Counterfeiting, A False alarm?

September 2010, counterfeiting has become a widespread phenomenon, and brands accuse it of damaging their image and cannibalising their profit. Estimates of lost sales do vary from one source to another, for the sake of argument let us agree that brands usually come up with a number that compares with the United States national debt.

The anti-counterfeiting propaganda fuelled by brands usually find an echo in the press and government officials, who run rather patronising and moralising campaigns that antagonise consumers by depicting them as unwitting criminals or worse: terrorists.

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Counterfeit mechanical components and medicine are a serious safety hazard. That being said, Professor David S. Wall drew ire when he dared to contradict the brand’s arguments in a report co-signed by Doctor Joanna Large for the British Home Office. Teir findings are actually very similar to those published by Pamela N. Danziger in 2008: by constantly drawing attention on image, brands have completely forgotten about content and governments are now expected to step in to protect the fat margins of private companies.

Globalisation permanently changed the game of intellectual property but brands continue to play with outdated rules. The solution is no longer to fight counterfeiting downstream by antagonising customers, but to fight it upstream by sorting out priorities. Instead of antagonising consumers, a less cynical and patronising type of marketing could actually generate true consumer love for the genuine article.

Preamble

Twenty years ago, a layman could easily tell a genuine Rolex from a fake one purchased on a street corner. Nowadays, one can easily order in an online store, run a few hundred yards from the factory, a counterfeit that is identical to the original and have it delivered under a few days. Brands talk of losses in seven figures numbers, and their lawyers are lobbying for heavy penalties on any occasional counterfeit importer caught red-handed. Besides the alleged financial loss and damage to reputation, the same brands treat those customers like potential terrorists:

By 2010, the market of luxury good represented 170 billion dollars per year, which is the gross domestic product of the 42nd richest country in the world (on a list of 243 countries). After an unbridled globalisation and access to broadband internet, physical goods and information take less than one day to go round the planet. The current size and reach of counterfeiting leaves little doubt as to the success in repressing it.

By hammering consumers with advertising, brands have almost brainwashed consumers in replacing brand loyalty by lust after logos, a Pavlovian reflex that they must channel through counterfeit goods. Professor Wall and Danziger swam upstream when they chose to debunk the brands discourse that typically gets relayed by the press.

According to Pamela Danziger, counterfeit products don’t take away from sales of the brand, since the majority of counterfeit products out there are bought by customers who can’t buy the real thing anyway.

The three experts point to pragmatic solutions that would be worth considering. Before going any further, the author would like to try to separate the wheat from the chaff by looking at the causes of counterfeiting, the current lack of results in cracking it down, and the experts recommendations for a cure.

Dogma of Intellectual Property

In the history of civilisations, intellectual property is a fairly recent concept. From Antiquity to the Modern Era, ideas that were considered of public interest were easily accessible. The only way to protect an idea was to surround it with mystery as was the case with Alchemia, or to reserve it to insiders as was the case with Shamanism. At a time where craftsmanship was predominant, the concept of a model or a design didn’t yet exist. The Decorative Arts of an ethnic area would typically use popular shapes and patterns that resulted from slight improvements brought on generation after generation. The difference between two artefacts mostly lied in the following:

  • Quality of raw materials
  • Skill of the manufacturer

The best craftsmen having made a name for themselves, competitors would be tempted to pass items of lower quality as the real thing. As the reader can guess, the risk of seeing a design used by competitors would increase with the capacity for mass production.

Birth and evolution of the concept of intellectual property

In Europe, the first monopoly on a design dates from the 5th century BC in Greater Greece (Southern Italy), but it is mostly during the Renaissance that rulers started to grant monopolies limited in time in return for full disclosure of the design.

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The first patent ever was granted to inventor Brunelleschi in 1421, and Gutenberg’s assistant negotiated a lifelong monopoly on movable-type printing from the city of Venice in 1469. The first draft of copyright appeared in 1710 with the Statute of Ann, taking from the Licensing Act created to allow the crown to control the printing industry.

Statute of Anne, by British Government. Original source: The History of Copyright: A Critical Overview With Source Texts in Five Languages. Licensed under Public Domain via Wikimedia Commons

Statute of Anne, by British Government. Original source: The History of Copyright: A Critical Overview With Source Texts in Five Languages. Licensed under Public Domain via Wikimedia Commons

The Statute of Ann laid the ground for protectionism in favour of English printers who were at a disadvantage with lower Scottish wages. Intellectual property was borne from a sovereign and unilateral decision to grand a protectionist monopoly to the holder of an idea. In our Modern Era, there is a distinction between copyright, trade mark, registered design and patent. Copyright extends for several decades after the death of a person, to allow heirs to reap the benefits:

  • Trade marks can be protected forever.
  • Registered designs only last for 25 years.
  • Patents only last for 20 years.

