Nintendo, Sony Fight Against Counterfeit Goods

[Alpha]

June 3 (Bloomberg) -- When a nine-person team of Nintendo Co. anti-piracy investigators and Chinese police raided the Hi- Tech Electronic Factory in southern China last November, they found almost 10,000 counterfeit GameBoy cartridges stamped ``Made in Japan.''

 

It took 20 porters to carry out all the loot found in raids on the company's factory and warehouse, part of a growing effort by Nintendo's anti-counterfeiting team to stop illegal copying of the company's goods. Investigators, who found about 100 workers assembling cartridges at Hi-Tech's factory, detained owner Huang Weijian, according to a summary of the event provided by Nintendo.

 

The seized games would have cost Kyoto-based Nintendo about $350,000 in lost sales if they'd made it to the streets of Hong Kong, Shanghai or Seoul, where fake games and DVD movies sell for as little as a 20th of real retail prices. Nintendo says it lost about $720 million in sales last year to counterfeit goods, even after it seized a record 4 million fake game cartridges, consoles and other items -- double the number in 2002.

 

``It's an uphill battle,'' said Jodi Daugherty, the director of Nintendo's Redmond, Washington-based anti-counterfeiting task force, who has worked on the team for more than a decade. ``I don't know if you ever win the war. We're certainly making it more difficult.''

 

Nintendo, the world's biggest maker of handheld game players, can't afford to lose money to counterfeiters after net income for the year ended March 31 fell by more than half to 33.2 billion yen ($303 million), hurt by price cuts and the yen's gains.

 

Shut Out

 

Nintendo and Sony Corp., the world's biggest consumer- electronics maker, get most of their sales from Japan, the U.S. and Europe, where piracy is less common than in developing nations. Yet China's thriving marketplace for fake goods is shutting those companies out of surging consumer demand in a nation whose economy grew 9.1 percent last year, said Alexander Shalash, who manages $190 million of global technology stocks, including Nintendo, at Swissca Portfolio Management in Zurich.

 

``Companies like Sony and Nintendo are finding it difficult to break into fast-growing markets like China because piracy is so common,'' Shalash said. ``The scope of piracy tells you the unrealized potential.''

 

Software piracy in the Asia-Pacific region rose 15 percent to a record $5.5 billion in 2002, according to a June 2003 survey by the Washington-based Business Software Alliance, which will release 2003 figures in July.

 

As much as 42 percent of the world's software is illegal and in some countries the figure is as high as 90 percent, Robert Holleyman, the alliance's president, told a U.S. Senate subcommittee at an April 30 hearing on piracy.

 

$200 Billion a Year

 

Across all industries, counterfeiting and piracy cost companies more than $200 billion a year, according to the Washington-based International AntiCounterfeiting Coalition, whose 130 members include Microsoft Corp. and Procter & Gamble Co.

 

Even as companies step up anti-piracy efforts, the governments of countries such as China, Russia and Mexico are letting fakes proliferate, said Ric Hirsch, senior vice president of the Entertainment Software Association, a Washington-based trade association that represents game makers.

 

``In a number of countries the level of responsiveness is very low,'' Hirsch said. In China, fake brand-name goods including Microsoft software, Colgate toothpaste and Nike sneakers account for about a quarter of the market, according to a mid-2003 survey by the Quality Brands Protection Committee, a Beijing-based association of about 90 multinational companies.

 

`Relentless'

 

A copyright-enforcement push by China -- a member of the World Trade Organization since 2001 -- is succeeding, said Duan Yuping, a spokeswoman for the government's National Copyright Administration.

 

``We're relentless in cracking down on piracy,'' Duan said. ``China's piracy problem can be fundamentally turned around within five to 10 years.''

 

Tokyo-based Sony has 350 people worldwide devoted to combating intellectual property violations, said Yoshihide Nakamura, senior vice president of Sony's intellectual property division.

 

``Without a solid IP policy, I don't think any high-tech company will survive in the future,'' Nakamura said. ``We have a challenging job to protect our business and our products. We will devote more manpower and resources to do that.'' He declined to say how much Sony loses to counterfeit goods.

 

Sony's crackdown comes as sales decline. The company said on April 27 its shipments of PlayStation 2 game consoles would fall 30 percent in the current fiscal year. The next day, the company forecast that annual profit would rise 13 percent to 100 billion yen, less than analysts had forecast.

