Whilst trying out Magento it became apparent that when you wish to watermark your product images it would overcast a grey background which could also be pixelated, although not ideal there is a way to combat this.
Note that it kinda works in the left of this image but the corners don’t look right, then see the top right how the wording is pixelated with blocky grey around it.
Here is an image with a background:
See how it’s now working as I intended.
So as a temporary fix you could give your product a background or border it right on the edge. It’s not ideal and keep in mind if you run multiple stores or shops with different themes it could look off, also if you change the pages individual designs it could also look odd.
So with your product image and your watermark image being transparent it doesn’t play well together.
If you wish to get messy with some code then take a look at the comments over at PHP.net:
There are some handy tidbits in there to read.
If you don’t then the above information should be enough to at least get your images displaying right but one might then argue, why not add your copyright when creating the image? Unless you plan on changing your copyrights.