Special Report on Counterfeit AV
to 10 different people and you’ll likely get an equal number of different responses. To some, they have a literal meaning?an imitation or fake that is made to represent an original product. But to others, they mean a chance to purchase a brand that is out of their price range. In the AV community, counterfeiting draws ire from all sides.
Say the words “counterfeit” or “knock-off” to 10 different people and you’ll likely get an equal number of different responses. To some, they have a literal meaning–an imitation or fake that is made to represent an original product. But to others, they mean a chance to purchase a brand that is out of their price range.
In the AV community, counterfeiting draws ire from all sides. “Counterfeiting has been an issue for years, but technology changes have made it a problem to a larger magnitude. It used to be a periodic problem, but now it happens more frequently,” explains Paul Applebaum, chief legal officer and head of human resources for pro audio manufacturer Shure. “The Internet has made it easier to sell counterfeits around the world.”
According to statistics published in May 2008 by the European Commission, customs registered over 43,000 cases of fake goods seized at the EU’s external border in 2007. Statistics from the Department of Homeland Security’s U.S. Customs and Border Protection agency show that China was the country of origin for 80 percent of all U.S. counterfeit product seizures in 2007. And according to INTERPOL, “evidence shows that virtually all major transnational organized crime groups are involved in product counterfeiting, generating huge profits which often fund additional criminal activities across all sectors.”
These products include handbags, watches, clothes–and yes, AV gear.
“Our company has been experiencing increasing problems for years, especially the counterfeit of product designs and even product catalogs,” says Fred Besnoff, product applications manager for Neutrik, a professional connector products manufacturer. “I’ve seen copies of our catalogs that were copied word for word, including photos.”
For Neutrik and other manufacturers, imitation is not a sincere form of flattery. For vendors, counterfeiting means lost revenue and, in cases where users aren’t aware they’ve been duped, damage to their brand. For AV pros who, knowingly or not, specify counterfeits or knockoffs, it can mean unhappy clients and greater liability.
“The ultimate problem is that counterfeiters are now putting our brand name in their molds,” says Besnoff. “It’s a big problem worldwide. Given all the effort in our designs, counterfeiting is a slap in the face.”
Counterfeit Royer Labs microphones (left and right) are often branded and given model numbers. Similar fakes have appeared on eBay and been sold in Europe. Counterfeiters sometimes build smaller slots on the front of the mic in an effort to claim that the trademarked look was not copied. Other than that, according to Royer, the parts from the counterfeit are interchangeable with the genuine article. Some even copy Royer’s patented “offset transducer” design.
How it happens
The line that connects a manufacturer’s design and a counterfeiter’s fake can be tangled and complicated. The process of counterfeiting often depends on a company’s design, manufacturing, and distribution methods. For example, the use of overseas contract manufacturers offers one obvious opportunity for counterfeiters because product designs must be shared across borders.
But what about an American company that manufactures and assembles its gear in the U.S.?
Royer Labs microphones are completely designed and manufactured in Burbank, Calif. “The parts do not leave the city, much less the shores of our country,” explains Rick Perrotta, president of the ribbon microphone manufacturer, and co-product designer with David Royer.
Still, Perrotta says, the company receives e-mails and phone calls from customers who have bought authentic Royer microphones only to see to see it offered for significantly less elsewhere.” Sometimes we get calls from our European dealers who will complain that someone is selling a counterfeit and hurting their business,” he says.
When his company first began exhibiting at trade shows, Perrotta says, “I noticed that people were taking detailed photos of our transducers on display. Because we don’t send our designs anywhere, counterfeit Royer products are likely done by reverse engineering based on those photos or by acquiring a sample.”
In particular, Royer Labs has had problems with Chinese original equipment manufacturers (OEMs) and distributors. One Chinese manufacturer had even copied the company’s patented offset ribbon in its transducer, Perrotta says.
According to Applebaum, the vast majority of Shure and other audio brands are counterfeited in China. He says that the product could be assembled in other countries like India or Russia but are built with Chinese-made parts.
“Once they get the design, it is easy to superficially copy it, sometimes using laser-computer technology. Technology makes it easier and faster to create counterfeits,” Applebaum says. “What they can’t copy are the subtle trade secrets that go into it to give the product its Shure acoustics and quality. The fake is only superficially similar to the genuine product.”
