Global Business 3rd Edition by Mike Peng

Exercise 48

The scale and scope of counterfeiting, especially in motion pictures, make it very challenging to combat counterfeiting. Are current anti-counterfeiting measures effective? Big Business Counterfeiting is big business. It is a problem that has been haunting businesspeople for millennia. The first producer's marks appeared on pottery in China about 4,000 years ago. And it was not much later when counterfeiters saw the advantage of copying successful products. In the Roman Empire, a well-known brand name for oil lamps was FORTIS. So many artifacts with this name have been found that it is evident that widespread product copying took place at the time.
What exactly is a counterfeit product? A common definition is that "any unauthorized manufacturing of goods whose special characteristics are protected as intellectual property rights (IPR) constitutes product counterfeiting." IPR includes copyrights, patents, and trademarks. The scope of counterfeiting is widespread with traditional products ranging from footwear to computer software to watches to cigarettes. The pirates have also diversified their product offerings to non-traditional goods in health and safety areas, such as pharmaceuticals and aircraft parts. The total size of the counterfeit market is nearly impossible to accurately determine, but it appears to be growing rapidly. In 1985, the annual worldwide product counterfeit market was estimated at about $25 billion. Today, a number of organizations claim that more than 5% of world trade consists of counterfeit goods and some estimate the total from $200 billion to $500 billion annually.
A number of reasons have been given for the growth of counterfeits. An in-depth analysis shows many driving forces, including the low investment required to get into a market combined with easily available cheap technology, globalization and lower trade barriers, powerful worldwide brands, ongoing consumer willingness to buy counterfeit product, and 1) © Alan Zimmerman and Peggy Chaudhry. Reprinted with permission. especially weak national and international enforcement of IPR. Each of these forces relate to the basic issues discussed in this text. Industry structures such as entry barriers that can be overcome by technology and the continuing importance of worldwide brands are important. Firm-specific resources such as the ability to copy product, find distribution outlets, and secure financing make certain pirate firms successful.
But it is clear that the overriding driver of the growth of counterfeit products lies within institutional frameworks. A number of multilateral organizations exist to protect IPR, including the World Trade Organization's Trade Related Aspects of Intellectual Property Rights (TRIPS), the World Intellectual Property Organization (WIPO) that is charged with implementing the provisions of the Paris Convention dealing with patents and trademarks, and the Bern Convention that focuses on copyrights. In addition, nongovernmental organizations (NGOs), such as the International Anticounterfeiting Coalition (IACC), the Business Software Alliance (BSA), and the Software Information Industry Association (SIIA), deal with chronic piracy. A critical problem lies in enforcement. While in the United States, convicted counterfeiters may be fined millions of dollars and spend years in prison even for a first offense, in many countries counterfeiters can get away with small fines and virtually no danger of a prison sentence. The US Trade Representative (USTR) reports each year on the IP environment within each US trading partner. Countries that fail to enforce their IPR laws are subject to penalties from the US government.
Despite the plethora of governmental and nongovernmental agencies attempting to control counterfeit product, the failure of enforcement at national and international levels has allowed pirates to operate with impunity in many countries. For example, the infamous Ciudad del Este in Paraguay has been described as the Wild West for its illicit trade. Other problem countries for IPR protection described in our 2009 book, The Economics of Counterfeit Trade: Governments, Consumers, Pirates, and Intellectual Property Rights, are Argentina, Brazil, Chile, China, Egypt, India, Israel, Lebanon, Mexico, Russia, Thailand, Turkey, Ukraine, and Venezuela, which are host countries notorious for counterfeit shopping districts (such as Xiushui Market-formerly known as Silk Alley-in Beijing).
Counterfeit Motion Pictures
One critical worldwide problem is the illegal copying of motion pictures. The box office for films in the United States was estimated at $10.6 billion in 2010 (the same as 2009) and globally at $31.8 billion (an 8% increase over 2009). For example, Disney's Ratatouille was launched simultaneously in 33 countries in multiple languages and earned more than $300 million in international sales on the third weekend of its debut in 2007. With this type of revenue, the Motion Picture Association of America (MPAA or MPA) tries to improve the image of "Hollywood." It reports several reasons why the industry should be nurtured, since it employs over 2.5 million professionals (ranging from costume designers to set builders), contributes almost $80 billion per year to the US economy, and is the only US industry that has a positive balance of trade in all of its foreign markets.
A 2009 article in The Wall Street Journal authored by one of us (Chaudhry), "Getting Real About Fakes," reported that over 50% of 2,000 consumers surveyed in Brazil, Russia, India, China, and the United States had obtained a fake movie in either a physical or virtual market and that the average frequency of acquisition was three times during the past year. Despite the well-publicized efforts of many national governments and international as well as nongovernmental institutions, the counterfeit product market appears to be growing at a rapid pace. The world of counterfeiting seems subject mainly to informal norms and beliefs. The advent of easy and inexpensive communications allows all the players in this business to rely on relationship-based informal networks while easily avoiding detection.
Many actions aimed at slowing down product counterfeiting have been offered by a number of researchers. Studies of these recommended actions show that some are particularly ineffective. In particular, actions directed at consumers, whose willingness to buy counterfeit products including pirated movies is undaunted, seem fruitless. The MPA is targeting young consumers on its website and even has prepared material for the Weekly Reader that educates fifth-grade students through a story of "Lucky and Flo," two dogs who sniff out fake DVDs by sensing the chemicals used to manufacture this product. Obviously, the goal is to create better cybercitizens by educating youth to reinforce the concept that using fake movies is stealing and analogous to shoplifting. Nevertheless, most studies report that consumers generally see purchasing a counterfeit good as a victimless crime. In addition, the industry has followed in the footsteps of Apple iTunes, and there are now several ways to obtain movies legally through the web at places like MovieFlex and Netflix. Today, consumers can obtain Ice Age: Dawn of the Dinosaurs at Amazon Video on Demand for $6.99 that gives them the flexibility to watch this film through their television, a computer, a portable video device, or "save it for later" in a video library.
The most effective anti-counterfeiting action is straightforward-registering trademarks/patents/copyrights in the relevant jurisdictions. In addition, other effective actions focus on distributors and employees and local law enforcement. The MPA has developed a multipronged action plan ranging from publication of the "Top 25 University Piracy Schools" to commercials featuring Jackie Chan and Arnold Schwarzenegger riding motorcycles in their "Mission to Stop Piracy" advertisement. A few years ago, the MPA used the "You Can Click But Can't Hide" campaign to educate consumers about the ease of finding someone who has illegally downloaded a movie from the web. This prompted bloggers to create their own anti-antipiracy campaign, "You Can Sue, But You Can't Catch Everyone." Current ads at the MPA website focus on illegally filming movies in the theater with the slogans, "Lights. Camera. Busted." and "Leave Your Camera at Home. Do Not Record in This Theater."
It may be that over time the growth and sophistication of particular markets will reduce counterfeiting. Pressures from legitimate suppliers have certainly made product counterfeiting less widespread in the United States, Japan, Hong Kong, Taiwan, and South Korea as these markets mature. In the meantime, to limit the harm counterfeiters can do to their brands, owners of IPR must have effective ongoing antipiracy programs that have the attention of top management.
Case Discussion Questions
Why do some entrepreneurs choose a strategy of product counterfeiting?