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AnonymousInactiveFakes: Can You Tell The Difference?
August
2007 Aqua Systems is caught in a noose. Whether employees with the
Roslyn, N.Y.-based VAR tied the rope themselves by knowingly selling
counterfeit goods is up to a New York circuit court to decide. QLogic
says yes, and hopes to prove that the sale of fake host bus adapters by
Aqua Systems was both intentional and damaging to the manufacturer’s
reputation, channel sales and bottom line. Aqua Systems claims it was
duped right along with its customers, and accuses its own suppliers of
being the real guilty parties.Aqua’s tale is not unusual. Counterfeit
goods, both hardware and software, have infiltrated the channel, and
solution providers that aren’t careful could—knowingly or not—get
burned.Peddling goods on the black market is big business. According to
a report published by KPMG and the Alliance for Gray Market and
Counterfeit Abatement (AGMA), the IT industry loses an estimated $100
billion annually to counterfeit products.Also, according to the
Department of Homeland Security (DHS), computer hardware accounted for
9 percent of all types of counterfeit goods seized by U.S. Customs and
Border Protection in fiscal year 2006. The total amount was worth
approximately $14.3 million—an increase of 198 percent compared with
the year prior. On the software side, the fourth annual Software Piracy
Study conducted by the Business Software Alliance and IDC found that 22
percent of total software installations in North America last year were
pirated, a loss of more than $8.1 billion for the region.”We have seen
counterfeit product from day one and we continue to see it on a daily
basis,” said Josh McCarter, president and COO of independent
distributor Arbitech. “In certain product lines, there’s so much
counterfeit and, in some instances, so little information available to
distinguish real from fake product, that companies will unknowingly buy
or sell the fake product.”Typically, the most counterfeited goods are
those that are made in large quantity, such as Gigabit interface
converters, WAN interface cards, memory, printer cartridges, network
modules, or standard desktop applications from mainstream, marketable
vendors, such as Cisco Systems and Microsoft.China remains the hotbed of counterfeit goods.
Coding
of software programs is cracked and copied, and hardware products are
reverse-engineered and re-created. In the case of the latter, many
point to vendors’ use of original design manufacturers, or ODMs, that
can make their products for much less overseas. With fewer controls in
these locations, exposure of processes inevitably occurs. Identical
products without the brand name are created and sold for discounts of
up to 90 percent, often bought by unscrupulous players that add a fake
label and packaging and sell them as genuine products, McCarter said.
Because these are often (but not always) commodity-type products,
they’re easily counterfeited.”Manufacturers don’t make their
products—they rely on others for that,” said Frank Kobuszewski, vice
president of the Technology Solutions Group at CXtec. The Syracuse,
N.Y.-based VAR offers both new and refurbished technology equipment.
“And with the increasing emphasis on offshoring, people don’t know
what’s happening at the facility. This is a very fragmented market
because of people that want to make a buck, and mom-and-pop shops
looking for discounts.”Tracing the Source
Products
typically go from counterfeiter to what Kobuszewski and others in the
industry call “tweeners.” These companies know where to find cheap
goods—sometimes fake, sometimes stolen—and market themselves as
legitimate suppliers to customers shopping around for the lowest price.
When a potential buyer inquires about certain products, the tweener
digs into the black market to find the goods, then passes them off as
genuine, from the manufacturer.And that’s where VARs often get entangled in the black market.
Take
American Data and Computer Products. In September 2006, CRN sister
publication GovernmentVAR reported on incidents involving allegedly
counterfeit goods that resulted in lawsuits between the Tampa, Fla.,
solution provider and Largo, Fla.-based Gulfcoast Workstation, a
division of Relational Technology Solutions. According to court
documents, American Data went to Gulfcoast to source Cisco switches for
a contract with Lockheed Martin, having been told the supplier could
leverage Relational’s position as a Cisco Gold partner. When the
switches were delivered, Lockheed discovered duplicate serial
numbers.Upon investigation, court documents from Cisco revealed the
serial numbers listed on the Gulfcoast invoices were attached to
products produced as early as 2003 and shipped to locations all over
the U.S. and Europe. Many of those serial numbers have since been
traced to units still being used by other customers.”If these companies
still have physical possession of the switch, then how is it that
another like piece of equipment was delivered to Lockheed’s receiving
dock with the same serial number?” asked Robert Castro, president of
American Data. “No other conclusion can be arrived at, except that
black market or counterfeit equipment is involved here.”Indeed,
evidence shows that the collection of switches was a mix of gray- and
black-market equipment. Documents filed with the court showed that
Relational and Gulfcoast bought the switches from VOIP Inc., Murrieta,
Calif., and Epoch Sales, Santa Ana, Calif. Neither is a certified Cisco
partner, and both specialize in liquidation and “alternative” sources.
In recent developments, subpoenaed invoices prove that VOIP got at
least some of the equipment from Chicago-based Equivoice, which sourced
the products from distributor Comstor, a division of Westcon. Epoch,
however, acquired the goods from two companies in Hong Kong, which
named both China and Taiwan as countries of origin.
