Internet piracy: the virtual sea for counterfeits
Piracy in Cyber Space: Consumer Complicity,
Pirates and Enterprise Enforcement
This paper presents an overview of the growth of internet piracy in the global marketplace. The ethical perceptions (or lack of) of the younger generation is addressed, in terms of their willingness to consume counterfeit goods on the web. Firms face the task of educating the consumer that downloading music, software, movies and the like, without compensation, is unethical
. This awareness is critical for decreasing the demand for counterfeit goods in the virtual marketplace, where a consumer can exhibit a rogue behavior with a limited fear of prosecution. We address the internet piracy pyramid, which encompasses sophisticated suppliers/facilitators such as the Warez group. An overview of the Digital Millennium Copyright Act and the No Electronic Theft Act is included to debate the controversy surrounding this legislation. A discussion of enterprise enforcement mechanisms is provided to reveal some of the tools used to fight the pirates.
Key Words: Internet Piracy, Cybercrime, Consumer Complicity, Warez, Digital Millennium Copyright Act, Net Act
Business managers need to monitor several trends relating to the protection of a firm’s intellectual property
on the internet. On the one hand, the internet has presented many companies with the opportunity to explore markets, gather information, and sell through the web. On the other hand, this virtual marketplace has been a way for unscrupulous players in an intricate game of cyber crime to renounce a company’s intellectual property rights and channel illicit goods by way of the internet piracy pyramid. The overall positive growth in global technology, such as internet penetration rates, has also paradoxically created a lucrative distribution channel for the counterfeit trade. Moreover, the augmentation of legislation designed to curb internet piracy, such as the Digital Millennium Copyright Act (DMCA), has ignited controversy surrounding its enforcement, especially the ‘safe harbor’ provisions. The recent divergent outcomes of the litigation filed against EBay for selling counterfeit goods at its internet auction site by both Tiffany’s and Louis Vuitton is testimony to the dilemma facing firms that goods are sold by way of the internet. In July 2008, after 4 years in the U.S. court system, a U.S. judge declined the liability of EBay regarding counterfeit jewelry sold at its site. However, in June 2008, a French court awarded Louis Vuitton €38 million for failure to block the sale of this luxury goods manufacturers items on Ebay (Waters 2008).
2. ANTICIPATED GROWTH OF PIRACY
Passariello, in her article in the Wall Street Journal,
reports that the internet is now the third largest market
for the sale and distribution of counterfeits, behind China and Italy, and that companies such as Rolex and Tiffany & Co. have sued EBay to promote more responsible selling at its internet site (Passariello 2004). The counterfeiters have attracted the attention of policymakers, as the sale of fake pharmaceuticals, baby formula, airplane parts, and the like stimulates health and safety concerns. Carol Matlock of Business Week
, in her personal interview with Jean-René Fortou, former head of the International Chamber of Commerce, asked what attributed to the dramatic increase in government policy makers’ attention to curbing counterfeit trade (Matlock 2005). In response, Mr. Fortou claims that recent government policy changes are resulting from the rampant growth and scale of the piracy problem, especially since the illicit trade is related to organized crime. Mr. Fortou cites the alarming increase in counterfeit goods that potentially threaten public health and safety, resulting in a broader perception of the scope of a problem which was initially associated primarily with the luxury goods sector.
Buzzeo, in his work on counterfeit pharmaceuticals, reports the success of the U.S. Drug Enforcement
Administration sting operation, Operation Cyber Chase, in shutting down 200 illegal e-pharmacies that were associated with a sophisticated black market industry. Overall, the increase of fake drugs as a dimension of the counterfeit market is a result of large profit potential, anonymous distribution channels by way of the internet, and price sensitive consumer demand. According to the Food and Drug Administration (FDA) official William Hubbard, “some experts are telling us it is more lucrative to sell a counterfeit drug than it is to sell a narcotic such as heroin” (Buzzeo 2005, p. A20).
