Entertainment, software are the most heavily counterfeited sectors

MUMBAI: Gieschen Consultancy has released the 2006 Mid-Year Counterfeit and Piracy Intelligence Report derived from Bascap's Daily Counterfeit and Piracy Intelligence Report statistics compiled over the first half of 2006.

This focusses on intellectual property theft, citing major links to illegal activity, the Internet, and brands.

Entertainment, software are the most heavily counterfeited sectors. The US, UK, India, Malaysia and China top the list of countries that have the most intellectual property violations. Over the first six months of 2006 a total value of $699.3 million of counterfeit and pirated goods, specifically intellectual property theft, was discovered from 760 incidents in 69 countries. Louis Vuitton, Nike, Microsoft, Gucci and Prada are the brands that are counterfeited the most. Pepsi is the most counterfeited brand in the food category.

Glen Gieschen says, "This activity has major implications upon job creation and sustainability, consumer health, safety and security, and is driving serious criminal activity into this seemingly innocent crime. The greatest misconception about counterfeiting is that the impact is negligible, however the truth is far different.

"Consumers who are unaware they are purchasing fake products and those who are actively seeking them have consumed adulterated drugs and died, installed fake products in their vehicles which reduce its life or cause bodily injury when they malfunction. We have documented an endless number of instances where these bogus items result in serious problems, large and small for consumers.

"Recently, counterfeit airline parts were discovered in Russia which, as a passenger, is a concern. When seizures are made of bootleg music, software, and films, it is becoming a frequent occurrence to discover illegal drugs and weapons. In some cases, phony items are sold by illegal immigrants to support their families and fund causes in their homelands. When you purchase these items, you have no idea of the type of people you are supporting, where these funds are going and for what purpose."

The top 5 (of 69) countries enforcing intellectual property violations:

1. USA, 205 incidents, $51.7 Million seizures & losses

2 UK, 116 incidents, $31.1 Million

3. India, 87 incidents, $2.5 Million

4. Malaysia, 52 incidents, $5.9 Million

5. China, 43 incidents, $5.3 Million

The report also analyses the use of the Internet in networking and organising the activity of counterfeiters in addition to providing unregulated and competitive advantages which legitimate businesses are unable to use through trade boards, spam, auctions and cyber outlets.

The most heavily counterfeited sectors:

1. Entertainment and Software, 383 incidents, valued at $256 Million

2. Clothing and Accessories, 149 incidents, $69 Million

3. Drugs and Medical, 44 incidents. $15.8 Million

4. Food and Alcohol, 40 incidents, $1.7 Million

5. Cigarettes and Tobacco Products, 37 incidents, $276 Million
The reports conclusions are based on data obtained from actual counterfeit and piracy activity.

- Countries, such as China and Russia, export more counterfeit goods than they seize domestically.
- The US and UK are more effective at enforcing intellectual property rights than other countries.
- Five per cent of all intellectual property theft is linked to other serious criminal activity such as drugs, thefts, and weapons offences.
- Counterfeiters are now cross selling different brands with different types of fake goods and in some cases are dealing illicit items with the counterfeits.
- 14 per cent of counterfeit investigations now involve the use of the Internet.
- The Internet is being used by all types of counterfeiters to network and organise their activity.
- Trademark and copyright goods are counterfeited in nearly equal proportions.

The Bascap Intelligence Reports show that the Internet has been used as marketing tool in one of every seven reported investigations. A significant percentage of spam and junk email is attributable to internet vendors peddling everything from counterfeit drugs and watches to clothing, jewelry, software and pens. Manufacturers of fakes are using the Internet to market directly to consumers, retailers, and distributors through trade boards, auction sites, spam, and cyber outlets.

The shift from physical marketing to cyber marketing of fake products is due to a number of factors. The Internet is a vast and growing consumer and business market in all economies. Websites can be set up in minutes, at a minimal cost, with the use of a credit card and require only basic computer skills to design and publish. Moreover, tracing the physical location of a counterfeiter through a website can be extremely difficult.

Some counterfeiters are able to gain a competitive advantage over legitimate businesspeople by using Internet marketing methods that may be illegal or that most manufacturers or retailers would not wish to use. For example, the use of spam, online auctions, or trade boards may dilute a brand's value and pose legal, technical, and ethical challenges for many legitimate brand owners.

The top 5 (of 357) items counterfeited:

1. Films, 13.3 per cent of items counterfeited
2. Music, 7.5 per cent
3. Software (Business and Games), 6.1 per cent
4. Medicine, 4.3 per cent
5. Handbags, 2.1 per cent

In reviewing the top counterfeited items reported in the Bascap Intelligence Reports, it becomes evident that copyrighted (51.3 per cent) and trademarked (48.7 per cent) products are being infringed in nearly equal numbers. The variety of reported items suggests that counterfeiters are diversifying into a larger range of goods and industries, which phenomenon is regularly demonstrated when a wide mix of products is seized in raids on a single site.