(In our reporting, we heard from several AV pros about knock-off loudspeakers, amplifiers, and other high-end equipment, but none of those people or the manufacturers whose products were being imitated would talk about the problem on the record.)
Shure attempts to trace fakes back to their Chinese sources, but the process can be extremely difficult. “There are often many middlemen in the channel. It is usually traced back to a nonexistent address or a forwarder someplace else like Hong Kong or Taiwan,” Applebaum adds. “The receiving party may only have the name of the company in English, but you must usually know the Chinese name in order to pursue them in China.”
Neutrik’s Besnoff, too, has witnessed trade show attendees taking detailed photos and asking for detailed specifications of their connectors and has long suspected it was with the intent to reverse engineer the company’s products.
“Before you know it, we’ll be at the next show and there will be a Chinese manufacturer who is advertising most of our connectors as their own,” he says. “In Europe, the government will shut down suspected counterfeiters at the show. Europe is more stringent and protective of intellectual property rights. Only U.S. Customs has that kind of power here, and they don’t attend AV trade shows.”
Third Shift
And how are these counterfeit products actually manufactured? Some call it the “third-shift syndrome” at the contract manufacturer.
“The bosses have gone home and workers do an extra run of products,” explains Karl Young, director of business development at Net Enforcers, a brand protection company with offices in Arizona, Florida, and the Philippines. “It is so blatant that people will bring products home or to another warehouse and assemble them. Then the products are drop-shipped to someone in Europe or the U.S. who will sell them on eBay.”
In fact, the rise of the Internet and the popularity of online auction sites have only made it easier for counterfeiters to sell their products worldwide. “Online auction platforms are what cross all borders. In the Internet age, advertising and distribution of fake products are easier and more widespread,” says Applebaum. “It is easier to distribute fakes anonymously. Clearly the counterfeiting problem has grown but it is partly the growth of perception as well.”
Besnoff agrees. “eBay is a horrible problem,” he says. “We will get a call about a product that has failed and find out these people bought it online and not from an authorized sales source.”
Counterfeits or not, eBay or not, many AV manufacturers have begun to take pains to warn people about buying products from unauthorized dealers. Companies like Anchor Bay, Klipsch, and SpeakerCraft post information on their Web sites about unauthorized dealers who, among other things, might be selling counterfeit products.
Combating the Problem
Shure has waged a very public battle with counterfeiters, dating back to 2000 when it announced it won an intellectual property rights lawsuit against Taky Electronics Co. Ltd. of Taichung, Taiwan. In 2007, a company press release touted that Shure captured a large amount of counterfeit products following a raid in Taiwan. “This sends a clear message to counterfeiters that Shure is committed to protecting our brand and reputation,” said Sandy LaMantia, president and CEO of Shure, in a statement at the time. “We will not tolerate this activity and will do everything within our power to ensure that sub-standard products bearing our name stay out of the marketplace.”
And as recently as 2008, the company issued releases about finding counterfeit Shure earphones in Hong Kong and counterfeit microphones in India and China.
Taking a public stance and educating the market about counterfeiting is but one option. According to Besnoff, Neutrik has chosen to build and staff its own manufacturing facility in China, allowing them to be cost-competitive while safeguarding their design techniques. Recently the company introduced a unique hologram of the Neutrik name and logo as a way to identify its products. The company will also include an authenticity seal on its individual and carton packaging. “Anti-counterfeiting efforts such as holograms on connectors are effective because the process to create the hologram is very difficult,” says Besnoff.
Royer Labs, on the other hand, is taking an altogether different approach. “We had several meetings about this problem and decided that the problem was too big and too broad,” says Perrotta. “Instead, we decided to distinguish ourselves and introduced two elite microphones that were up-market. The strategy is to put as much distance between us and the knockoffs.”
Other companies, makers of integral AV systems such as loudspeakers, reportedly have lawyers in the Far East attempting to identify fakes and knockoffs and to work with local authorities to shut them down–with limited success. Some Chinese manufacturers, sources say, copy designs and then subtly alter a name-brand manufacturer’s logo to give the impression of a high-end product while not blatantly showing a counterfeit model to the market.
