Etsy feels the sting of critics where it counts

Etsy chief executive Chad Dickerson today tried to reassure investors frazzled by the handmade-craft site's worse-than-expected quarterly results. He explained how the Brooklyn, New York-based online marketplace tries its best to remove counterfeit goods from its site. His words, though, failed to dissuade at least one critic, Wedbush analyst Gil Luria.

Investors seemed inclined to side with Luria. They pummeled Etsy (ETSY) shares today, knocking them down more than 18 percent, to $17.20, after the company posted a surprise loss of $36.6 million, or 84 cents a share. Revenue surged 44 percent to $58.5 million, but earnings missed Wall Street expectations. Investors were further unnerved by Etsy's plans to increase spending in the current quarter.

Dickerson, who orchestrated the company's recent initial public offering, told investors that Etsy is "often accused of being too aggressive in taking down material posted by sellers," but it tries to strike a balance that respects the needs of all parties.

"It's certainly true that brand owners complain to us about infringing items appearing on Etsy," he said. "But our experience has been that when we engage in a cooperative and transparent way with brand owners, we enjoy a productive and beneficial relationship and partnership with those brands."

Moreover, he said, Etsty's legal team follows the Digital Millennium Copyright Act, the Communications Decency Act, industry best practices and established case law in policing the site. Etsy terminates the accounts of repeat offenders and will block them from returning to the site.

But Dickerson's comments didn't impress Luria, who rates the stock as "underperform." While searching the site, he said he found 2 million items that mentioned a brand in their product description.

"I came away unconvinced and even more concerned about whether Mr. Dickerson is removed from the facts or disingenuous," Luria said, adding that Etsy could face lawsuits from companies angered by the knock-offs. "I am not sure which is worse. ... They have clearly left the majority of the infringing sellers out there."

The company's problems are also getting increased media attention.

A February story in Wired titled "How Etsy Alienated Its Crafters and Lost Its Soul," writer Grace Dobush wrote that she closed the Esty store she had opened in 2006 because the site did a poor job of preventing sales of mass-marketed items. Sellers are also at the mercy of Etsy, she said

"A customer complaint can freeze your payment account," she wrote. "An accusation of copyright violation can freeze your store or shut it down entirely. For a full-time crafter, that's too much of a risk."

Crafter Beth Piccard's Etsy shop was shut down for copyright infringement. She admitted on her site that she had made some inadvertent errors and accidentally used material that infringed on existing intellectual property. Nonetheless, she wrote that she wondered why she was being targeted because "Etsy is FULL of people selling copyright infringement images of the mascots, logos and everything else."

Dickerson alluded to Piccard in his comments to Wall Street analysts, noting her "frustrating and frightening confusing account of her back and forth with a rights holder." He added that the company provides answers to sellers' questions about intellectual property in "plain English."

In his remarks, Dickerson said Etsy was "really proud" that the nonprofit Electronic Freedom Foundation had awarded Etsy three out of a possible four stars for its intellectual property policies.

"We ultimately lost a star because we don't issue a transparency report," he said. "So, we've been working on that transparency report for the last few months, and we plan to publish that in the future."

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.