Cross selling of different items and brands is also becoming a standard practice as fake Viagra is sold with cigarettes, CDs with handbags, and perfume with watches. In a small, but growing, trend, knockoffs are being sold with other illegal goods such as illicit drugs, fake identification and counterfeit currency.

The growth of the popularity as a distribution channel for counterfeit and pirated goods notwithstanding, reports indicate that traditional channels and mobile operations are still a significant problem for brands. A large percentage of retail operations are now set up in homes to minimise detection of mail order, product assembly, copying, warehousing and distribution operations. Mobile operations such as street vendors, flea markets, bazaars, auctions, and boot sales remain strong due to the large numbers of consumers attracted to discounted items and bootleg goods.

Intelligence also suggests that counterfeiters are experts at building upon existing brand marketing, thus saving themselves the cost of creating and testing consumer segments, setting up distribution channels, and advertising. For these reasons, it is not surprising that the leading brands counterfeited in each classification are well-known global brands. A notable case study is the Fifa World Cup 2006 which serves as an example of how counterfeiters implement this strategy.

Unlike brands whose images have been developed over dozens of years, the World Cup was promoted by organisers and sponsors in a relatively short period of time. Counterfeiters anticipated key markets, manufactured and warehoused knockoffs well in advance of the consumer demand, and then began attempting to distribute them as soon as the brand image was created by the World Cup organisers.

The top 5 (of 392) brands counterfeited:

1. Louis Vuitton, 5.2 per cent of incidents.
2. Nike, 4.9 per cent
3. Microsoft, 4.7 per cent
4 Gucci, 3.8 per cent
5. Prada, 2.5 per cent

During this reporting period, 392 brands were imitated. The majority of the 760 investigations focused on a number of brands, of which the top five were compiled in Table 4. Noticeably, Louis Vuitton, Gucci and Prada represent luxury products where supplies are limited and prices reflect the exclusivity of the brand. Counterfeiters are successfully moving large quantities of these products for a number of reasons. This exclusivity includes substantial marketing and retail costs, which translate into high prices that are easily avoided by counterfeiters.

The counterfeiters are able also to manipulate product quality and thus lower the cost of copying the products. The result is a substantial undercut in price of between 50 - 75 per cent from the suggested retail price. Regardless of these deeply discounted prices, it is common to find hundreds of percentage points in profit margins on these knockoffs, thus making it an attractive market to enter.

The top brands counterfeited in each category:

Cigarette and Tobacco Products - Marlboro
Clothing and Accessories - Louis Vuitton
Computer Equipment and Supplies - Canon
Drugs and Medical - Viagra
Electronic Equipment and Supplies - Underwriters Laboratories
Entertainment and Software - Microsoft
Food and Alcohol - Pepsi
Industrial Goods and Supplies - Toyota
Jewelry and Watches - Rolex
Perfume and Cosmetics - Giorgio Armani
Toys and Sports Equipment - Fifa World Cup 2006
Non-luxury goods, such as those produced by Nike, fight the challenge of popularity as opposed to exclusivity. Due to the high consumer demand for some brands, counterfeiters are able to sell large quantities at the full retail or modestly discounted prices. Again, quality is controlled by the counterfeiter to reduce costs and increase profit margins. Perhaps the highest-margin knockoff product is software. While hundreds of percentage points in profit appears adequate to counterfeiters and pirates for many phony products, margins in pirated software are in the thousands of percentage points.

The 392 brands analysed for this report represent a significant portion of the portfolio of consumer products available worldwide and a significant percentage of international trade. Moreover, the production and distribution of these brands provide millions of jobs – many of which are at risk to growing competition from illegal markets distributing fake versions of the original products. In controlling the cost of production and thus the quality of fake products, counterfeiters may put consumer health and safety at risk and undermine the confidence placed in these brands.

A number of factors affect sectors differently. Sales of fake Clothing and Accessories are influenced by a large variety of selling schemes, such as street peddlers, flea market vendors, bazaars, purse parties, internet auctions and discount outlets. The Entertainment and Software industries are vulnerable to Internet file-sharing technology and simple computer manufacturing techniques available to most consumers.

The Drugs and Medical, Food and Alcohol, and Cigarettes and Tobacco sectors are subject to regulatory and health restrictions such as mandatory age limits, verification of prescriptions, and expiry of goods. In addition, added taxes levied on these products provide incentives for counterfeiters to enter these markets and infiltrate supply chains.

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