands create an image in the minds of consumers and help to create a hopefully long-term relationship. A brand name can stand for sought after characteristics such as reliability, good after-sales service, quality of product and so on. Consumers with a preference for a particular brand will associate that brand’s attributes with all products carrying that same brand name even though they may never have tried the actual product in question. A brand therefore is a way of creating trust between the consumer and products under the umbrella of that particular brand.
A brand is an intangible asset to the brand owner, yet can be the owner’s most value asset of all. Brands do not just come out of nowhere and are created with great effort and at great expense. Firms invest heavily to build brand reputation in the marketplace by advertising. A successful brand occupies a prominent position in consumers’ minds, is accompanied by a high level of loyalty and enjoys considerable trust among consumers (Green & Smith 2002). Green et al (2002) go on to argue that a firm’s tangible assets have little value without a brand as demand is mainly based on the brand’s equity and it is therefore no surprise that companies go to great lengths to protect their brands, which are constantly at risk of being targeted by counterfeiters.
Counterfeiters do not steal a company’s finished products but reverse-engineer or - with simple products - just copy them. Should any part of the manufacturing process be patented the copies are illegal. As counterfeiters usually apply protected trademarks that the original manufacturer has registered the question as to whether a product or any part of its manufacturing process is patented loses significance as trademarks may clearly only be used with the holder’s consent. It is not actual products but rather brand equity that has seen big investments and nurturing over long periods of time by the owners which is “stolen”. For creations like music, literature, films and software the issue of piracy is even bigger. Such creations, in spite of being copyrighted, are frequent targets for illegal copying. The actual product is normally identical and of exactly the same quality as the original, even though the augmented product (case, manual, label, support, guarantee, access to updates) might be considerably inferior or absent. What worsens the issue is the fact that virtually anyone can engage in the illegal copying of tapes, CDs and the like without any major investment, often just by using equipment readily available in many households. Not many consumers are likely to counterfeit a Nike sweatshirt themselves at home, whereas private individuals can effortlessly copy CDs.
DECEPTIVE vs. NON-DECEPTIVE COUNTERFEITING
When considering the phenomenon of counterfeiting it is vital to distinguish between deceptive as opposed to non-deceptive counterfeiting. Bloch et al (1993) acknowledge that in some instances buyers are fooled into buying counterfeit merchandise but often see consumers as willing accomplices knowingly purchasing illicit copies. Buying a Tag Heuer sports watch on a beach in Thailand for the equivalent of £15 and buying one for the original price in a shop can both turn out to be counterfeit purchases. The first scenario is a case of non-deceptive, the latter a case of deceptive counterfeiting. It is deceptive counterfeiting that poses the bigger problems while an observation of non-deceptive counterfeiting also provides worrying insights for anyone in the fight against counterfeiting as we shall learn later.
This study features cases, which are largely high-profile due either to the rights owners involved or the hazard to consumers. The cases are drawn from the literature and display both victim firms’ reactive and proactive measures, which will be evaluated in order to arrive at a new framework. The insights gained will be utilised to challenge existing theoretical concepts with the aim of arriving at a new framework for corporate responses.
EFFECTS OF COUNTERFEITING
The obvious victims of piracy and counterfeiting are the artists, rights owners and license holders whose works are being copied or whose trademarked brands are being used without authorisation. The latest estimates by the Anti-Counterfeiting Group (ACG) of losses caused to the United Kingdom’s most affected sectors are listed below.
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Adapted from ACG (2003)
The above figures result in a total loss to the UK economy of £6.51bn. The corresponding figure for the USA stands at $200bn (Jacobs, Samli & Jedlik 2001). Jacobs et al (2001) contend that this figure is estimated to have increased at a rate of thirty per cent over seven years while Stipp & Curry (1996) contend that US firms’ losses due to piracy have quadrupled over the past decade with approximately five per cent of products sold worldwide not being genuine. According to the International Chamber of Commerce the problem is worse with eight per cent of world trade being counterfeit (Freedman 1999). In fiscal year 2003, US Custom’s IPR seizures amounted to just over $94m with the main commodity being cigarettes (valued at over $41.7m) with 66 per cent of seized items originating from China (US Customs & Border Protection 2004). EU member states’ customs do not value their seizures but merely record the number of items. In 2003, in excess of 50m items were seized with most originating from Thailand. Interestingly, the most frequently seized product type is not cigarettes but CDs, DVDs and cassettes (Europa - Taxation and Customs Union 2004).
