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 user 2007-08-21 at 11:08:00 am Views: 128
  • #18589

    Fakes: Can You Tell The Difference?
    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.
    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
    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.
    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.
    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
    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
    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
    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.”