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Issue Date: Vol. 41, No. 10 / August 25, 2001 - September 24, 2001, Posted On: 8/25/2001


Sales Of Imported Parallel Video Game Boards Are On The Rise In U.S.; Mainstream Distribution Involved


Marcus Webb

U.S.A. - Parallels are back.

Lawfully-manufactured video games, originally intended for sale and use overseas, are being imported into the U.S. on a wider scale today than has been seen in several years. Typically, parallel imports cost much less to buy, both for the importer and for the operator who is the final purchaser. But, under U.S. copyright law, parallels are illegal to operate.

The last major round of parallel importing took place in the mid-1990s. At that time, importers tended to be a handful of rebellious operators and a few second-tier distributors.

This time, by all reports, the situation is quite different: mainstream distributors are actively involved in parallel importing. That charge has been leveled by several U.S. subsidiaries of the Japanese manufacturers of the imported games, most prominently Capcom. More cautiously, Sega Enterprises USA and Konami of America have also confirmed the situation, as has the Amusement Machine Association of America.

NEGATIVE CONSEQUENCES

Informed sources say that buying or selling a parallel version of a game can hurt operators, distributors and the authorized factory subsidiary. Operators may find themselves unable to get factory-authorized service. They may be vulnerable to copyright infringement charges , although at this juncture, none of the affected parties appears to have much, if any, appetite for pursuing legal action against parallel traffickers.

Distributors can also suffer from the cut-rate price competition that is typical of parallel importing. Losing sales to such unauthorized competition "harms distributors who buy through traditional [authorized] channels" because the distributors who "play by the rules" must pay higher prices for equipment, said AAMA president Mike Rudowicz.

Finally, of course, the U.S. subsidiary of a Japanese manufacturer also loses sales whenever a distributor or operator decides to buy a parallel version of a particular game, instead of going through authorized channels.

Matt Atwood, public relations manager for Capcom USA, has been the most outspoken manufacturer on the parallel issue to date. "A lot of illegal product has been coming in from Hong Kong," Atwood told V/T. "That includes counterfeits of consumer games, and both counterfeits and parallels of coin-op games. The market is shooting itself in the foot by trafficking in these products. We cannot compete with copygame prices."

Capcom's own distribution policies have been under review, and the company has assigned marketing responsibilities for its current arcade game ("Capcom vs. SNK2") to Sega. Atwood expressed serious displeasure with the coin-operated distribution network for several reasons, including the allegation that some dealers have dabbled in parallels. In addition, he charged that other factories have been victims of the practice. "It's been happening to everyone and it has been allowed to slide," Atwood declared.

Sega Enterprises president Al Stone confirmed that Sega has also been affected by parallel importing and that some distributors have been involved. "Distributors are looking at parallels as a chance to make greater margins," he said.

According to Stone, several factors have combined to spur the recent rise in parallel importing. "It's just getting harder and harder in a down market for us to control worldwide shipments," he said. "In Japan and Asia, the useful life of a game has grown shorter. Even though earnings are still high, [foreign operators] can be through with a game in five or six weeks and sell bare minimum kits to brokers. These kits eventually find their way to the United States. The reverse is also true: if we close out a product here in the United States it can end up in Europe."

One of most prominent parallel import titles this year has been Konami's popular music novelty, "Dance Dance Revolution." Unlike the typical gray market video, it is not just a printed circuit board; a parallel import version of "DDR" necessarily includes an entire game, and a relatively large one at that.

Konami of America sales manager Jim Belt confirmed, indirectly, that some mainstream distributors , including at least a few authorized Konami distributors , have dealt in parallels of Konami games. However, he carefully qualified his statement. "Most of the distributors that have been bringing in parallel equipment are not top level distributors, and most are not authorized Konami distributors," he said.

Belt played down the extent of the problem, telling V/T that trafficking in gray market goods this year is "possibly a little stronger than in previous years, due to the continued downturn in our business." He added: "Everyone is looking for ways to make a profit and attract new customers."

DANCE DANCE REVOLUTION

Most parallels of "DDR" have been used games, Belt said. "The reason that various versions of 'Dance Dance Revolution' have been targeted by certain distributors is that they could not get them directly from Konami of America," he explained. "The weakening of music-themed games in the Far East made used games more readily available."

Operators who purchase parallels are taking an investment risk because there is no warranty and no promise of factory service support, Belt said. "They have no idea how long the machine was on location, and what kind of condition it was in. I have heard reports of operators trying to send games back to the distributors because they were in such poor condition." Executives at Konami, as well as Sega, have taken the stand that only authorized games sold through their offices will be serviced by the factory.