The problem of counterfeit trade is growing and the seizure statistics for the infringement of intellectual
property rights (IPR) show a change in total domestic value of goods from $45,327,526 in 2000 to $196,754,377 in 2007 (U.S. Customs and Border Protection, 2008) Protection, 2007). However, this data collected by the U.S. Customs and Border Protection represents physical goods
seized at some port of entry into the United States. The problem of counterfeit trade in a virtual marketplace, such as via internet auctions on e-Bay or peer-to-peer downloading, is an activity that many industry associations claim is growing, especially with internet penetration expanding in many global markets, yet the illicit trade in cyber space is difficult to measure. The Internet World Stats (IWS) estimates there are 1,319,872,102 internet consumers in the world (www.internetworldstats.com). The IWS estimates that 676.6 million consumers are located in markets (43 countries) with greater than 50% internet penetration.
The Business Software Alliance
(BSA) claims that the demand for counterfeit computer software will go up
or down as a function of consumer education, law enforcement, the number of new users coming into the market, the ease of access to pirated software, and certain external factors such as political conditions. The BSA also notes elements such as culture, institutional effectiveness, and even geography as having an impact on the abilities of countries to reduce piracy. Overall, the BSA forecasts that the increased use of the internet, the proliferation of peer-to-peer networks, and the growth of broadband access will increase software piracy rates, especially in emerging markets such as China, India and Russia (Fourth Annual BSA
3. COMPLICITY – A GLOBAL CONSUMER
Jeane Twenge in her 2006 book publication, Generation Me
, provides a descriptive label of the cohort of
people in the United States born in the 1970s, 1980s, or 1990s, or a person currently aged between 9 and 37 (Twenge 2006). Twenge selected to brand this population segment, ‘Generation Me,’ since he or she has focused on ‘self’. The title does not allude to selfishness, but is rather “branding” which stems from the significance this generation places on the individual. For example, people within this age bracket have been consistently told to ‘Be yourself,’ and/or ‘Believe in yourself.’ A few firms and trade associations have conducted studies on buyers likely to purchase counterfeits which suggested that this generation constitutes key players contributing to counterfeit sales. In 2005, the Motion Picture Association (MPA), in their study on the cost of movie piracy, found that the typical consumer of fake goods was aged 16-24, male, and lived in an urban environment (The Costs of Movie Piracy
, 2005). Although this demographic profile does not yield detailed segmentation, it does show the bias of the
younger generation as a ‘willing player’ in the internet piracy game. A recent study conducted for the Business Software Alliance (BSA) by Harris Interactive, involving 1,644 youth, found that young people clearly viewed downloading music (60%), software (56%), and games (54%) without payment less harmful than stealing from a store (92%) ( In another web-based survey of 254 (77% response rate) college students from three different universities – one each in New York, Oklahoma, and Pennsylvania -- Chaudhry and Stumpf (2008) found the following rank order of relative importance of reasons why these students were willing to buy counterfeit movies, where ‘1’ is highest rank, was:
1. Is easy to obtain (mean 2.22, sd 1.17) 2. Desirable quality (mean 2.34, sd 1.37) 3. Not an immoral or unlawful act (mean 2.82, sd 1.17) 4. Have low income or low education (mean 3.55, sd 1.46) 5. It is acceptable due to anti-big business sentiment (mean 3.80, sd 1.13)
Younger students were more inclined to be willing users of counterfeit movies (r = -.23, p < .001) and
acquire them (r = -.19, p < .002). Male students were more inclined to find the Internet shopping experience hedonic (r = .22, p < .001), be willing users of counterfeit movies (r = .20, p < .001) and to have acquired them (r = .17, p < .01). More active users of the Internet reported less ethical concern (r = -.13, p < .05), perceived anti-counterfeiting tactics to be less effective (r = -.18, p < .005), social marketing to be less effective (r = -.15, p < .05), and find the Internet shopping experience hedonic (r = .19, p < .002). They also reported to be more willing users of counterfeit movies (r = .21, p < .001) and to have acquired them (r = .14, p < .01).
