Gray market increasingly fueled by the Internet 17 July, 2008 By Paul Weinberg

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"OEMs do not have to create a perception change among their channel partners since these partners already believe it is better to stay within authorized limits," asserted the authors of the white paper which included the results of interviews with 90 OEMs, 82 channel partners and 17 brokers in the fall of 2007.

Nevertheless, "partners do require a push in the right direction through improved monitoring and enforcement efforts," they continued.

Also, "the OEM sets the policy for who can buy and sell its products as well as the qualifications for receiving an incentive or rebate through authorized channels."

The AGMA and KPMG define the gray market as "the unauthorized alternative channel where branded products have been intentionally diverted from authorized sales channels into the hands of unauthorized dealers, brokers or the open market for gain."

The most commonly purchased gray market products, they report, are hard-disk-drive storage products (48 percent of gray purchases), followed by consumer electronics and memory at (37 percent).

IT vendor authorization rules dictate how products should be sourced, how they are resold and regional restrictions, revealed Marla Briscoe, AGMA's vice president.

Among her organization's s findings is that the Internet "fuels" the gray market with almost 4 in 10 channel partners surveyed admitting receiving gray market product offers ( 94 percent of the time) by email.

"The majority of product is diverted to the gray market from folks who specifically set out to defraud a manufacturer into allowing them access to special pricing, whether it is through misrepresenting themselves as legitimate resellers with the intent to abide by contractual obligations or posing as end customers, when their intent is not to use the product but to resell it on the gray market," added Briscoe.

Competitive pricing drives the continued existence of the gray market. AGMA and KPMG concluded, as many end user customers are willing to forgo OEM warranty and support or other inconveniences in favor of lowered price gray market items.

They suggested that to please the customers OEMs will sometimes support their products despite their gray market origins. "In essence, the OEM is compounding the gray market problem by losing revenue through supporting an unauthorized product."

Half of the OEMs polled by AGMA/KPMG indicated that gray market products are often discounted more than 25 percent below the average authorized channel partners' price.

Furthermore, while 60 percent of OEMs told the survey they have implemented processes for the identification and monitoring of gray market, only 39 percent of them involve internal audit or finance, and 43 percent covers corporate security.

Also, 62 percent of OEMs lacked formal training programs to educate their own staff or customers and half of them have no contractual provisions involving gray market activity in either their distribution or reseller agreements.

Finally, more than a third of OEMs (38 percent) stated they have experienced inappropriate incentive claims including sales to ineligible entities (67 percent), product procured from unauthorized sources (55 percent), and funds not being used for marketing as directed (52 percent). Almost half (48 percent) do not verify end users when processing relevant rebates. Those who do verify end users for each claim (52 percent) use product serial number tracking and/or require proof of purchase/ invoice before processing any claim.