Copyright infringement is another problem inherent in parallel games. Unauthorized public performance of a copyrighted work is a violation of U.S. law. The work in question may be a game software program in a typical video machine. Another possible infringement would relate to the musical score for a novelty like "DDR," said Belt. "In the case of imported music games, operators are at legal risk because the games contain music that is not licensed for use in the U.S.," he pointed out.

Despite this rather diffident suggestion of copyright problems, none of the affected Japanese subsidiaries has gone out of its way to publicize this year's parallel import situation. Nor have factories seen fit to threaten parallel operators with copyright infringement lawsuits. This relative quietude is another significant change from earlier periods of parallel importing.

Capcom has made the most hardline public statements about the issue to date. PR manager Atwood put the industry on notice that Capcom is taking a get-tough stance, stating: "If we find people are using copies, we will stop working with them. That goes for operators, distributors, and retailers alike." However, Atwood also conceded: "We are just starting to work with this problem and have not approached our associations or the federal government for help yet."

Sega's president Stone was circumspect about Sega's plans to shut down the flow of parallels, other than to say the company would keep a tight reign on production. "Inventory is a cardinal sin these days, so we will get more conservative with production runs," Stone advised.

Konami had even less to say about its response to the parallel challenge. "Konami Corporate (HQ) is reviewing its distributor network and policies to see what additional steps can be taken to limit parallel imports," the company's Belt told V/T.

"The best way for operators to protect themselves is to buy legal product from authorized distributors," Belt added. "If the product belongs in the U.S. and is sold by an authorized Konami distributor, then both Konami of America and the distributor will stand behind the sale."

That guarantee won't apply, though, in cases where operators buy parallels , perhaps unknowingly , from authorized distributors. This has reportedly happened in a few cases, with more than one manufacturer's product.

Belt also suggested that AAMA may be investigating potential actions it could take to help prevent parallel importing. However, Rudowicz declared that the responsibility and authority to solve this problem ultimately lies with individual factories.

Speaking to V/T, Rudowicz said: "The main problem is that the individual company has the control over this. If they want to stop it, they can stop it. However, an association can't do it."

If so, then AAMA's current position on parallels is a far cry from its former policies. From 1986 to the mid-1990s, AAMA was actively involved in investigating alleged importing and operation of parallel video games. AAMA-sponsored investigations frequently provided ammunition and evidence for followup investigations by law enforcement agents.

Such official investigations, in turn, led to seizures of gray market imports at various ports of entry. At least one manufacturer sued a parallel importer civilly. AAMA was also very active in lobbying Congress to ensure that parallels were viewed as illegal under the U.S. Copyright Act.

That was another era, however. AAMA eventually reached a compromise with the Amusement and Music Operators Association. Both associations agreed to hold that operating parallels is illegal, and to refrain from making parallel legality an issue before Congress. In addition, individual manufacturers pledged an effort to make all video games available in kit format in the U.S., if those titles were sold as kits overseas.

Today, neither AAMA nor AMOA appears to have any desire whatsoever to revive the parallel controversy. Nevertheless, Rudowicz did acknowledge that AAMA has more than once received word of parallel importing recently.

"I've had this complaint as well that some distributors are bringing in [parallel] product from Europe and Asia," said the AAMA president. Asked why gray market activity had increased recently, he said: "I think the worldwide economy is difficult everywhere and our industry is also facing challenges everywhere , not just the U.S., but worldwide. So offices overseas that can't move product are sending it here, offering deals here they can't make there."

Rudowicz further confirmed that affected factories have been relatively quiet about the parallel issue this time around. "Some manufacturers are turning their faces away from this issue because the product is moving, so they're not concerned," he said. However, he added that "Ignoring the problem is not the right thing to do."

The paradox of parallel importing, as Rudowicz's remarks suggest, is that the greatest victims of this practice , authorized factories , are also sometimes the source of the problem as well. In certain cases, parallel imports are used games that were sold by an arcade in Japan or Europe. At times, however, an authorized factory subsidiary sells its excess inventory into other markets.

PRIMARY SOURCE

Most paradoxical of all, some instances have occurred where the parent company, sitting atop the whole market chain, sells parallels "out the back door," not knowing (or much caring) who ultimately makes the final sale, so long as the parent company is paid. In such cases, the manufacturer's U.S. subsidiary can find itself at odds with its fellow subsidiaries in Asia or Europe, or even with its own parent company in Japan.

The current parallel importing situation also creates a further novel and delicate paradox, by putting manufacturers' U.S. subsidiaries at odds with at least some of their own authorized distributors. Some observers have suggested that this dilemma may be another element motivating certain manufacturers to experiment with direct online sales of product to operators, either as an alternative to the traditional chain or as a contingency to encourage authorized distributors to remain faithful to traditional market channels.


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