Another common way to measure the damaging impact of counterfeiting is in jobs lost or not created. The ACG estimates the total number of UK jobs either lost or not created as a result of counterfeiting to be at least 4,100 (Batram 2000). The corresponding figure for the US was estimated at 750,000 jobs by the US customs service in 1993 (Nia et al 2000).
Piracy and counterfeiting deprives creators and brand owners respectively of revenue and in the case of brand counterfeiting also damages brand equity, which can have a damaging and lasting effect on the targeted brands. It is manifested in Western business philosophy that Intellectual Property Rights are necessary in order to tap and encourage the innovative capacity of individuals, adequately diffuse new innovations and provide adequate incentive and financial return to perpetuate the process (Shore, Venkatachalam, Burn, Hassan & Janczewski, 2001).
DEMAND FOR PIRATED AND COUNTERFEIT GOODS
Prendergast et al (2002) assess there to be a huge supply of counterfeits, which is supported by a strong demand. Economic theory suggests that a curbed or eradicated demand will lead to the curbing or eradication of supply respectively. Victim firms’ strategies mainly seem to focus on curbing supply directly, largely failing to address the demand side. By ascertaining the customer profile for pirated and counterfeit goods, companies can better formulate anti-counterfeiting advertising campaigns and direct them at the target audience with greater accuracy
Before investigating what drives buyers of counterfeits it must be clear that deceptive counterfeiting is excluded here as by definition consumers are fooled into buying the counterfeits at the price of the corresponding original in a credible location believing that they are buying the genuine article. Buyer behaviour can purely be studied when consumers knowingly buy illicit merchandise, which is previously defined as non-deceptive counterfeiting.
For reasons to be outlined later, counterfeit and pirated goods are offered at prices much more favourable in the eyes of consumers. One could therefore assume that exclusively consumers with below-average spending power seek non-deceptive counterfeits, which is unfortunately not the case at all.
Firstly, consumers in so-called piracy havens will be considered. Today anywhere outside North America, Australia, New Zealand and Central and Western Europe displays alarmingly high piracy rates. One of the world’s largest entertainment software companies, Electronic Arts, estimates its business losses to be around $300m with the pirates grabbing a 95 per cent market share in Thailand (Jacobs et al 2001). Such countries with extortionate piracy rates are often referred to as one-disc-countries, which is only a mild exaggeration of the truth.
Citizens of developing markets generally have less income and therefore most branded Western products are unaffordable to them. Despite inferior income levels being a major factor, what is specific to Asian piracy havens is the societal attitude towards piracy and counterfeiting. It is generally agreed that Asian cultures, particularly Chinese culture, emphasise the obligation of creators to share developments with society (Ang, Chen, Lim & Tambyah 2001, Bloch et al 1993, Jacobs et al 2001). Attempting to find an explanation as to why only a small share of counterfeits in their study had been bought as gifts, Prendergast et al (2002) regarded that phenomenon as a reflection of Asians being more concerned about the way they project and perceive themselves in society, which is in conflict with the general belief that Asian culture values sharing and public access. While their argument may otherwise hold true, someone’s standing in society would not be harmed if sharing and consequently counterfeiting are accepted, if not favoured – in Asian culture.
Low prices do not just lure consumers in developing countries into buying illicit goods. The pricing of counterfeits constitutes their main attraction anywhere in the world. Consumer attitude towards non-deceptive counterfeiting is worrisome to victim firms. Ang et al (2001) label consumers as willing collaborators who are mainly driven by the attractive pricing of fakes.