As shown in Table 1, Chaudhry and Stumpf (2008) found a number of predictors of student complicity
with counterfeit products: the extent to which they had ethical concerns with acquiring counterfeits, the perceived
quality of the counterfeit, and the extent to which the shopping experience was hedonic. Their sample also assessed
the perceived effectiveness of three actions intended to reduce consumer complicity: product-specific actions (e.g.,
special packaging), reducing price, and social marketing advertisements. For those that were complicit with
counterfeit products, these anti-counterfeiting actions were perceived to be ineffective or to have little effect.
Table 1. Correlations among Attitudes, Shopping Experience and Actions Intended to Reduce Complicity with Consumer
Complicity with Counterfeit Movies
Ethical Product Hedonic
Concerns Quality Shopping
Counterfeiting Counterfeiting Counterfeiting
Perceived Effectiveness of Actions Intended to Reduce Product Counterfeiting
Complicity with Counterfeit Products
N = 262 *r’s above .12 are significant at p<.05, two-tailed **r’s above .17 are significant at p<.005, two-tailed Main diagonal contains coefficient alpha estimates of internal consistency (reliability) and number of scale items (in parentheses).
All items except movie acquisition were responded to on a seven point scale anchored as follows:
1 = strongly disagree, 4 = neither agree nor disagree, 7 = strongly agree. Movie acquisition requested a yes/no response
Companies are devoting attention and effort to devising effective ways to decrease internet piracy, as they
acknowledge that the consumer demonstrates a more rogue behavior and erroneously misjudges his or her ability to
be punished for this type of intellectual property theft. For example, the Recording Industry Association of America
has an established record of litigation against consumers who are at the bottom of the internet piracy pyramid. In the
absence of the fear of being caught and punished, company or industry sponsored anti-counterfeiting actions may do
little to deter consumer complicity.
4. THE INTERNET PIRACY PYRAMID
The virtual marketplace via internet activity poses an even more lucrative distribution channel for fake
goods, a concern which is coupled with the aforementioned awareness that the internet penetration in markets across
the world is rapidly growing. Kupferschimid (2003) described the main types of internet piracy as auction piracy
(e.g., EBay), FTP piracy (e.g., hijacking a corporations FTP site to place illegal files in its directories), Peer-to-Peer
Piracy (e.g., the infamous Napster case), Instant Messaging (e.g., sharing illegal software via buddy lists), and
Internet Relay Chat (which allows access by many users to large files in a main location with security of anonymous
4.1 The Warez Scene
Warez is a generic term used to describe software that has been stripped of its copyright protection and
placed on the internet for downloading without
a financial compensation. Members of this illicit group can be the first-providers – that is, the original source for the illegal trading and online distribution of pirated works. Once a release group prepares a stolen work for distribution, the material is distributed in minutes to secure, top-level servers and made available to a select clientele. From there, within a matter of hours, the pirated works are illegally distributed throughout the world, ending up on public channels on IRC (internet relay chat) and peer-to-peer file sharing networks accessible to anyone with Internet capability. Since releases are duplicated, renamed, and then re-uploaded to different sites, it can become impossible to trace the original file. Release groups are hierarchical, highly-structured organizations with leadership positions that control day-to-day operations, recruit new members, and manage the group’s various computer archive sites. These groups exist solely to engage in piracy and compete with each other to be the first to place a newly pirated work onto the Internet, often before the work is legitimately available to the public. The groups employ highly sophisticated technological measures to shield their illegal activity from victims and law enforcement. Some warez groups targeted by recent government-led sting operations, such as
, include RiSCISO, Myth, Goodfellaz and the like (Justice Department Announces International Internet Piracy Sweep, 2005).
