Fighting back against piracy: the new corporate strategy to regain the low-end market.

Luis Carrillo is in charge of a store that sells DVDs on Eje Central, one of the hot spots for piracy in Mexico City. From the outside, it looks like many shops on the avenue, selling everything from DVDs and CDs to software, electronics and apparel. The prices are very competitive: "Love actually", the romantic comedy with Hugh Grant, and "Master and Commander", with Russel Crowe, cost only $40 (US$3.70), when an original product in a retail store is more than $110 (US$10). If they were copies, those prices should not surprise anyone. But on the entrance of the store, there is a sign that grabs the attention of the people passing by: "We only sell original movies."

What makes those prices possible is "Only DVD," an innovative project of Mexican company Distrimax to regain the low-end market, the main consumer of piracy, with a new offer of specific products for that target. "Considering we are surrounded by 400 vendors that sell copies, the competition is hard," said Carrillo. "But sales are good and I think it's great giving people an access to quality products at a reasonable price."

Distrimax, a Mexican company that commercializes and distributes movies from the major studios in Mexico and Latin America, is the pioneer of an emerging trend between local and international companies in Mexico, looking for alternative ways to fight one of the biggest piracy markets in the world. The name of the game is "reconversion" of street vendors.

Distrimax launched the program two years ago, supported by the Motion Picture Association (MPA) of Mexico. It already has 2,650 vendors selling original movies in the traditional mercados or tianguis on the streets of cities like Mexico, Monterrey, Guadalajara, Tijuana, Morelos, Pachuca, Aguascalientes and Coahuila.

With a catalog of 600 titles from major studios--20th Century Fox, Universal and Paramount--and at least 20 launches per month, more than 2 million movies have been sold, under the label Videomax. "It is not much yet," said Carlos Cayon, general director of Distrimax, to BUSINESS MEXICO. "But it is a beginning in a market where there was only piracy before." Sales are growing 3 to 5% a month, and Cayon expects to end 2005 with a growing rate of at least 35 percent. As he stated, volume will be a key factor for the success of the project.

Distrimax has even touched base in Tepito, the biggest piracy market in Mexico, where it has 35 vendors under the program. "It has been a surprise", said Cayon. "Generally, the vendors of piracy are willing to go for the original product."

The offer, of course, has to be tempting. To start with, the vendors that sell Videomax movies must get a profit of at least 10 pesos (almost US$1), the same amount they would get if they sold copies. Distrimax also flatters its vendors with signs, T-shirts and promotional material for their stores. To supply them, Distrimax has opened 7 stores in the main Mexican cities. Further, two months ago the company launched direct selling of movies through a catalog, in the way cosmetics companies like Avon do.

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In order to avoid the danger of cannibalizing its traditional customers, the movies sold under the Videomax label have to be at least 2 years old. And the catalog does not only include action or comedy movies, considered to be a sure bet for the low-end market: "Lost in Translation", directed by Sofia Coppola, and the classic "The Rocky Horror Picture Show," are also part of the offer.

Surprisingly, one of the biggest successes of Videomax has been "Dancer in the Dark", the movie directed by Lars Von Trier starring Finish singer Bjork. The movie has all the ingredients to repel a massive audience: it is a drama, a musical and is not in English. But the movie, that had not even sold 10,000 copies when launched three years ago in retail stores, sold more than 30,000 in 25 days on the streets. "This market is going to give us a lot of work and many lessons," said Francisco Guerra, director of the Mexico Antipiracy Program of the MPA. "Habits and preferences could be very different from what we think."

The music industry follows

The second industry taking the "reconversion strategy" is music. Through the Amprofon (Asociacion Mexicana de Productores de Fonogramas y Videogramas), one of the biggest organizations of the sector, seven of the biggest labels in Mexico have been working for a year to develop their own path to the low-end market. The music industry has been the most plagued by piracy in Mexico. According to Amprofon, 6 out of 10 CDs sold in the country are copies, with losses of more than US$300 million a year.

The first step of companies like EMI Music, Warner, Sony-BMG, Universal and Azteca will be to launch multi-label compilations of music known in Mexico as popular (ranchera and grupera). EMI, for example, is completing a catalog including groups like Tigrillos and Banda Zarape. "It has to be music that has been in the market for some time," said Camilo Lara, EMI marketing director. "We also make savings with more austere packagings, like cardboard covers printed in fewer colors." The prices will range from $28 to 60 pesos (US$ 2.50 to 5.50) for the final consumer, when the pirated version usually sells for 20 pesos (US$ 1.80).