Brett Heavner, partner at intellectual property law firm Finnegan in Washington, D.C., underscores the challenges in tackling counterfeiting outside U.S. borders.
“In the U.S., civil and criminal penalties are in place. You can go to a court and ask for an ex parte seizure order,” he explains. “But trademarks are territorial. Just because a company has a U.S. trademark does not mean it extends to another country. Abroad, you have to rely on local courts and laws to enforce your trademark. China needs to get their court system developed. It’s not that they don’t uphold intellectual-property rights. Their courts are not as developed as other countries.”
Still, despite the public efforts of some major AV brands, there are many manufacturers who choose not to acknowledge or discuss counterfeiting as a problem.
“Some companies don’t want people to know about their counterfeiting problems,” says Young. “But they don’t realize that bad products can erode the brand. For the professional AV crowd, the mindset says sales will suffer if people think they are buying fakes even though they are buying real products.
“Counterfeiting will affect the AV market soon,” Young warns. “They’re just getting around to you.”
Why You Should Care
On a trade show floor, one manufacturer related the story of an integrator he’d met at another trade show in Europe who knowingly specified counterfeit amplifiers for a project. That integrator was willing to risk a certain percentage of bad or malfunctioning units in exchange for lower cost.
Taking Precautions
Brett Heavner, partner at intellectual law firm Finnegan, specializes in trademark and copyright law, as well as counterfeit and infringement litigation. He says that counterfeiting is a global problem that is not unique to any individual industry.
“The trend has been away from luxury products to more basic things like pharmaceuticals, industrial, and large pieces of equipment. Why? Because there is profit in it,” he says. “As more contract manufacturers are used overseas, there is more exposure and opportunity for counterfeiting.”
Heavner says that no matter what size a company is, it needs a plan to combat counterfeiting that makes sense for its business.
“Smaller manufacturers can start by doing selective enforcement,” he says. “And look at the quality of counterfeiting. If it’s crude, don’t bother.”
Heavner suggests three simple steps that any company can take if it expects to design a product that might be susceptible to counterfeiting:
1. Take advantage of trademark and copyright registration early in any country that is important to your business. In most countries, trademarks can only be protected if they are registered (outside the U.S.).
2. Take control of the production and design process in-country and come up with a special mark that distinguishes the product as yours.
3. Be careful about who you hire. If you’re teaming with a contractor, use background checks and learn who they are and how they do business. Moreover, find out how they secure your information.
However, educated clients don’t live in a bubble. Many know what products cost and they may not be as tolerant of hardware failures, depending on the criticality of the applications.
“Why should pros care?” Applebaum says. “Perception makes a problem. If there is perception that the market is crowded with fakes, or confusion in the market regarding performance and pricing, then it causes problems for everyone, from manufacturers to end-users.”
And the problem stands to get worse, so being on the right side of counterfeit AV now may prove crucial to stemming its tide later.
“As the Chinese [contract manufactures] develop, there will be pressure for them to improve their counterfeits,” says Perrotta. “What they lack is design creativity–the ability to dream up these products. But it’s only a matter of time before that changes,”
AV professionals have a unique relationship with AV manufacturers. They’re often authorized dealers, and their feedback can directly influence the design of a system. Many once worked for manufacturers themselves. They have a vested interest in maintaining the design integrity of the products that are their livelihood.
In telling the story of a recent meeting with a major manufacturer, Neutrik’s Besnoff offers an ominous picture of where the industry could be headed if the AV community doesn’t stay alert to issues of counterfeiting.
“I was called in to assist with a unique design that they had encountered a problem with it,” Besnoff explains. “I had a few ideas for a solution but was surprised that the company had also flown in its Chinese contract manufacturer to attend the meeting.”
On behalf of Neutrik, and in good faith, Besnoff presented his ideas with the understanding that his company would do the work for the manufacturer, as described in a previous agreement. But it didn’t turn out that way.
“At the end of the meeting,” says Besnoff, “the contract manufacturer stated that he could copy my proposal and no longer needed me.”
Linda Seid Frembes is a freelance AV journalist and frequent contributor to Pro AV.