4.2 Internet Sites
The internet provides access to a readily available virtual counterfeit shopping environment. The Replica
Center blatantly informs consumers where they can purchase a fake Swiss Rolex watch, and provides “customer satisfaction reviews” and “testimonials” for the illicit dealers (www.replicacenter.com). Industry watchdogs, such as the Software Information Industry Association, are constantly ‘trolling
’ internet auction sites, such as EBay and Yahoo! to detect pirates and, for example, can use the ‘notice-and-takedown’ process in the Digital Millennium Copyright Act (DMCA) or the Verified Rights Owner (VeRO) program in EBay to slow the growth of software piracy at this type of internet auction site (SIIA Anti-Piracy 2005 Year in Review
). The Business Software Alliance claims to have shut down an estimated 13,800 auction sites in 2007 for selling illegally pirated software. The sites were selling more than 50,500 software products with an estimated value of $13.3 million. The majority of these auction sites (over 67%) were located at U.S. auction websites (BSA Raises the Stakes in the Fight, 2008).
In September 2006, eleven persons were indicted on the premise of their involvement in an Atlanta-based
generic drug scam on the internet. This recent case is testimony to the fact that many consumers can ‘unknowingly’
purchase counterfeit via the web. Indeed, the customers in this case actually thought they were purchasing
prescription drugs such as Ambien, Xanax, and Viagra over the internet from a Canadian firm. However, according
to the indictment, the entire operation began in 2002 by Jared Wheat, principal owner of Hi-Tech Pharmaceuticals,
who lured the internet customers through ‘spam’. The drugs were allegedly manufactured in unsafe conditions in a
house in Belize (Hi-Tech Pharmaceuticals, 2006). 5. ENFORCEMENT IS A QUANDARY IN THE VIRTUAL MARKETPLACE
It can be very difficult to convince consumers that internet piracy negatively affects such industry giants
like the motion picture industry. Consumer willingness to purchase counterfeits can emerge from an anti-big
business sentiment; many times the consumer describes a “Robin Hood” (warez groups stealing from the rich to give
to the poor) and/or “David vs. Goliath” (e.g., internet piracy is a means to attack the price-gouging music, software
and movie industries) types of analogies to justify their actions of obtaining illegal goods. A quick search in Google
using a search query of ‘internet piracy’ produces more individual blogs that support internet piracy than hits which
serve to refute its legitimacy. Companies need to reposition the stereotype of a pirate and place a higher emphasis
on the connection of the activity to organized crime. For example, Rob Clyde, Vice-President for Technology at
Symantec, states that “Cyber crime today isn’t about computer geeks just having fun at other people’s expense . . .
its real criminals, making real money off of real victims. And it gets more serious by the day” (The Fight for
, 2008, p. 2). The message that internet piracy is hurting more than the ‘Goliath’, a term representing
firms such as Microsoft or highly-paid screen stars such as Will Ferrell ($43 million in 2006), is a message that
needs to be disseminated to the populous to change their sentiment (Rose 2006).
5.1 Digital Millennium Copyright Act (DMCA)
In October 1998, the Digital Millennium Copyright Act (DMCA) was unanimously supported by the U.S.
Senate and signed into law by former President Bill Clinton. Basically, the DMCA makes it a crime to disable anti-piracy measures with respect to goods, such as software; outlaws code-cracking devices; requires service providers to remove items from their websites if one suspects copyright infringement; and limits liabilities of nonprofit institutions of higher education. Digital Rights Management (DRM) allows the copyright holder to thwart access, copying, or conversion alteration to other formats by the consumer. The passage of the DMCA has been replete with controversy in terms of both consumer rights and skepticism surrounding enforcement, such as the role of internet service providers’ play by policing their sites for intellectual property rights violations. First, consumer advocates, such as the Electronic Frontier Foundation (ETF), have expressed that ‘technological locks’ inappropriately limit
how the purchaser can play and view his or her CDs and DVDs. Secondly, there is a key provision of the DMCA called the ‘safe harbor’ clause that protects internet service providers from being liable for the activities of its users. In general, if a service provider qualifies for the safe harbor exemption, only the individual infringing customers are liable for monetary damages; the service provider's network, through which they engaged in the alleged activities, remains free of liability.