Bloch et al (1993) as well as Albers-Miller (1999) observed that consumers will select fakes in preference to genuine products when there is a price advantage. Obviously, non-deceptive counterfeits need to be cheaper than their genuine counterparts in order to attract sales. With counterfeits, product quality is always below the level of the corresponding original even if it is only the manufacturer’s warranty. One should therefore refer to value rather than price when considering the preference for counterfeits. Consumers of counterfeits are willing to trade quality and performance for the brand image of the genuine good at presumed price savings (Bloch et al, 1993). The consumers’ willingness is naturally dependent on the associated risks of a product performing unsatisfactorily or not at all. Not many would knowingly buy counterfeit medicine or car parts. It is a different story with clothing or CDs, where such risks are comparatively low and hence demand is high. Tom, Garibaldi, Zeng and Pilcher (1998) distinguish between two groups of consumers of fakes. The first believes fakes to be of comparable quality and performance while the second regards fakes to be inferior but reckons that shortfalls are more than offset by their advantageous pricing. Both groups therefore believe fakes to be better value – the first more so than the second. Counterfeits are characterised by tremendous cost savings for the buyer with often only little compromise in terms of quality and performance, thereby resulting in a very high perceived value.
Studies (Prendergast et al 2002, Wee, Tan & Cheok 1995) conclude that there are product-category-specific criteria for purchasing fakes. Product attribute variables such as durability are of much bigger importance when consumers consider buying counterfeits of functional products. In the decision-making process for the purchase of counterfeit fashion or symbolic products, product attribute variables such as image and physical appearance are prioritised.
The fight against piracy and counterfeiting is regarded to be particularly difficult by Ang et al (2001) as they found that both buyers as well as non-buyers of illicit goods do not consider individuals buying counterfeits to be unethical. The idea that purchasing counterfeits is at least in some way wrong or unethical seems to be completely absent in Asia. Ang et al (2001) even report that prospective buyers of fakes employ double standards in that that they do not hold themselves accountable for their action but hold the sellers of counterfeits responsible instead. The most severe example of this attitude may be confined to Asia; however a similar attitude is evident in developed economies. Bloch et al (1993) found that over one third of the population of their study, which was conducted in the Southeastern US, appear willing to become accomplices in counterfeit activity when given the opportunity.
The legal risks associated with purchasing counterfeits do not always deter as suggested by Wee et al (1995). In fact, Albers-Miller (1999) argues that quite the contrary is the case more often than not. The fear of criminal punishment is intended to deter but individuals are known to get satisfaction out of the performance of deviant acts as a means of rebelling against the system. This argument applies to any illegal action. Specific to piracy and counterfeiting is the attitude of many consumers that they want to get back at large corporations and rich artists as they regard original manufacturers to be charging exorbitant prices. Consumers see how much artists are worth with their luxurious lifestyles and consequently do not see how they could be harming them by buying pirated versions of their creations. Continued reports about “Rip-off Britain” could foster this attitude in the UK across all product categories. “The government’s “Rip-off Britain” campaign has given a certain moral justification to consumers who feel they are getting their own back on overpriced brands by buying fake versions at cut prices” (Benady 2002, p.25). The proliferation of retailers’ own brands, that are usually very similar both in terms of name and packaging can only further facilitate the consumers’ “Robin Hood attitude” that counterfeiting means taking from the rich companies and lower prices for all without any real harm being suffered by anyone.
Such insights into what drives consumers do not leave victim firms with an easy task. Not only do consumers engage in illicit purchases when they are faced with price pressures as the economic consequences influence the tolerance of questionable behaviour (Ang et al 2001) but they also do so knowingly in order to express their view that they are being overcharged and only making rich companies and artists even richer by purchasing their products. “If counterfeit buyers are not deterred by concerns for legality and social welfare and even recognise that they are buying lower quality, what appeal could successfully reduce their participation?” (Bloch et al 1993, p. 35).
THE RATIONALE FOR COUNTERFEITING AND ITS ANTECEDENTS
Even though Ang et al (2001) have the opinion that strategies to curtail the supply of counterfeits will ultimately fail because pirates will always find a way of meeting demand as long as it remains healthy, this paper will argue later that it is necessary to tackle both the demand and the supply side of counterfeiting. In certain cases a focus on the supply might be the more suitable strategy altogether. In order for an anti-counterfeiting strategy focusing on the supply side and perhaps even ignoring demand to be successful, firms need to gain an understanding of who the infringers are and of how their supply chains are organised.
