Fakes: Can You Tell The Difference?

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, 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."