Companies will also launch "maxi singles", a CD with only 2 or 3 songs from a recently released product. Most of the launches involved by the new strategy will be music in Spanish, since only 10 to 15% of the CDs that are copied in Mexico fit into the "Anglo music" category. The reconverted vendors will also receive promotional materials for their stores and even the visit of a popular Mexican singer, to sign autographs to customers.

The first target of the reconversion strategy is Gualadalajara, where mayor Emilio Gonzalez Marquez launched a strong program to combat piracy in places like San Juan de Dios, the biggest piracy market in the city. Amprofon aims to have 200 street stores reconverted in the city by the end of the year, and the next step will be Monterrey.

"With more than 10 million street vendors in Mexico, we have to give people an alternative to make a living", said Fernando Hernandez, director of Amprofon. "Still, our main philosophy is that piracy must be taken off the streets. In the case of the music industry this new strategy will not work if we are surrounded by piracy vendors."

This two-ways strategy--taking steps to regain the low-end market while demanding the authorities to fight piracy--is shared by the apparel industry. The National Chamber of the Apparel Industry (CNIV), for example, is organizing bazaars in cities like Mexico and Puebla, where customers can find clothes at wholesale prices from producers and designers. "Prices can be even 20 percent lower than in the illegal market," said Toni Kuri, president of the CNIV. "And we're offering products of quality that are in fashion." A new bazaar will open next year in Queretaro.

Through industry events like Intermoda, in Guadalajara, the organization is also trying to get closer to small shops, which usually sell copies of brands like Mossimo or Levi's. Further, its associates are keeping an eye on the strategy developed by MPA with DVDs in Puebla, which could result in around 500 street vendors reconverted in the next months. "After that, it will be the turn for our clothes", said Kuri.

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Although he believes these strategies help, he also stated that the most important factor to contain piracy in Mexico is the law, which needs to be enforced. The problem of piracy in the apparel industry is huge. According to the organization, 5 of 10 pieces of clothing sold in Mexico are copies, the reason CNVI is also working on the political front.

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The organization is pushing for legal reforms that give local governments the capacity to enforce penalties against piracy and smuggling, like definite closures of stores selling copies, no matter what size they are. There are already two reform projects presented in the assemblies of Mexico City and Puebla, expected to be debated this month. "Fighting against piracy requires the participation of the first levels of government," said Fidel Lopez, legal coordinator of the CNIV. "Otherwise, we're leaving open spaces that cannot be reached by the federal authorities."

Business invited to join

Of course, there are also skeptical voices toward the "reconversion" tactic. One comes from the Alliance against Piracy, an association of 15 companies operating in Mexico to make consumers aware of the economic and social problems caused by piracy in Mexico. "We support those strategies as long as they favor the established commerce," explained Roberto Castaneda, president of the organization. "The formal vendors are our partners and that's a relationship we have to take care of."

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The organization, integrated by companies like Nike, Disney, Phillip Morris and Marti, is actively taking part of an executive committee called by the Federal Attorney General's Office (PGR), that is helping the federal Mexican government to design a National Plan Against Piracy. Other members include MPA, Grupo Televisa and the Association of Authors and Composers (SACM), among others. "Although we know it's impossible to eliminate piracy and smuggling completely, actions can be taken to control the problem", said Castaneda. "And this group will give the plan a continuity, beyond governments."

Meanwhile, the organization keeps on working on its main focus: creating a new culture of respect for the law between consumers, to end up with the widespread idea that piracy is not a crime. "Always on behalf of the consumer's benefit", says Castaneda. "The first affected with pirated products is people who buy them."

What seems clear for the "reconversion" strategy is that it does not fit all products. For example, you will never see Louis Vuitton or Chanel trying to position its luxury products in that market. That seems to be the case of Nike and Microsoft.

Nike, who has the exclusive rights for the T-shirt of the Mexican American soccer team, has for example widened its offer with cotton T-shirts with the club's image, that are worn by soccer players in training and isolation camps. While the most expensive and high-technology America T-Shirt costs around $900 (US$83), a cotton version can sell for $249 (US$23). But Nike has not included street vendors between the distribution channels of its original products.