5.2 Safe Harbor of DMCA
The ‘safe harbor’ aspect of the DMCA has proved a source of debate, especially in the legal community.
Trevor Cloak in his 2007 article in the Vanderbilt Law Review
, “The Digital Titanic: The Sinking of Youtube.com in the DMCAs Safe Harbor,” provides an outstanding example of how the emergence of video-sharing internet sites (VSIs) such as YouTube.com and the exposure to millions of savvy bloggers has created a significant challenge for any provider that allows this type of digital content. Cloak reaffirms the controversy of the ‘safe harbor’ provision by stating, “Given the current operational framework of video-sharing Internet sites, are owners of these sites liable for copyright infringement when copyright material is illegally posted by their users?” (Cloak 2007, p. 1561) This presents the premise for an ongoing deliberation of the liability of the internet service providers. Cloak notes that many VSIs will be facing multimillion - if not billion - dollar law suits in the future due to copyright infringement. The previous question presents two related issues for discussion: 1) whether the VSIs receive financial benefits from the copyright materials illegally posted by their users, and 2) whether the VSIs have the ‘right’ and means to effectively control what their users post on the site. Another dispute involving the DMCA centers on its ability to have copyright holders shut down websites if they suspect
intellectual property rights violations. For example, in a case brought by InternetMovies.com to the District Court for the District of Hawaii, the firm asked the court to require that copyright holders provide some type of investigation and/or evidence of copyright infringement before websites could be shut down. This request for proof of infringement was rejected by the court, and the article reported that “This decision rules that the Digital Millennium Copyright Act (DMCA) does not require a copyright holder to conduct an investigation to establish actual infringement prior to sending notice to an Internet Service Provider (ISP) requiring them to shut-down an allegedly infringing web site, or stopping service all together to an alleged violator” (Court Confirms DMCA, 2003, ¶ 3).
5.3 No Electronic Theft Act (1997)
The No Electronic Theft Act (NET) embodied a critical form of anti-counterfeit enforcement, since it was
mentioned that “warez” scene infringements are often not motivated by profit-oriented incentives. The NET posits
that it is a federal crime to reproduce, distribute, or share copies of electronic copyrighted works such as songs,
movies, games, or software programs, even if the person copying or distributing the material acts without commercial purpose
and/or receives no private financial gain. Prior to the passage of this legislation, people who
intentionally distributed copied software over the Internet did not face criminal penalties if they did not profit from
their actions. As such, warez scene involvement, driven by the mere incentive of “cracking the code”, had
flourished due to transgressors’ perception of this liability free mentality.
6. ENTERPRISE ENFORCEMENT MECHANISMS
Chaudhry and Zimmerman (2009) address an array of plausible enforcement mechanisms that enterprises
can use to combat piracy in their book, The Economics of Counterfeit Trade: Governments, Consumers, Pirates and Intellectual Property Rights
. There is a plethora of anti-counterfeiting actions targeted at consumers (e.g. labeling techniques), distribution channels (e.g., RFID tags, DNA markers), pirates (e.g., monitoring purchases of key components), governments (e.g., lobbying for more IP legislation), international organizations (e.g., using the TRIPS of WTO), and company-based (e.g., developing IP data gathering and monitoring system) (Chaudhry and Zimmerman 2009, p. 158). These researchers’ recommend that an enterprise use an Action Program that includes 1)
developing an IP protection strategy; 2) forming a brand integrity team; 3) registering trademarks, patents and copyrights; 4) creating information monitoring program; 5) developing a multi-pronged action plan; 6) fighting pirates; and 7) establishing measurement feedback program. Clearly, the need to quickly funnel any information about how counterfeits are affecting the enterprise across country markets should be channeled into some type of central repository for the firm.