While relatively common, vendors argue that VARs play with fire when they go outside authorized channels.
“There’s
a phenomenon of gray going black,” said Phil Wright, director of
worldwide brand protection at Cisco. “After the dot-com bubble burst,
there was an ongoing demand for products and a secondary market. This
market grew up, and became a source for people who needed product
sooner than what was possible through normal channels. There was a good
chance a few years ago it was genuine product, but with the rise of the
counterfeit base, the gray market has been an attractive conduit for
counterfeits. That channel is potentially contaminated with fakes.
There’s no guarantee at all—there never was, but the chance of getting
a mixture of used, fake, not updated and so on are better than
ever.”The situation between Aqua Systems and QLogic stands as another
example. According to the legal complaint filed by QLogic, Aqua Systems
sells host bus adapters with the QLogic name that the vendor claims are
not genuine or authorized, charging prices significantly below those
charged by the vendor or authorized distributors. In response, Aqua
Systems filed a third-party complaint against Microsource, a company
based in Singapore. If the goods are indeed counterfeit, the complaint
states, Microsource is responsible as Aqua Systems’ supplier.Regardless
of whether Aqua Systems was indeed duped along with the end customers,
some might argue that sourcing product from an unauthorized supplier in
China was asking for trouble. An Internet search for Microsource brings
up a static Web site described as “under construction,” with contact
information included. Microsource could not be reached for comment.
Neither QLogic nor Aqua Systems would speak about the suit.”Buy through
authorized channels, and don’t worry about anything,” Wright said.
“It’s when [VARs] stray that they have to watch. Just don’t do it and
you won’t have a problem.”Harm Done
The
fallout for companies like American Data and Aqua Systems that,
knowingly or not, get tangled up in the black market can be
significant. Vendor relationships can be damaged or lost, customer
trust jeopardized, and huge revenues sacrificed, especially when
lawsuits are involved. American Data expects to shell out at least
$800,000 in legal fees. And that doesn’t factor in the loss of future
revenue resulting from severed ties with Cisco. The vendor cut off
American Data’s partner agreement because the solution provider
purchased goods from outside authorized channels.But playing by all of
the rules doesn’t necessarily protect VARs from the dangers of the
black market. Counterfeit goods in the channel have an indirect impact
by draining margin, snagging business opportunities and confusing the
market. “If you’re quoting an installation for a small organization,
and someone undercuts your price with something unrealistic, it becomes
unfeasible to have a legitimate channel,” said Michael Beare, channel
director of Microsoft’s Genuine Software Initiative. “You can literally
put a lawful channel out of business.”Shawn Larsen, president of
Morris, Minn.-based Morris Electronics, lost a large order for software
on price. “When I said there was no way anyone could sell Microsoft
Office for $50, this particular entity said, ‘It’s about price, and if
someone gets in trouble, it will be the one who sold it to us,'” he
said. “I told him that’s assuming [the supplier] is still in business.”
The customer in question was a government entity, no less. Another of
Larsen’s customers bought a large number of Adobe licenses off eBay,
becoming suspicious only when the owner’s manual arrived as a
photocopy. In that case, the customer turned the supplier in to
authorities, and the Web site got shut down and pulled from eBay.James
Yearnd doesn’t resell hardware or software as part of his IT
consultancy firm, but he comes across counterfeits in customer IT
environments regularly. “I have had equipment returned to Cisco for
trades and for repair on SMARTnet contracts turn out to be
counterfeits,” he said. “I have also purchased used Cisco equipment and
had to return it for the same reason, [and] received bad Compaq memory
with stickers that look exactly correct. Some look and work so much
like the real thing that we cannot determine if it is legit or not. We
need some fail-safe method to protect ourselves.”Fighting Back
Demand
from the channel, combined with the potential of damage to brand
reputation and the bottom line, drive many vendors to take action.
