It has been estimated that there are $50 billion of illegal counterfeit and gray market goods sold on the internet annually – and with the amazing growth in popularity of online auction sites and business-to-business (B2B) exchanges, all indications are that this trend is going to get worse before it gets better.
In fact, the same characteristics that make the internet attractive as a channel for legitimate business – things like low cost and instant global reach – foster the development of smaller illicit operators emboldened by their relative anonymity and the plethora of potential customers within relatively easy reach.
Whether a good is counterfeit or authentic but sold through unauthorized channels – often referred to as gray market goods – the internet has emerged as a breeding ground for these types of brand infringements.
Practically anything that is manufactured is susceptible to being counterfeited. Fake items found on the internet include such wide-ranging items as consumer electronics, high-tech equipment, pharmaceuticals, apparel and accessories, sporting goods, software, movies and music. These products are sold on various online marketplaces, including auction sites, B2B exchanges and retail websites – and customers are often diverted to these unauthorized sites via email solicitations, pay-per-click sites and paid search ads. In a sense, these venues have become the modern day "street corner" for unauthorized selling of branded goods.
For corporations, the problem is multifaceted: there are financial implications, safety concerns and marketing and customer service issues.
The threat to revenue is significant and instigates a widespread ripple effect throughout the value chain. When revenue is stolen from a legitimate brand-holder and diverted instead to a criminal (who may be operating alone or as part of a broader, organized crime network), the loss is felt not only by the corporation but also by the municipality or country which would have collected legitimate sales and corporate income taxes. Further, distributors and retailers suffer price and margin erosion as they now compete with illegitimate sellers, and their status of being an authorized reseller is reduced. If corporations do not proactively manage their online channel, they will risk damaging valuable channel relationships.
Consumer health and public safety are other major concerns. Note the recent cases where individuals have died as a result of taking counterfeit drugs. Problems with counterfeit automotive and airline parts also pose a risk to public safety. What if the plane you are flying in received a counterfeit part during its last maintenance stop? Other examples include bacteria in shampoo and hazardous materials used in the manufacture of batteries.
Scared and angry consumers and consumers' rights groups are holding manufacturers, as well as legitimate distributors, accountable.
Counterfeiting also creates marketing and customer service issues: an unwitting purchaser of a counterfeit luxury item may be severely disappointed when the product's reliability doesn't meet the quality expectations for that brand. The online buyer of a gray market printer or camera may not be aware that he purchased through an illegitimate channel, and may be angry to learn that his warranty claim will not be honored. These issues, if left unmanaged, can and will result in brand equity erosion and buyer's loss of trust in the affected brand.
With the proliferation of illicit sales online, and the commensurate ease with which one can find counterfeit goods via a simple internet search, it's no longer a viable option for corporations to deny knowledge of these trades. Instead, to minimize liability, enterprises must take assertive action against online counterfeit sales. The good news is that new technology makes this possible.
Ultimately, in order for an online transaction to be completed, the seller must somehow meet potential buyers in some form of online marketplace. In today's internet, that juncture between buyer and seller is commonly represented by the online auction, B2B exchange or retail web site. The need to advertise the false good is the Achilles heel of the illicit seller – because it is in that advertisement that they must represent the brand and promote a price, and it is there that sophisticated searching and monitoring technology can help corporations quantify the problem and go after the worst offenders.
Not surprisingly, many of the companies that I talk to are unaware of the extent of their illicit online sales problem. They often seem to take a passive stance, arguing that they have no way of knowing exactly how much counterfeit there is, just that they know it's "bad." They tend to focus their security efforts on offline activities such as shutting down illegal manufacturing operations.
I would argue that this situation calls for a much more aggressive approach. Focusing exclusively on offline activities is only addressing a part of the problem. Companies must approach the issue holistically – identifying where illicit sales are happening online and quantifying the amount of goods traded through this channel, as well as reaching out into the physical world to shut down illegal operators—in order to address both the manufacturing and the distribution problem.
Unfortunately, it is a given that these types of activities will continue. But it's like that old joke about a group of campers trying to outrun a bear: you don't have to be faster than the bear, you just have to be faster than the other runners. Brand owners that protect themselves aggressively simply make themselves less attractive targets.
-Laura Mather is senior scientist at MarkMonitor