News

How Rampant Is Unauthorized Reselling?

Home networking category growth could spur more unauthorized ‘gray market’ channel buying (and reselling) by integrators, which voids warranties and tech support for end users (and dealers).


“It’s not always that obvious you are buying from an unauthorized source,” says Benson Chan, director of marketing at Pakedge Device and Software.
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The purchasing channels in the custom electronics industry used to be so well defined. Integrators purchased their products either directly from the manufacturer (sometimes via an independent rep) or they bought products from their local distributor slightly marked up. Boy are those days gone.

The Internet pretty much took care of those well-defined sales channels. Today, according to the 2015 CE Pro State of the Industry Study, about one in five products purchased by a custom installation company is actually bought either online from an etailer or physically from a retail store, where many dealers pick up their flat panel TVs these days.

But there is another twist in the sales channel that is much more damaging. It has primarily been brought on by prolific growth in the IT space that is blurring the lines of demarcation even more. But unbeknownst to many integrators, these unauthorized “gray market” purchases (and sales) can void warranties, tech support and other vital support functions that are necessary for complex home networks.

‘Gray Market’ vs. ‘Black Market’

According to Benson Chan, director of marketing at Pakedge Device and Software, integrators that buy products via an unauthorized channel, also known as the “gray market,” primarily do it for two reasons: they need it fast and/or they want it cheap.

“Everyone knows the term ‘black market,’ which denotes either a completely counterfeit product or an illegal sales channel, but few know the term gray market,” says Chan.

He defines the gray market as a convoluted sales channel in which integrators unknowingly (or knowingly) purchase products from unauthorized resellers, or sell the products themselves when they are not permitted to do so. In both scenarios, the ultimate loser is the end user who finds himself without a valid warranty and no tech support.

“Not all products are available to everyone,” continues Chan. “Many small clients [integrators] have not invested in the necessary training to deploy these systems. By getting that product, they undercut the guys who have taken the training. It’s especially important in the IT networking space for manufacturers to require resellers to meet certain requirements.

Chan, who came from Cisco before joining Hayward, Calif.-based Pakedge, has seen this vicious cycle happen before in the IT world.

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Unauthorized sales channels can take many forms.

“For many manufacturers, we often don’t find out that unauthorized reselling is taking place until we see it on the Internet, or someone calls us asking for technical support or to complain about something. That’s when we find out their product does not match our sales records,” he says.

It recently happened at Pakedge. Chan says an end user customer called upset that he could not get support for his networking equipment. He had bypassed Pakedge’s authorized reseller in Australia and bought from a foreign non-vetted reseller outside his support territory.

“We had to give him the bad news that we could not provide technical support for his product,” says Chan.

How Prevalent Is it?

Fortunately, unauthorized reselling does not appear to be pervasive in the home networking space… yet.

“But it could become a problem,” admits Chan. “Not necessarily at the high end of the market, but as home networks move more into the middle market, the problem could increase.”

In some cases, these unauthorized purchases by integrators are innocent; dealers literally do not realize they are buying from an unauthorized reseller.

“It can be as simple as getting online, Googling a product and buying it,” says Chan, who estimates that 80 percent of Cisco’s products are online from gray market resellers.

Remember, when an integrator deploys a home network for a homeowner client, he is, in essence, “reselling” the equipment, so don’t get confused that the term “reseller” only defines guys with websites hawking products for sale. Dealers are resellers. So integrators can often unknowingly (or knowingly) contribute to the problem by selling IT products when they are not authorized to do so.

“Installers are often not aware of what is in the contracts that they sign,” adds Chan. 

Among other things, those contracts include clauses that prohibit authorized resellers from selling outside their geographic region. For example, integrators or end users might try to buy a product through a Canadian reseller to take advantage of the exchange rates. That voids the warranty and tech support.

“It not worth saving $30 on a product to do that,” says Chan.

How Can You Be Sure?

“It’s not always that obvious you are buying from an unauthorized source,” continues Chan. He advises integrators to look for how many “tiers” are involved in a product purchase. The manufacturer is one tier; the dealer/distributor is a second tier. 

“If a product purchase involves more than two tiers, it is probably not authorized,” he says. To protect yourself, you can either:

  • Always buy factory direct from the source
  • Verify that the entity you are purchasing from is authorized by contacting the manufacturer and cross-checking the dealers’ name.
  • Plan better so you are never caught short on time ordering a product.
  • Read the contract. Make sure you understand the definition of what constitutes being an authorized reseller vs. the end user.

Jamie Corpuz, associate marketing communications specialist at Pakedge, sums up the current situation rather succinctly: “When people aren’t following the policies, it hurts everybody. We can’t guarantee our product when that happens. It makes everybody look bad because we can’t support the installation.”

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This is what Authorized Sales Channels should look like.



  About the Author

Jason has covered low-voltage electronics as an editor since 1990. He joined EH Publishing in 2000, and before that served as publisher and editor of Security Sales, a leading magazine for the security industry. He served as chairman of the Security Industry Association’s Education Committee from 2000-2004 and sat on the board of that association from 1998-2002. He is also a former board member of the Alarm Industry Research and Educational Foundation. He is currently a member of the CEDIA Education Action Team for Electronic Systems Business. Jason graduated from the University of Southern California. Have a suggestion or a topic you want to read more about? Email Jason at [email protected]

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