Microsoft is another good case. The company has recently launched the Windows Starter Edition, a limited and more economic version of the Windows XP Professional and XP Home operating systems, that is selling through the OIM (Original Equipment Manufacturers) channel for companies like Dell, HP and independent PC assemblers. But the company has no plans to launch new versions of its software for the low-end market. "We have a different business model, not even 3% of our sales are through the retail channel", explained Enrique de Icaza, legal director for Brand Protection of Microsoft Mexico.

What seems clear is that companies betting on the "reconversion" strategy have to think in a long-term basis. "The low-end market should be considered as another target by companies," said Guerra confidently. "But in the medium term, let's say in five years, it should become an important source of income. I strongly believe we're creating the next wagon of growth for companies."

RELATED ARTICLE: How to Protect a Trademark

A company seeking to launch a new product in Mexico must face a number of challenges. Choosing a trademark, and taking steps to protect that trademark, should be at the top of the list.

The first step is to consult with a trademark counsel. He or she will conduct a trademark search, to determine whether other companies have registered similar marks for similar goods. The Mexican Institute for Industrial Property (IMPI) will not register a mark that it believes to be confusingly similar to an earlier registered mark.

Trademark counsel will also consider whether the mark is inherently unsuitable for registration. For example, if the mark consists of a generic term, or is descriptive of some aspect of your goods or services, it cannot be registered.

The next step, if your mark is available, is to file an application for trademark registration with the IMPI. Once the certificate of registration issues, you are legally presumed to have the exclusive right to use the mark for the goods or services stated in the registration.

It is important to begin use of the mark before or shortly after the registration certificate issues. If a mark is not used for a period of three years, it is considered to be "abandoned" and the registration may be cancelled at the request of a third party. The mark should be used in the form that it is registered--for example, if you change the spelling of a word, or change a design element of the mark, it may be considered to be an abandonment of the mark.

In addition, it is important to use the appropriate registration notice in connection with the mark. Under the trademark law, you may use either the words "Marca Registrada", the abbreviation "M.R." or the [R] symbol. The purpose of the symbol is to put others on notice that you have the exclusive right to use the mark. If you do not use an appropriate marking, you may be prevented from enforcing your rights in the mark. On the other hand, if you use a registration notice in connection with an unregistered mark, or in connection with goods or services not covered by the trademark registration, you may be guilty of fraud.

Imitation is the sincerest form of flattery, and if your product is successful, you will be very flattered. Counterfeiting is big business in Mexico. Fortunately, the law provides remedies if you are the victim of unlawful flattery:

1. You may file an action for infringement or unfair competition before the Intellectual Property Protection Division of the IMPI. If the IMPI decides there has been an infringement, they can order the defendant to stop using the infringing mark, issue fines, seize infringing products and even shut down the defendant's business. If you request preliminary relief--for example, seizure of the defendant's products pending a final decision--you will need to post a bond against possible damages to the defendant if they are ultimately found not to have infringed your mark. On average, IMPI takes almost a year to issue a final resolution in infringement and unfair competition cases.

2. You can file an action for damages in federal court. Of course, this avenue only makes sense if the defendant is a substantial company that can pay damages if the court awards them. Before filing an action for damages, you must first obtain a ruling from IMPI that the defendant is guilty of infringement or unfair competition.

3. You can file a criminal complaint, supported by evidence, with the Federal Attorney General's Office (PGR). The complaint may be filed with the PGR's Special Unit for Intellectual and Industrial Property Rights, or alternately, with the local office of the PGR in the state where the infringement is taking place. Nowadays, each local office has a public prosecutor that specializes in trademark counterfeiting cases. Once you file the complaint, the prosecutor will investigate the matter. Counterfeiting is considered a lesser offense when committed on the streets and sidewalks, but is considered a felony when committed by an established company or a criminal organization. Bear in mind that the PGR only handles cases involving counterfeiting--that is, direct copying of someone else's product. If your case involves garden-variety infringement--which is to say, a case involving confusing similarity about which reasonable minds could differ--you must pursue the matter through IMPI.

Alfredo Medina is an associate of Arochi, Marroquin & Lindner.

By Alfredo Medina

Annual Losses by Industry

(in US$ millions)

CDs and DVDs               460
Software                   369
Apparel                    940
Shoes                      360
Editorial                  220
Medicines                  700
Tobacco                    600
Wines and liquors          273

Source: Alliance Against Piracy.

Note: Table made from bar graph.