White Paper
the Counterfeit Problem
The Value of the Counterfeit Market
and anti-Counterfeit Budgets
It is difficult to find reliable estimates of the scale of the Global Counterfeit Market. You will find estimates as low as $200 billion up to "9% of World Trade" (which would put it around $540 billion). More specifically, the US Government estimated that the counterfeit market in 1996 was valued at $200 billion (US businesses only). An OECD report estimated the world market for counterfeit trade at $250 - $350 billion in 1995. The consensus seems to be around 5-7% of world trade which implies, for 2002, a figure of over $500 billion.
It is also the case that despite an estimated street value, for counterfeit items, of around a half a trillion dollars annually, total spending on anti-counterfeit strategies totals only around $50 billion - just 1% of the apparently lost revenue.
This, however, may not not be as strange as it seems at first glance. It reflects the fact that the estimates of value are based on retail value of the estimated volume of counterfeit items. It does not, in any sense, represent the actual cost or realistic estimates of lost revenue incurred by Brand Owners as a result of the piracy.
Consider one of the most awkward counterfeit products to police - music cds. What is the actual cost, to a record company, when one of its legitimate copies is pirated? Answer: Zero. The most they can claim is a fraction of the value of a lost sale. In the case of music, the industry's own estimates suggest that 40% of music on CDs is pirated. But this does not mean that 60% of that 40% would have resulted in sales. Unfortunately no serious studies have been carried out to determine what proportion of the counterfeit copies would have translated to sales had piracy not been possible.
And against the obvious negative impact on revenue, there is some evidence that the spread of pirate copies of goods also "promotes" the brand and - in the case of Microsoft software for example - at least ensures that their commercial competitors don't take their place.
Accountants and business strategists between them must have their own ideas, of course, about how much prevented counterfeit would translate into sales and it is fair to assume that their actual spending on the problem reflects those estimates. In short, why spend a million dollars on a problem if the result is only $800k in new sales?
One obvious conclusion is that any prospective solution must cost no more than manufacturers are already spending. It should also promise either significantly better results or significant savings for the same level of protection. Preferably it should offer both significant savings and considerably better results.
There are two other factors which various commentators suggest might influence anti-counterfeit budgets. First is the effect of "bad" counterfeits on Brand value, either through poor quality or safety related shortcomings. Second is the increasing tendency for governments to insist on accountability, to the extent that proposed legislation on both sides of the Atlantic may soon have the effect of making Brand Owners liable for damages caused by counterfeits if a court should be satisfied that the manufacturers have put insufficient effort into making their goods difficult to counterfeit. Both these factors could potentially increase anti-counterfeiting budgets above the commercial payback level but would nevertheless be unavoidable. As yet, however, there is no sign that these pressures have begun to increase spending.
