Author: Courtney Goldsmith
4 Mar 2019
Globalisation and the rapid development of technology have presented the world with countless benefits – from free trade to a more even playing field for companies of all sizes. But over the years, one negative side effect has emerged: a booming counterfeit market.
The unstoppable rise of e-commerce has only intensified the mushrooming growth of the counterfeit goods industry. Market research firm Euromonitor International has estimated that e-commerce will become the largest retail channel in the world by 2021, accounting for 14 percent of total retail sales. In some parts of Europe, digital retail sales are set to outpace in-store shopping as soon as this year.
Due to the digital nature of online counterfeiting, virtually no market is safe from this impending threat
The sheer size of the online counterfeit market is shocking: according to the latest Global Brand Counterfeiting Report, it was worth $1.2trn (€1.05trn) in 2017, with online intellectual property (IP) infringements accounting for as much as $323bn (€281.5bn) of that total. IP infringements are especially rife on trusted online marketplaces and social media websites.
As the fake goods industry grows and fraudsters improve their techniques, high-end brands and little-known start-ups face an equally daunting challenge. “The truth of the matter is that online sales make fakes even harder to spot,” said Laura Urquizu, CEO of brand protection technology firm Red Points.
With the volume and quality of online fakes making it increasingly difficult for brand owners to protect what is rightfully theirs, artificial intelligence (AI) technologies could provide a revolutionary solution.
Automating brand protection
Traditionally, companies have dealt with any issues of IP infringement or brand protection through in-house lawyers or contracted legal services. But today, as sales on e-commerce marketplaces and social media platforms begin to dominate the retail landscape (see Fig 1), these conventional solutions are struggling to cope with the increased level of counterfeiting occurring in the market.
With this changing landscape in mind, Urquizu believes machine-learning tools – such as computer vision and natural language processing – can help brands organise information and detect fakes quicker, allowing for the automatic enforcement of IP rights. “Contrary to a service-based approach, only a scalable technological solution can significantly address the challenge [presented by IP infringement],” Urquizu told European CEO.
Barcelona-based Red Points has emerged as a unique leader in IP infringement and brand protection thanks to its AI-based solution, which aims to save businesses time and money on online counterfeiting issues. The company’s cloud-based, software-as-a-service (SaaS) technology detects and removes online IP infringements through advanced keyword-monitoring systems, which are managed by clients via a simple platform. By using machine-learning technology, companies also benefit from a brand protection service that is constantly evolving and learning to highlight the most important potential incidents to rights owners.
“When brand protection is automated, it can take, on average, as little as four-and-a-half hours from detection of [infringement] to takedown – a process that typically takes days or weeks when done manually,” Urquizu said. “Speed and accuracy are key when it comes to effectively fighting online counterfeits, and this can only be achieved with smart technology.”
Every day, Red Points’ proprietary software removes more than 100,000 incidents of illegal products and related content from the internet. Its technology currently helps more than 400 customers tackle fake content across over 100 global markets with a 96 percent success rate. As a result, the company, which was founded in 2011 by intellectual property lawyer Josep Coll and entrepreneur David Casellas, has attracted $26.2m (€22.8m) of investment from venture capital firms such as Eight Roads and Northzone.
“The online counterfeit market moves very fast,” Jessica Schultz, a partner at Northzone, commented at the time of the company’s investment in Red Points. “There is a clear gap in the market for a technology solution that is scalable and flexible to the demands of the brand owners, and has strong relationships with the online properties where IP infringements are a problem.” Schultz added that the SaaS model for dealing with counterfeits was “highly effective” and had a real competitive advantage compared with service-led options.
Davor Hebel, a partner at Eight Roads, which has invested almost $6bn (€5.2bn) into growing technology and healthcare companies to date, said: “[Red Points] is exactly the kind [of company] we like to invest in, scaling fast and with the ambition and product to become a global industry leader.”
Tackling social media
The counterfeiting market is constantly growing and changing. In 2013, the Organisation for Economic Cooperation and Development (OECD) revealed that trade in counterfeit goods accounted for 2.5 percent of global imports – nearly $500bn (€435.8bn) – with the growth of digital IPs leading to an “expanding problem for brand owners in securing copyright protection across a proliferation of third-party sites”. The figure represented an increase of more than 80 percent on the OECD’s 2008 findings. In the EU, counterfeit products make up as much as five percent of imports.
A 2017 study by Frontier Economics suggested the total value of counterfeit and pirated goods could rise to $2.81trn (€2.45trn) by 2022, while the total domestic production and consumption of counterfeit and pirated goods could reach between $524bn (€456.7bn) and $959bn (€835.9bn). The study also estimated that net job losses related to counterfeiting and piracy could reach as high as 5.4 million by 2022.
Due to the digital nature of online counterfeiting, virtually no market is safe from this impending threat. According to the OECD, fake products are found in every category, from handbags and perfume to machine parts and chemicals. “Many people think luxury goods are counterfeiters’ main targets but, in fact, these products are estimated to account for no more than five to 10 percent of all counterfeit goods,” Urquizu told European CEO.
According to the OECD, footwear is the most copied item, but infringements can also occur on produce such as strawberries and bananas. The market for fake cosmetics is particularly large and, according to Red Points’ data, just over half of all IP infringements in this category were found to originate on either Facebook or Instagram. The research also showed that social media posts would often redirect consumers to e-commerce sites like eBay, AliExpress or Wish, where the counterfeit goods would then be sold.
“Counterfeiters’ presence on social media and e-commerce is difficult to deny,” Urquizu said. “In fact, they have been growing rapidly. However, online platforms aren’t the enemy… All major social media and e-commerce platforms have reporting tools for counterfeits and bad-faith accounts.”
