Recession Likely to Spur More Counterfeit Technology

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As end users push back on the price of IT hardware and software, solution providers may be tempted to troll for lower-priced name-brand goods and find themselves in the ‘grey market.’ If it looks too good to be true, it probably is.

As the economy continues its downward spiral, a crime of opportunity is becoming more prevalent in the IT marketplace through the sales of counterfeit IT products.

“Piracy has always been around and the expectation is that it will increase,” said John Gunn, general manager at Aladdin North America, which develops software antipiracy solutions.

Counterfeiting of IT hardware and pirating of software has long been the stuff of back-door dealings and shady operators. But as more companies are tasked with doing more for less, which includes building out their networks, solution providers increasingly feel the pressure on the back end to meet customers’ needs for both equipment and price. In addition, most solution providers report that the average selling price of hardware decreased in 2008 by as much as 10 percent, according to the Channel Insider 2009 Market Pulse Report.

So, in an effort to keep down costs and answer customers’ pricing needs, some solution providers are sourcing their IT goods from auction sites, Internet storefronts or overseas distributors, the majority of whom are dealing in counterfeit products.

“Products like cables, network interface cards, EEC memory … that stuff is easy to counterfeit because it’s small, relatively easy to manufacture and it’s not really branded,” said Mike Sheldon, president and CEO of Network Hardware Resale, a used networking equipment reseller based in Santa Barbara, California “The stuff in big shiny boxes with holograms and logos – you’re not really going to see that counterfeited because that’s too difficult.

A 2008 study by KPMG titled, “Effective Channel Management Is Critical in Combating the Grey Market and Increasing Technology Companies’ Bottom Line,” suggests that counterfeiting is more prevalent than many would care to admit.

“Channel partners are attracted to the grey market for several reasons including larger discounts, product availability, and often shorter lead times,” the report noted. “Channel partners that were surveyed indicated it was often easier and quicker to buy product from the grey market than from their OEM, and for some OEMs, consequences were minimal for doing so. The balance is therefore tipped toward the path of least resistance.”

And when you can spend $25 (£17) on a WIC-1ENET expansion device rather than the $400 (£280) list price, what’s the harm, right?

“If it doesn’t work, at the very least you’re caught with a piece of equipment that doesn’t work and you’re out however much you spent on it,” said Steve Hasselbach, CTO at Bayshore Solutions, a Tampa, Florida.-based Web design and hosting company.

Or, the counterfeit product could end up damaging other genuine, more expensive hardware, costing your customer and you serious money.

But how can a solution provider determine whether something is counterfeit? Cori Hartje, senior director of Microsoft’s Genuine Software Initiative, said it’s not that easy sometimes to spot the fakes.

“We see a lot of high-quality counterfeit of all of our popular products. The high-quality counterfeiters are making [pirated software] look like an OEM product,” she said. “It’s psychological – users expect to pay less for OEM software, and overall it’s less obvious to the consumer.”

Gunn agreed: “There are some pirates that are so sophisticated they were able to dupe customs officials.”

“I’m sure a lot of people have counterfeit IT equipment and have no idea, and they probably never will know,” Hasselbach said. “But there may be interoperability issues and later warranty issues. It’s not worth the risk to the network, and it’s not worth the risk to the reseller. It’s his reputation at stake as well.”

And resellers who purchase pirated software also may have the added risk of malware to contend with, Hartje said. “No partner should want to be in a position of selling counterfeit, especially when there might be malware [in the software]. They put their own reputation on the line and end up supporting counterfeit software.”

Dimension Data, a global solution provider with North America operations based in Edison, New Jersey, deals in large enough quantity through distributors and vendors to not have to worry about counterfeit goods entering their product stream. But that doesn’t mean it can’t end up polluting corporate networks, said Lawrence Van Dusen, the company’s national practice manager.

“We recently did an audit of the existing contract maintenance for one of our customers, one of the largest insurance companies in the United States. We found that there was a significant amount of bogus serial numbers and contract numbers associated with the equipment,” Van Dusen said. “The company traced back and discovered the equipment had been repurposed from other projects or acquisitions.”

Cisco worked with the customer to replace the bogus products with genuine equipment, Van Dusen said. “They’re more interested in taking equipment back so they can identify the counterfeit stuff in the future. But it goes to show anybody is vulnerable.”

To avoid making your customer – and your business – vulnerable, Van Dusen and others recommend solution providers only purchase through reputable distributors or secondary market vendors they know and trust.

“Focus on purchasing through authorised resellers,” he said. “If you need to buy on grey market, there are some organisations that are reputable. But know who you’re dealing with.”

Sheldon agrees. “Be wary about places like eBay or Alibaba where you find Cisco premier partners offering something that is list price $400 (£280) but $15 (£10) each. It’s just not possible.”

Rather, a company like Network Hardware Resale, which tests and inspects all of its used equipment before it goes out the door, can provide a legal yet still cost-effective alternative to counterfeit.

“Solution providers shouldn’t hesitate to look for alternatives to new product, but they shouldn’t have to look to Hong Kong,” he said.