 

$1 Movies

 

DVD copies of Sony blockbuster films such as ``Bad Boys 2'' and ``Spider-Man'' are available on the streets of Shanghai or Hong Kong for as little as $1 just days after being released in U.S. theaters. Buyers who want authentic versions have to wait months for a movie's DVD release, then pay at least $15 for it in stores or at online retailers such as amazon.com.

 

``This is really a dark and menacing threat to our economy,'' Jack Valenti, 82, president of the Motion Picture Association of America, said at the April 30 Senate hearing. The association's members include Sony Pictures Entertainment, Walt Disney Co. and Time Warner Inc.

 

Memory Sticks

 

In July 2003, Hong Kong police busted a ring distributing counterfeit Sony Memory Sticks, an accessory for products such as Camcorder video cameras and Cyber-shot digital cameras, according to Keith Wong, head of intellectual property investigation for the Hong Kong Customs and Excise Department.

 

Twenty-seven people were arrested in the crackdown and 231 Memory Sticks were seized, Wong said.

 

At the Oriental 188 shopping center in Hong Kong's Wanchai neighborhood, a five-minute cab ride from the Central business district, pirated Nintendo GameBoy and Sony PlayStation games are among the items available on two floors of about 40 small shops selling goods ranging from toys to clothes.

 

A salesman at a store selling GameBoy cartridges said he offers both real and pirated games, and about 70 percent of his customers buy the fake ones.

 

``Who would buy real products nowadays?'' said the salesman, Ah-Shing, 20, who declined to give his full name. He charges between HK$70 ($8.99) and HK$110 for pirated GameBoy cartridges, depending on how new and popular the games are -- less than half the HK$300 to HK$320 price tag for real ones.

 

`Not That Different'

 

Counterfeit Sony PlayStation games, which come on discs instead of cartridges, sell at an even bigger discount: Shops in the mall charge between HK$10 and HK$20 for a disc, compared with about HK$400 for real ones.

 

``The pirated ones are a lot cheaper, and the quality is not that different from the real ones,'' said Alex Chan, 20, a university biotechnology student shopping for PlayStation games at Oriental 188.

 

Shopping centers and street stalls across Hong Kong sell fake games, DVDs, designer handbags and other goods for a fraction of real retail prices. European Union Trade Commissioner Pascal Lamy flagged the city as a major transit point for counterfeit goods.

 

``Despite Hong Kong's efforts to increase intellectual property protection, we are still concerned by significant quantities of pirated and counterfeit goods that transit through Hong Kong,'' Lamy told reporters in Hong Kong on March 12.

 

`Relatively Protected'

 

Nintendo and Sony aren't yet suffering significant losses from piracy in markets such as China because their profits come mainly from regions where counterfeiting is less common, said Peter Boardman, who manages about $250 million in non-U.S. equities, including Nintendo shares, at NWQ Investment Management Co. in Los Angeles.

 

``At the end of the day it's in Europe and the U.S. and Japan where they will make most of their profits,'' Boardman said. ``Those are the markets where people have the money to buy.''

 

Sony got 81 percent of its sales from Japan, the U.S. and Europe in the year ended March 31. Japan alone accounted for 86 percent of Nintendo's operating profit in the year ended March 31, according to the company.

 

For now, counterfeiters are reaping a bigger share of profits from Chinese consumers' growing appetite for goods such as electronic games and DVDs.

 

Ample Opportunity

 

There's ample opportunity for copying in a country where thousands of international companies have factories, said Ewen Turner, managing director for North China at Pinkerton (China) Ltd., a unit of Sweden's Securitas AB that provides security services -- including copyright investigations -- for clients such as electronics and consumer-goods makers.

 

``For any product that can be produced here, there is someone prepared to produce a counterfeit version of it,'' Turner said.

 

This is just horrible, imagine buying a PS2 memory stick and finding out it's a counterfeit once all your saves die after a year or something.

[Cominus]

Thats horrible, thanks for burning that image into my mind danno.

[Gryph]

Oh this is making me all teary eyed. *sniff sniff*

 

But seriously, this is pretty bad...