A dangerous game
According to a 2015 survey conducted by brand protection firm MarkMonitor, 24 percent of consumers across Europe and the US had bought at least one product online that turned out to be a fake. While it’s easy to quantify the impact of these counterfeit products on the global economy, it’s worth noting IP infringements aren’t only bad for business: they can be harmful to consumers, too.
Counterfeit auto parts can fail, knockoff pharmaceuticals can make people sick and fake toys can injure children. Even goods that are less obviously harmful can have associated health risks due to the lack of quality control or certification protocols undertaken during their manufacture. Fake cosmetics, for example, have been found to contain extremely dangerous chemicals, such as lead, arsenic and mercury, as well as E coli, animal faeces, paint stripper and cyanide. A danger to the environment also exists, as the toxic substances found in fake products can contaminate soil, water and food.
Red Points deals with a diverse set of brands – from baby products and cosmetics to wind turbines – but Urquizu has previously said the company sees the strongest performance of its anti-counterfeit technology in the toy, design and furniture, fashion, and sports equipment markets.
IP infringements aren’t only bad for business: they can be harmful to consumers, too
One brand Red Points has worked with closely is Beautyblender, the cosmetics company behind the eponymous make-up sponge. In a case study published on the Red Points website, Shelley Swallow, Director of Trademark and Copyright Compliance at Beautyblender, revealed how the company turned to Red Points after low-priced counterfeits of its products had started appearing in staggering numbers on social media websites, including Facebook and Instagram. As a result, the rate of IP infringements became too difficult for the company to keep up with.
MVMT, an online-only watchmaker and another user of Red Points’ services, revealed that it was worried about losing customers who were complaining about the quality of the company’s products after unknowingly buying counterfeit versions online. For these digitally focused, fast-growing companies, dealing with IP infringements by monitoring e-commerce websites and social media for counterfeits can take up a large chunk of company time and resources. To make matters worse, fake products can have a devastating impact on a brand’s burgeoning reputation.
Even the existence of fake products online reflects badly on a brand: according to Red Points’ research, 81 percent of consumers believe their opinion of a brand would sour if they saw counterfeits online, negatively effecting their buying behaviour in the process. “It wouldn’t [have] been possible to grow so fast having to fix [counterfeit] products [on] our own,” Swallow said.
Raising a red flag
Urquizu, who joined Red Points as CEO in 2014, said the market for online IP infringement solutions has changed a great deal in the past decade, with new entrants increasingly able to challenge incumbents by offering disruptive and innovative technological solutions. This has led to an intensifying global race for leadership in the brand protection industry, with companies around the world raising millions of euros to enhance their technological capabilities.
At the same time, the speed of development at which online counterfeiters have moved has been equally impressive. This has kept constant pressure on the industry – not only to use the most advanced information technology to collect as much data as possible, but also to process and understand that data quickly in order to offer clients real insights and predictions. “The market’s response to the growth of online IP infringements has been, quite frankly, fascinating to be [a] part of,” Urquizu said.
Red Points itself has changed tremendously since Urquizu took up the mantle of CEO. “When I joined the initial founding team in 2014, Red Points was still [in] its infancy and the company’s main focus was copyright infringements,” Urquizu told European CEO. “Upon my arrival, I took the decision to expand our brand protection remit and shift to our current… SaaS model.”
Since then, the company’s size has surged from just 10 employees to 170. Last year, Red Points opened new offices in New York to help with its international expansion in the US and Canada. It has also worked to bolster its brand protection portfolio with the launch of a new product that helps companies monitor distributor compliance.
Online distributor compliance software enables a company to manage its distribution partners’ behaviour across all digital retail channels. Red Points’ automated solution, for example, offers price-monitoring technology that allows firms to detect when a competitor is selling a product below the agreed price. Further, it identifies partners who are out of stock, automatically sending offers or notifications.
“In the years to come, our core focus will continue to be to expand our global footprint by leveraging our existing technology while continuing to invest in product innovation and bringing the best-in-class talent to our business,” Urquizu said. “In this way, we hope brands will no longer have to worry about the risks of piracy, counterfeiting or brand abuse.”
Although Red Points is eyeing a speedy ascent to the international stage, a culture of technological innovation has already developed in its home city of Barcelona. The city now ranks among the best in the world for tech entrepreneurship, and it’s certainly one of the top spots for start-ups in Europe. What’s more, Barcelona boasts the fourth-highest volume of business investment – behind only London, Berlin and Paris – having raised €722m in 2017.
The city is home to more than 1,300 start-ups, 22 percent of which are focused on the SaaS industry. A Financial Times analysis of business school alumni from around the world, meanwhile, found that around 26 percent of MBA students from Spanish schools went on to set up their own companies, a percentage that was ahead of all other countries.
“The combination of highly qualified talent from around the world and an environment that encourages innovation has led to success stories,” Urquizu said. “In the future, I expect this trend to continue, with even more innovation and investment coming to companies based in Barcelona, [helping us to compete] with our counterparts in Silicon Valley.”
As one of few female CEOs in the Spanish tech sector, Urquizu believes there is much that must be done to educate the industry on the benefits of having women driving growth in leadership positions. While the number of women in the tech sector remains low, Urquizu believes the tide is slowly turning: “The one piece of advice I would give to aspiring female tech leaders is, don’t wait for someone to give you the next big opportunity – you have to be active and make your own path forwards.”
As Red Points goes from strength to strength, Urquizu’s focus remains on developing the best technology: “Technology is our weapon against the spread of online IP infringements worldwide.” And it’s hard to argue with her: the groundbreaking developments coming out of the brand protection sector today could be key to preventing counterfeit goods from poisoning e-commerce markets and devouring businesses around the world.