Opinion

Felix Salmon

CNBC embarrasses itself on counterfeiting

By Felix Salmon
July 19, 2010

The people at CNBC never got back to me when I asked to talk to them about their counterfeiting documentary, and now that I’ve seen the trailer, I can see why: it gobbles uncritically all of the baseless statistics that I’ve been railing against since 2004.

The trailer talks ominously of a “secret criminal world robbing businesses of $250 billion a year,” before cutting to a customs agent talking about how the volume of seized counterfeit goods has risen from $47 million in 2000 to $261 million in 2009. Is she really saying that Customs and Border Protection literally lets through 99.9% of all counterfeit goods, despite inspecting 8% of shipments coming into the country?

The show never does those sums; instead, it goes to a big warehouse with “just over $200 million of seized cargo,” adding that “there are 12 more like it around the country.” Hm, that would make $2.4 billion of seized counterfeit goods, if true — but when were they seized, given that ten years ago, customs was only seizing $47 million a year in such material?

And that’s not the only quantitative dissonance. “This year alone, counterfeited medicines will be a $75 billion industry,” says a representative of Big Pharma; there’s no indication that that number comes form a mysterious report which no one can ever seem to produce, which was published in 2005, and which projected the number basically out of thin air. Meanwhile, CNBC’s own slideshow puts the volume of seized counterfeit drugs at just $11 million last year.

It’s worth remembering, too, that often the values of seized goods are generally based not on how much they would sell for on Canal Street, but rather how much the real items would sell for. How can Customs claim to have seized $21.5 million in handbags? When you try to track down the figures, which is often hard, you tend to come up with implausibly high numbers for the value of one counterfeit handbag or CD.

The CNBC report insists on parroting the old “7% of world trade” number which was never based on anything at all; that allows it to inflate the numbers in the documentary as much as possible. It doesn’t even use the dreadful OECD report, which massively overestimated trade in counterfeit goods and even then could only manage to reach a “global ceiling” of $200 billion by pulling a grossly inflated number out of thin air, doubling it, and then doubling it again. CNBC, by contrast, says that trade in the US alone is more than that.

Oh, and they also say that counterfeiting costs “nearly 750,000 legitimate jobs each year.” I love that “nearly”: it makes it seem as though the number wasn’t completely invented.

The fact is that the cost of counterfeiting is almost certainly orders of magnitude lower than the insane numbers being bandied around by people who genuinely consider themselves numerate financial journalists at CNBC — indeed, it might even be negative. And every scaremongering journalist who uncritically parrots those numbers is part of the problem, not part of the solution. Carl Quintanilla, and your producers — shame on you all.

Comments
7 comments so far | RSS Comments RSS

Nice article. Sometimes I think companies in trouble pull the counterfeiting rabbit out of the hat when they want to explain why their current strategies are not increasing sales. First it was the music industry fighting against progress, then it was Microsoft deflecting criticism for not growing in emerging markets where users couldn’t afford their prices.

As for the valuations, as you say they are completely crazy. As if many of the people buying the cheap counterfeits would have been in a position to be able to afford the hugely more expensive brand new product. But they still insist on multiplying some imaginary number of units lost by the full price with no normal sales discounts.

I’m not saying there isn’t a problem, but the companies moaning about it must be more honest. Not that they will of course, the huge numbers are great for political lobbyists to dangle in front of politicians saying how much tax revenue they are losing. No they aren’t, those sales do not, have not and will not exist.

Posted by FifthDecade | Report as abusive
 

Good points, Felix. There is one hidden cost that is worth mentioning. Many nations that have poor traditions of intellectual property protection are contributing much less than one might expect to technological progress and discovery, as well as culture. I work in patents and this pattern seems widespread.

Such economies are also stifled as they linger in the realm of low value manufacturing and building rather than high value intellectual output. China is a major example.

What is the price of the innovation and creative output that is missing because output of the mind is not respected and protected in the regions where most of the people in the world live? It is certainly in the trillions of dollars.

Posted by DanHess | Report as abusive
 

My guess is that many of the purchasers knew that they were buying a knock-off desinger hanbag or Rolex. They would never have paid full price for the real thing in the first place but wanted the apparent cachet of one for a fraction fo the price.