Counterfeiters do not need to pay research and developments costs. Moreover, they do not invest heavily to create brand equity over a long period of time and do not pay tax. Pirates and counterfeiters therefore have a huge cost advantage vis-à-vis original manufacturers. Manufacturing and transportation, which original manufacturers also incur, are their only major costs. The only cost disadvantage that counterfeiters have is the bribe money they may have to pay enforcement agencies or customs officers in corrupt countries. Because of the advantageous cost structure, counterfeiters are able to offer their copies at a discounted price and benefit from huge profit margins at the same time. This holds particularly true for products where manufacturing costs make up an almost insignificantly small proportion of total costs. Corporations like Nike, Calvin Klein and Ann Taylor invest heavily into tracking and analysing fast-changing consumer tastes, designing hot products via CAD (computer-aided design), creating state-of-the-art distribution systems and orchestrating slick advertising campaigns (Freedman 1999).
Shultz & Saporito (1996) thus contend that large profit margins, a low probability of getting caught and light penalties make counterfeiting an attractive business, especially in emerging and transitional economies and consequently piracy and counterfeiting are regarded as the quickest and easiest way to make money. Stipp et al (1996) ascertain that piracy and counterfeiting are more lucrative than pushing heroin and refer to the problem as the crime of the 21st century. It is therefore not surprising that evidence linking counterfeiting with criminal communities at national and international level exists (McDonald & Roberts 1994). Buying fake goods is tantamount to supporting the mafia, the drugs cartels and even terrorist organisations such as the infamous al-Qaida – groups which, according to the police, are heavily involved in the counterfeiting of leading brands (Benady 2002). Since piracy provides stake money for dealers for the purpose of money laundering (Batram 2000), it is not surprising that the International Federation of the Phonographic Industry, a trade group pressing Chinese authorities to crack down on piracy, pulled its staff out of Guangzhou having been informed that hit men had been hired to make an example of them. It is essential for victim firms to understand that they are usually not dealing with small-time crooks that are otherwise law-abiding, but serious criminals, who pose a threat to anyone interfering with their undertakings. Such findings also have important implications in terms of understanding how the supply chains are organised. According to Batram (2000), piracy and counterfeiting are well organised with manufacturers, wholesalers, retailers and shadowy financiers, who demand the lion’s share of profits. With the heavy involvement of criminal elements it can be expected that many illicit goods reach the developed economies through the same routes and using the same means as smuggled drugs.
Together with the attractions of high profit margins coupled with lax enforcement and weak sentencing further factors have acted as catalysts to the proliferation of piracy and counterfeiting and as antecedents to turning a small-scale cottage industry into a sophisticated network of organised crime (Jacobs et al 2001). Whatever one’s stance on the extent of globalisation, it is evident that big brands are now available in a larger number of markets and that production or part of it can increasingly be found outside the manufacturers’ home markets. Counterfeit goods are manufactured on a worldwide scale, but most are at least in part made in Asia’s piracy havens with China being the main perpetrator. In 1991, China, Thailand and Indonesia were listed as leading violators by the US (McDonald et al 1994). It is important to note, however, that a US survey named at least 44 nations as producers, which included developing and newly industrialised nations and every member state of the EU as well as the US (ACG 2003). Companies do not have to look as far as Eastern Europe or Asia for shutting down illegal manufacturing operations – counterfeiting of their products may well be taking place in their home markets of the industrialised world. Often, blanks are imported from piracy havens into countries of the industrialised world. Such blanks essentially represent finished products with one small exception – they do not bear any brand name when passing through customs. Therefore, the goods cannot be seized. In the case of the US, Stipp et al (1996) report that, having reached their destination, labels are added in sweatshops inside the US. One can assume a similar scenario inside the EU. Without the realisation that counterfeits sometimes entirely originate from developed nations or that they are imported as blanks, which customs have no right to seize, victim firms might naïvely be led into formulating an anti-counterfeiting strategy, the aim of which is to prevent counterfeits from entering their home markets. Such a strategy is destined to fail when the fake goods are in fact manufactured domestically or imported as non-infringing blanks