The protectionist monopoly has been designed to reward, and thus foster creativity. In the case of registered designs and patents, rulers wanted to discourage inventors to rest on their laurels: once expired, those two categories of intellectual property allow for the rest of the industry to capitalise on the invention. The programmed obsolescence of this protectionist monopoly leads to a broader use of an invention by the rest of the industry and indirectly benefits to the state’s treasury.

In France and countries of similar law, intellectual property can combine registered design and copyright. The United states refuse to combine protections. Registered designs that have expired can be legally copied in the USA, but they will still be considered as counterfeits in France. The Reverso watch, registered in Paris in 1931 by engineer René-Alfred Chauvot, saw its patent fall into public domain in 1951, which led to the design registration in 1956. It remains under copyright protection in France.

Registered design

Artifacts were the result of an empirical and spontaneous design process, but the Industrial Revolution introduced new job titles such as the industrial designer. Frenchman Raymond Loewy, one of the most prominent spokesperson for this new discipline, use to say that “ugliness doesn’t sell”. Between the two world wars, designers are called upon to bring added value to mass-produced products.

In watchmaking, brands were used to buy stock cases, dials and hands from the same suppliers. As an example, the Compressor, Compressor 2 and Super Compressor watch cases from E. Piquerez SA found their way through a handful of brands. This practice led to very similar looks amongst numerous brands, and makes it difficult to determine who was the first to come up with the look. The Rolex Submariner, considered by experts as the template of the modern diving watch, was only released one year after the Blancpain Fifty Fathoms, another nautical watch.

After the first Oil Crisis, watch brands started to use design to differentiate their products from the competition. Audemars Piguet pioneered watchmaking design by releasing the first stainless steel luxury watch at the price of gold, at the 1972 Basel fair. The timepiece had been designed by a young Gérald Genta during his first year as a freelance designer.

The Royal Oak watch case by Gérald Genta.

The Royal Oak watch case by Gérald Genta.

The industry crisis of the 1980’s called for a change of priorities, and brands focused on surviving or regrouping. It took fifteen years before they started to innovate again. The 2000 collapse of the dotcom bubble discouraged investors to speculate on the virtual, and many brands outside of the watchmaking industry started to look at the fat margins made possible by brand extension towards timepieces. Between 2000 and 2007 there was an average of 40 new brands per year, novel or resuscitated. With this revival of interest, watchmakers ventured off the beaten path of classical and sports watches: Classicism, Neo-retro, New Horology, and so on…

Backfire of Intellectual Property

By giving priority to logos and cost reduction, the brands made two strategic oversights that paved the way for counterfeiters.

Consumers lusting after logos

After WWII, most of the industry benefited from stimulus packages, which led to the birth of new job types that are cynically inter-related:

  • Marketing: defining the need of consumers.
  • Design: shaping a product to meet their needs.
  • Advertising: convincing consumers that this product meets their needs.
  • Public Relations: limiting the damage when consumer becomes aware that the product fails to meet their needs.

The first mistake made by brands was to comfort themselves in the feeling of immunity granted by a protectionist monopoly and a design registration. By focusing on the types of intellectual property that can be registered, brand seem to have completely forgotten about the service that had to be performed by the product. At the end of the day, consumers find themselves surrounded with products with a strong image that can easily be manufactured anywhere. “Tut fumo, ninety arrosto” say the Italians: All sizzle and no steak. A good example of this trend is the pair of Dolce & Gabbana flip-flops, which is mass-produced with an extremely cheap material. With this type of product, brands just serve opportunities to counterfeiters on a silver plate: “The luxury brands have totally brought this counterfeit thing upon themselves,says Pamela Danzigerbecause they have been pushing the image so hard and have totally forgotten about the most important message, which is why we should be spending 10 or 20 times more on a real bag than a fake one. They are selling the sizzle and not the steak. They need to get back to the steak.” Counterfeiters just took the opportunity created by the emphasis of brands on image instead of substance in their advertising campaigns. By drawing attention to image rather than added value, quality and tradition, consumers no longer have a reason to buy the original. When value rests on a logo or on initials printed on a product, buyers are not incentivised to purchase the original.