[random guy]

I don't really think these companies can put a price-value on their losses, because doing that would assume people would by the full-priced versions if the counterfeit ones weren't available. For example, say counterfeit-stores sold 1 million counterfeit games at $5 a peice, but real games retailed at $50. Nintendo could claim that they lost $50 million in sales. BUT that is assuming that every single game that was sold would be sold legally if counterfeit sales weren't happening. In the above example, people could buy 10 games at a time for $50 (the price of one legit game), so they'd be alot more inclined to buy alot of games. However, if the counterfeit games weren't available, the 10 games that would have cost $50 now cost $500 - and there'd be alot fewer people buying 10 games at a time.

Therefore, if Nintendo claimed they lost $50 million in sales, that would only be on the basis of $5 million spent on counterfeit games. It's exactly the same as record companies claiming that every song downloaded is a direct loss in sales - that is simply not true, as people wouldn't necessarily buy the CD even if they couldn't download the song for free. So, too, is Nintendo claiming to lose money on sales that probably wouldn't even happen.

Edited June 3, 2004 by random guy

[Agozer]

It's not a news to me that Hong Kong is the counterfeited stuffs paradise. Same can be said about Estonia and Russia, but Hong Kong takes the lead still.

Hell, my mom even bought numerous Gucci handbags and other "legally compromised" stuff from Beijing to 3 years ago.

 

Anyway, I do agree with Random about the pricetagging of losses.

[L.S.D]

Why there is piracy in Asia?

 

For example, my ocuntry.

 

What is an original game cost in USA?

Around USD 50, for example.

If your salary is USD2K, it is only 2.5% of your total salary.

In our country, our salary will be RM2K.

But an original game will cost RM 200.

10% of our salary!!

Whoever buying original games in our country is:

1. nutcase.

2. has plenty of cash to throw about.

3. Bill Gates's son.

[Wizard]

Yeah, in the Phillipines, my cousin owns like 2 actual ps2 games and the rest are all backups. If I went there my self, I would spent possibly $50 USD on about 20 games, backups mind you.

[ugenn]

It's not a news to me that Hong Kong is the counterfeited stuffs paradise. Same can be said about Estonia and Russia, but Hong Kong takes the lead still.

Hell, my mom even bought numerous Gucci handbags and other "legally compromised" stuff from Beijing to 3 years ago.

 

Anyway, I do agree with Random about the pricetagging of losses.

HK? Then you haven't seen Taiwan (ROC). Not only do they have an entire industry of counterfeit products, they even have an industry of making products for counterfeiting products. A lot of the excellent ROM copiers and other cheap electronics are made in Taiwan.

[Gryph]

I don't really think these companies can put a price-value on their losses, because doing that would assume people would by the full-priced versions if the counterfeit ones weren't available. For example, say counterfeit-stores sold 1 million counterfeit games at $5 a peice, but real games retailed at $50. Nintendo could claim that they lost $50 million in sales. BUT that is assuming that every single game that was sold would be sold legally if counterfeit sales weren't happening. In the above example, people could buy 10 games at a time for $50 (the price of one legit game), so they'd be alot more inclined to buy alot of games. However, if the counterfeit games weren't available, the 10 games that would have cost $50 now cost $500 - and there'd be alot fewer people buying 10 games at a time.

Therefore, if Nintendo claimed they lost $50 million in sales, that would only be on the basis of $5 million spent on counterfeit games. It's exactly the same as record companies claiming that every song downloaded is a direct loss in sales - that is simply not true, as people wouldn't necessarily buy the CD even if they couldn't download the song for free. So, too, is Nintendo claiming to lose money on sales that probably wouldn't even happen.

Well yeah but they're still losing hella amounts of profit. But in the words of Clark Gable, "Frankly, my dear, I don't give a damn."

[alexis]

50 dollars is almost one third of my salary, but then because they are imported stuff it costs about U$s which is more than half my salary

[alexis]

well, it is not an excuse, but yes, random guy is true, i have here it many times before, everyone that owns a non origianl copy does it because they can´t afford to pay for them and if they wouldn´t buy it neither would they buy the original one. Talking about that much money is a very complex thing. 10% of the world population holds 90 % of the richness and the other 90 % if the people have the 10 %, the difference is huge. then you got a guy that makes a stupid but pop song or sth which becomes the furor for the next weeks and the guy wins more money than he can spend on his whole life. on the other hand there is a baby born form a poor family that can´t earn enough money to feed him, so he dies. So tell me is it fair?