The bigger issues with this is the apparent need to purchase illicit goods such as these for image purposes or to copy music mp3s without paying the artist. From a societal standpoint, I am more concerned that people find that they have an irrepressible urge to buy or steal these things than the manufacturers tapping int othat market. Overall, it is another indicator that our morals and ethics have slid into a materialistic gutter.

Posted by ErnieD | Report as abusive
 

To Dan Hess:

I don’t buy the hidden costs thesis for a minute. On balance, the patent system stifles innovation and creates an economic drag much more than it promotes anything good. Sure, some protection is needed for industries like pharma, but for most of high tech patents are a huge drag on innovation. I know this from years of first hand experience running a large software development organization at a major networking company.

The truth is, the vast, vast majority of patents are rubbish. When I set budgets for R&D, the value of potential patents was NEVER part of the equation. We only started playing the patent game after getting hit with a series of frivolous suits when we were a newcomer to the industry. Once we had a legal team in-house, we began to incentivize engineers to patent anything they could, and I mean anything, so we’d have a big portfolio to ward off competitors and to bully newcomers (like we were bullied). My team was often called to compile a list of patents that a new startup might possibly be violating. Sometimes this would go hand-in-hand with acquisition talks. In every case, there were no inventions to speak of, only cases where we made it to the patent office first to document what was the logical next step in the progression of the technology.

If a firm had their own portfolio, or we were being threatened, there would be a showdown. It was a game of “ours is bigger than yours.” After a while we got a reputation and the suits stopped. By then, we had become a predator ourselves. This is why now so much patent litigation is now done by trolls that don’t make anything – they can’t be accused of infringing and they usually acquire their patents through distress sales for pennies. Anytime you see a patent case filed in Texas, it’s probably a troll and you can bet there’s no innovation anywhere to be found.

Finally, it was standard practice to instruct our engineers NOT to browse online patent databases for fear they’d learn about something that could later be used against them to prove willful infringement. I bet there are zero cases (at least in software and business methods) where the patent system was actually used to disseminate knowledge.

So while there may be some parts of this system that increase innovation, in 20 plus years in high tech, I never saw that side. Even though I’m named as inventor on many, many patents, I’d support elimination of all software and business method patents in a heartbeat.

Posted by magellannh | Report as abusive
 

Patents in software have nothing to do with innovation or protecting intellectual property. They are about playing defense, and they are about money. http://wp.me/pJhAL-59, and http://wp.me/pJhAL-1c

Posted by Curmudgeon | Report as abusive
 

If you’re a fan of questioning numbers, I think you’ll enjoy this-

http://www.slate.com/id/2260461/

Posted by drewbie | Report as abusive
 

@magellannh –

You are right, there is a lot to be done with patents. But patents are an undeniably crucial part of the economy.

The pharmaceutical industry for instance could not even exist without patents. The man who had perhaps the greatest impact on quality of life presently, Thomas Edison, was a ferocious patent shark, getting lots of vicious patents fights all over the place.

Even Google, one of the most successful and valuable companies of all time, got off the ground on the back of a software patent of its special PageRank algorithm. Obvious in retrospect? Perhaps, but countless search firms had spent billions over more than a decade on inferior algorithms before that then.

Our founding fathers understood the importance of protecting inventions and put patents in the Constitution for a reason. Indeed patents are one of the few realms of our massive bureaucracy that actually finds support in that document.

The math of patents is funny. It is true that very many patents have no value, but that does not mean that all patents are worthless. Even if 99% of the 200,000 or so patents issued in the US have no value, that would still mean 2000 good inventions moving us all forward each year. Of course it is miserable working in the trenches if 99% of the patents you deal with are junk.

So-called trolls are an enormous problem — you are right. What to do? What if there was a requirement, in comport with your ideas, of actually making and/or promoting the invention in order to be eligible for a patent, or to keep a patent? It does seem that inventions which benefit us all are brought to life by their inventors and do not simply gather dust until brought into legal battle.

I would also note that there is another purpose to the patent system. The founding fathers felt that there was a public benefit to openly cataloging inventions for all others and all posterity to see. All patents are destined for the public domain after all. Surely that benefit remains intact.

Posted by DanHess | Report as abusive
 

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