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RealTime IT News

Gray Market a Double-Edged Sword

What if that computer you purchased through a trusted dealer wasn't running the 3.8GHz Pentium 4 you ordered but rather a slower processor cleverly disguised to look like the real deal? Chances are it's not the vendor's fault.

More than likely, the company you purchased the computer from was sold a product from sources not approved by the manufacturers. This is what's known as "the gray market."

While the problem is often only publicized when police or lawyers get involved, the situation is more widespread than most consumers and companies like to admit. Unfortunately, it is costing information technology manufacturers and their authorized distributors $40 billion every year, according to a 2003 study done by research firm KPMG and contracted by the Alliance for Gray Market and Counterfeit Abatement (AGMA).

"There are actually two losers: the manufacturer and the consumer," Marla Briscoe, vice president of AGMA, told internetnews.com. "Worse yet, often times if you've bought it online, the person they bought it from is gone. So everyone really does lose out."

But not every gray market dealer is a pirate or a thief. Martin Reynolds, analyst and vice president with IT research firm Gartner, says the grey market also deals with legitimate goods that hop a channel -- from an OEM to broker -- for example.

"It is a market-driven arbitration mechanism, and allows Intel products to reach more buyers without Intel having to deal with them directly," Reynolds told internetnews.com. "Intel has countered this, to some extent, with its boxed processor program. But there is still a healthy gray market for processors in trays."

Reynolds said the true culprits are re-marked goods are devices. These are repackaged and sold as higher-value devices and unlicensed products that are made on the same line as the real thing, but they're diverted and sold before the brand owner takes ownership.

All of this makes the gray market a bit of a double-edged sword.

Charles Kozierok, author of The PC Buyer's Guide, says manufacturers are trying to keep costs down and often sell the same products for less in the international market than they do in the domestic one.

"The products intended for export may be identical to the ones sold within the U.S., but may be of a somewhat different design in order to reduce cost," Kozierok advises his clients. "Distributors may be cut out of the supply chain, reducing overhead. There may also be other reasons why these units cost less than ones sold in the market for which they were intended."

AMD knows this all too well. Last month, the chipmaker alerted partners and customers of potentially mislabeled AMD Athlon, Athlon XP and Opteron chips coming out of Taiwan. No reports of counterfeit chips emerged, but AMD was quick to dismiss reports that the re-marked chips made their way into Europe.

The company then invested some capital to re-educate partners and customers about its 3-D hologram sticker program, which identifies the AMD processor as valid.

Briscoe said AGMA is aware of the issue and is preparing a new white paper with analysts from KPMG to explore the impact of counterfeit products on the new product marketplace. The report is due in February.

The problem of re-marking and the like has been around for years, and the gray market that produces these kind of processors has always been a bit shady, according to analysts like Kevin Krewell, a principal analyst for industry research group In-Stat/MDR.

"AMD has had this problem since the days when people re-marked 486 processors to higher clock speeds," Krewell told internetnews.com. "Intel had similar problems, as well, in the past. Intel began using holographic markings to Pentium II/III processors -- in the old Slot 1 module -- in an attempt to control re-marking."

The 2003 KPMG report found that of the products most often purchased from gray market sources, 67 percent were enterprise related (servers, hard drives, memory, etc.). Network products made up the next largest piece of the problem at 11 percent. Service parts, printer cartridges and various obsolete products rounded out the list with about 6 percent each of the items found on the secondary market.

AGMA said the problem is not even limited to certain geographies.

AMD's problems cropped up in Taiwan, Bangkok and the Philippines. Briscoe said network equipment maker 3Com had its gray market woes emerge in Canada. And HP managed to recover more than $1.8 million as part of its civil lawsuit against a Tennessee company dealing on the gray market.

Briscoe said AGMA spends as much as a third of its efforts educating its members about the dangers of letting the secondary market run amok. The group has even taken drastic measures to ensure its credibility and often de-authorizes partners based on their gray market activity.

But despite the organization's best-practices recommendations, AGMA said the problem is expected to intensify unless companies communicate better through their channels.

"At HP, we monitor the marketplace through various techniques," said Briscoe, who also works at HP. "Investigating fraud and discount abuse and enhancing controls are also checks that we have in place. We'll go back and take into account our processes because the scans that are out there are always changing."

Briscoe said HP especially keeps a careful eye on any quick sales and special pricing circulating the marketplace. KPMG's report found two-thirds of all products purchased from the gray market were delivered within a 24-hour period.

The bottom line, says Kozierok, is to be sure of exactly what you are buying, and from whom you are buying.

"If you don't want gray market goods, the best way to avoid them is to shop from a reputable vendor that buys from official distributors, and resist the urge to shop for anything primarily on the basis of price.

"An honest vendor will explicitly tell customers if a gray market product is being sold; some sell both gray market and 'official' versions and let the customer decide which they want, which I think is fine. If you aren't sure, ask."