Brands lusting after fat margins

In the 17th century, Swiss watchmaking was borne of a combined exodus and relocation. Religious persecution led Huguenots clock masters to flee from France to take asylum in Switzerland, where industrialists would later take advantage of low wages and outsource production away from France and Great Britain. The iconic Rolex brand was first created in London and moved to Switzerland. During the 20th century, the progress made in transportation and communication laid the ground for globalisation. Brands could kill two birds with one stone: new markets were opening up, thus increasing their reach, and outsourcing allowed to take advantage of low wages to increase margins. The second mistake of brands during the late 20th century was precisely the outsourcing of a know-how that had been their very \”golden goose”. The outsourcing of watchmaking to China, combined with a rising wage and stricter enforcement of labor laws eventually backfired with the burgeoning of a local industry. Local factories notoriously manage to source and distribute counterfeits through parallel channels.

Counterfeiting Pandemic

Today, counterfeiting has become a cultural phenomenon besides a monetary one. The division of society based on social and economic status helps to explain a decantering effect from the elite to the masses.

Sociology of counterfeiting

As early as 1899, the economic and sociologist Thorstein Veblen introduced the concept of conspicuous consumption, by which people attempt to display their social status. Unlike the disputed Say’s law of supply and demand, that makes demand inversely proportional to price, the Veblen effect explains how the price increase of a product will increase its desirability and importance as a social status marker. In his analysis, Professor Wall divides society into four layers of individuals:

  1. Trendsetters: celebrities, brand ambassadors and other VIP’s who can afford (or be lent) everything and sometimes receive free products.
  2. Cognoscenti: who buy genuine products and feel close to the trendsetters and above “the masses“.
  3. Ambitious (the upper part of the masses), who aim at being on top of the masses by sharing the aspirations of the cognoscenti, but who follow fashion by mixing genuine and counterfeit products.
  4. Conformists (the lower part of the masses), who follow trends to avoid looking out of fashion and mix counterfeits with replicas.

An example of trends successfully launched is Officine Panerai. In the late 1990’s, Hollywood actor and producer Sylvester Stallone showed a spontaneous interest in the Italian brand and introduced it to his friends. Out of interest (punt intended), he actually contributed to putting the brand on the map and creating a new trend for BIG watches.

Actor Sylvester Stallone as Kit Latura in the 1996 movie Daylight, credit Universal Pictures

Actor Sylvester Stallone as Kit Latura in the 1996 movie Daylight, credit Universal Pictures

Counterfeits and replicas

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Within the counterfeiting phenomenon, we can differentiate replicas (that copy a registered design) and the very counterfeiting, which always consists in using a trademark and sometimes in copying a registered design. The watch pictured above is a counterfeit, but it is not a replica. Even though the watch uses the A. Lange & Söhne trademark, it doesn’t correspond to any genuine model. On the major watch forums, the consensus is to avoid the apology of counterfeiting, but the opinion on replicase is more mitigated although it is indeed a violation of a monopolistic intellectual property. Some collectors are not convinced that replicas damages the real brands and only allow it in two cases: In the case of trademarks, the US office actually requires proof of use before granting a monopoly, and in Europe a trademark registration can be invalidated if it is not used after a certain time. The apologists of replicas suppose that registered designs do fall under the same rule.

Paradox of counterfeiting

The third strategic mistake of brands is to work downstream and ignore the feedback of consumers. Here are examples of rare cases where “counterfeiters” were able to anticipate the demand better than the original brand:

When the pirates find themselves cantilevered

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The Seamaster 600 from Omega became a collector’s piece after the brand removed it from its catalogue. As the French say: “Who says nothing consents”, and so the legit boutique brand Ocean7 unveiled their LM7 in 2007, two years before Omega decided to capitalise on the prestige of their iconic diving watch. Ocean7 tried to stay as close as possible to the original 600, while Omega decided to stylistically upgrade some of the details.

The original Seamaster 600 next to its re-edition by Omega

The original Seamaster 600 next to its re-edition by Omega

The table turner turned

Before its acquisition by Vendôme Luxury Group, Officine Panerai had issued watches that barely bore resemblance to its historical models. Japanese businessman Ken Sato decided to create replicas of the earliest designs of the brand, and his work under the brand R.X.W. proved so good that counterfeiters started stealing his trademark.

Shooting faster than one’s shadow

Sometimes, the counterfeiters are one step ahead of conservative brands: by replacing the traditional anodised aluminium insert of the GMT-Master II with a scratch-resistant ceramic one in 2005, Rolex sent the signal that this upgrade would be rolled out on all other sports models such as the Submariner. Before the release of the latter in 2010, counterfeits and replicas featuring a ceramic insert were already in circulation. In the [third part] of this essay, we are going to look at the real impact of counterfeiting on luxury goods, and how the experts recommend to think out of the box to fight this pandemic.