Organizations like AGMA, the Business Action to Stop Counterfeiting and
Piracy (BASCP) initiative, and the Business Software Alliance unite
companies from a range of markets to address intellectual property
rights issues. Vendors are also communicating with the channel on the
risks of the gray and black markets more than ever before. This month,
3Com’s vice president of worldwide channel sales, Nick Tidd, sent an
e-mail warning to partners:”Activity in gray market and counterfeit may
appear to be equitable in the short term, but it only hurts both you
and your customers in the long term,” wrote Tidd, who is also the
president and chairman of AGMA. “This activity disrupts forecasting,
pricing, quality, service and it may affect the validity of 3Com’s
warranty [and] also makes everyone vulnerable to the unknown
participation in counterfeit distribution. 3Com is very concerned with
this behavior and will not hesitate to terminate the partner benefits
and/or the focus level status for those identified to be participating
in either gray market or distribution of counterfeit 3Com products.”NEC
also released a statement following a high-profile counterfeit ring
that struck in 2006 by selling keyboards, writeable CDs and DVDs, and
MP3 players bearing the NEC logo. The company doesn’t even make MP3
players. NEC says it is cooperating with administrative and law
enforcement authorities, customs and other organizations.Among the most
proactive vendors in the fight against counterfeiting are Cisco and
Microsoft. The former launched the Cisco Brand Protection team, which
seeks to ensure authenticity of products, as well as the Cisco
Certified Refurbished Equipment Program, which provides partners and
customers a less expensive alternative to sourcing new
product.Similarly, Microsoft developed the Windows Genuine Advantage
(WGA) program, which notifies consumers using non-genuine Microsoft
Windows operating systems. The vendor’s How to Tell Web site,
http://www.howtotell.com, also offers a wealth of information for consumers
and partners, including a gallery of images showing real software
packages next to fakes. The company saw a significant victory last
month, when the Chinese Public Security Bureau and the FBI announced
the largest bust of counterfeit software manufacturing or distribution
ever, valued at $500 million. According to Microsoft, more than 1,000
customers in 12 different countries used WGA to learn their software
was counterfeit and submitted the fakes to Microsoft. They then were
traced back to the criminal syndicate in China.That software
counterfeit bust highlights a key difference in how vendors track black
market software vs. hardware. Pirated or counterfeit software is often
discovered when the program is first fired up or linked to the
developer for an update, and validated remotely. Microsoft incorporated
a Software Protection Platform into Windows to ensure authenticity, and
notifications in the latest versions of the operating system and Office
make customers aware if their software copy was not licensed correctly.
“Software has the intelligence to check itself or check in with us,”
Microsoft’s Beare said. “Hardware manufacturers face bigger problems
because counterfeits are more difficult to differentiate.”Vendors are
trying. All original 3Com switch products now have a holographic label
on the bottom center that combines authentication features,
tamper-evident construction and a tightly controlled secure supply
chain. And Samsung said last month that it’s redoubling efforts to
enforce intellectual property rights, investigating any manufacturers
and traders who counterfeit Samsung printing supplies. The vendor
promises to take punitive action against counterfeit suppliers.Solution
providers stand on the front line for vendors—one of few to see the
products before they ship to the customer, and often the first
contacted when the customer encounters a problem. Vendors can benefit
from that knowledge. In one example from Paul Busch, director of
distributor Ingram Micro’s Ingram Micro Outlet for distribution of
refurbished goods, a reseller returned products that it thought were
defective, but turned out to be counterfeit. The reseller had
supplemented digital cards ordered through distribution with others it
acquired from the gray market. The vendor, which Busch would not name,
provided full credit only after the reseller provided all information
on where it got the goods.But that scenario may be the exception. Some
VARs argue that vendors fail to adequately work with the most obvious
community in efforts to combat counterfeiting: the channel.”Cisco won’t
help,” said Mike Sheldon, president and CEO of Network Hardware Resale,
which provides preowned, used and refurbished Cisco, Juniper, Extreme
and Redback products. “They won’t engage, and they won’t help identify
the product. We’ve offered to share the knowledge we have with them
about what we see, and also who we see offering counterfeit products.
All we ask is that they help us identify the most common products. And
they refuse. We’re essentially on our own.”Part of the reason for that
lack of cooperation is that vendors typically have policies against
working with gray marketers. Network Hardware, for example, defines
itself as a secondary reseller; others in the market would call it a
“rogue vendor” that sells products without official approval from
vendors. Regardless, Sheldon said that the lack of a vendor
relationship requires the company to maintain very high standards of
quality control. The vendors would benefit from taking advantage of
that, he said.To ensure the authenticity of products, Network Hardware
tests output with a light meter, which measures strength and
wavelength, and checks the Common Language Equipment Identification
(CLEI) code. A counterfeiter will buy the cheaper model, Sheldon said,
then relabel it as higher. Beyond that, the company checks the serial
number to make sure the format matches the standard used by the
manufacturer, and the internal and external numbers are the same.Avoiding The Black Market Morass
Solution
providers that peddle new products often don’t have the opportunity to
dissect hardware or software. So how do they protect themselves? First,
lessons learned by companies like American Data should resonate. While
the competitive nature of the channel drives many companies to look for
deeper discounts from alternative sources, the ultimate price could
prove very damaging.Second, VARs can unite with vendors in their
efforts to combat counterfeit goods by joining any one of the
organizations actively working with law enforcement and policy makers
to tighten laws protecting intellectual property rights.And the best
advice might be the most obvious: If something appears to be too good
to be true, it probably is. These products are considered commodities
because the market generally keeps the price at a given standard. One
distributor may be a bit better than another in pricing for a
particular vendor, but rarely beyond a couple points. When someone
comes in 10, 20 or 30 points below the industry standard, Network
Hardware’s Sheldon says, channel beware.”If you’re offered large
quantities of new equipment at really good prices, you ought to cock
your eyebrow.” -
AuthorAugust 21, 2007 at 11:08 AM
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