The Business Software Alliance (BSA), the voice of the world’s commercial software industry, reports on
an annual basis its piracy study and claims that worldwide software piracy went up from 28% in 2007 to 41% in 2008 (BSA Piracy Study, 2009). However, this study claims that in some countries, piracy rates were reduced by education of consumers, enforcement of governments and technological shifts, such as the increased use of digital rights management by enterprises. Chaudhry and Stumpf (2009) emphasized in their Wall Street Journal
article, “Getting Real About Fakes,” that enterprises must center their anti-counterfeiting tactics on the fact that fakes are poor substitutes and sometime dangerous (e.g., fake pharmaceuticals); that pirates are not robin hoods (e.g., dispel the cult-like following of Pirate Bay); that enterprises are not faceless corporations (e.g., piracy affects the bottom line and resources available for innovation); and that ethical concerns are key to consumer education of piracy (e.g., counterfeits can harm consumers).
The Business Action to Stop Counterfeiting and Piracy (BASCAP) in conjunction with the International
Chamber of Commerce presented several findings related IP protection from a business perspective (Global Survey
on Counterfeiting and Piracy, 2007). Despite all of the legislation listed above in the United States, the enterprises
reported that the key issues were enforcement, not the need for more legislation to protect their IP. One of the main
outcomes of the BASCAP study was to discern how these business managers would allocate anti-counterfeiting
resources between efforts to promote more legislation, enforcement, and/or public education on their illicit behavior.
The enterprises overwhelmingly chose placing more of their resources into enforcement mechanisms. However,
when the firms in this survey were probed on how they would specifically distribute anti-piracy funds to guard their
products/services, the managers responded that (a) investing in anti-counterfeiting technologies and securing
productions against infringement through product differentiation (56% of expenditure) was more important than (b)
supporting local enforcement authorities (28%) or (c) spending on educating consumers (16%). A new way for
managers to dedicate their resources to both investing in new technologies and educating consumers is to empower
consumers by leveraging technology. Software firm Provalidate, for instance, is developing an electronic warranty
card for many enterprises to use that allows the consumer to authenticate purchases at the brand owner’s website by
using a sophisticated system of verification codes that also provides managers with the opportunity to collect
consumer data. Using an electronic warranty card for both physical and virtual purchases to ensure authenticity can
– and will – empower consumers to buy legitimate products (Chaudhry and Stump, 2009).
There have been both recent trends which have facilitated the growth of digital piracy in the past decade, as
well as enforcement measures acting to curb the spread. The common denominators to assist the growth of piracy in the global marketplace are namely that, 1) internet penetration rates are growing, 2) the consumer is willing to download and/or purchase fake goods in cyber space, and 3) the internet piracy pyramid remains intact to generate supply and/or demand. The main factors developed to impede this market are the various unilateral and multilateral enforcement tactics, such as Operation Buccaneer
, and government legislation, such as the DMCA. It can be concluded that firms face a battle that is really just beginning; one which is to be fought in a virtual war zone and thus requires awareness of measurable implications and managerial talent that understands the key players.
One can question how much enforcement is required to seriously demotivate the main actors in the warez
scene to stop supplying the internet piracy pyramid. Overall, these groups are releasing the illicit products on the web as a matter of pride in an elaborate art of cracking the code and subsequently engaging in a “digital war” with copyright holders. Recent legislation, such as the safe harbor provision in the DMCA, will be tested in the court systems to define the liabilities of the internet service providers, the pirates selling [or posting] at the site, and the consumers. The entire topic of digital piracy is a paradoxical issue presented by current technology advances. On the one hand, the internet has literally provided us with boundless information capacity to feed our insatiable
appetite for knowledge, such as the proliferation of information freely posted on the web. Could we have conceived or understood a concept like YouTube.com a decade ago? On the other hand, advances in technology and the expansion of internet market penetration have created a dark side to cyber space. Namely, the challenges associated with managing the growing concern for internet piracy implications. Ironically, the future demise of piracy may stem from creative technological solutions, such as software developed by Provalidate to provide enterprises the ability to use electronic warranty cards that are validated through the company’s website to thwart the pirates.
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