Bogus Counterfeiting Statistics Spawn Protection Racket

BusinessWeek's Eric Schine plants a big slobbering wet kiss on the anti-counterfeiting industry – yes, it would seem to be a fully-blown industry at this point – in the magazine latest issue.

There are lots of lies told about how big the world's counterfeiting problem is. Up until now, that hasn't been much of a problem. I said when I investigated the subject a couple of years ago that "this isn't a sexy story, and it's hard to see how the lie is causing much, if any, harm." But things have changed since then, it would seem. Now, the lie is causing harm. It's causing the owners of small businesses to spend good money "protecting" themselves from counterfeiters.

Another thing I said a couple of years ago was that if reliable statistics on the extent of international counterfeiting ever did emerge, the chances of their making their way into the news media were slim indeed:

The OECD, it is rumoured, may or may not be embarking on a survey trying to quantify the effects of counterfeiting. But if it does, and the numbers bear any relation to reality, they're hardly going to be trumpeted by groups such as the IACC

Boy, was I right. The OECD has now released the preliminary findings of its long-awaited study, and pegs losses due to counterfeiting at "up to $200 billion". Yet what do we find in BusinessWeek? The same old bullshit:

Counterfeiting has reached towering proportions. According to the International Chamber of Commerce, businesses lose about $600 billion a year to counterfeiters, a figure that's on track to grow to $1.2 trillion by 2009.

It's worth unpacking this a little. Firstly, there's the $600 billion figure, which is based on the idea that counterfeiting accounts for as much of 7% of world trade. (There's absolutely zero evidence for that assertion, by the way.) I've discredited it, others have discredited it, and no one has even attempted to defend it. Yet journalists never seem to question it.

But then comes the even more ridiculous assertion that business losses are likely to reach $1.2 billion in just two years' time. I haven't seen that one before, and I can't imagine where it comes from. But suffice to say it can't be coming from the same place as the $600 billion figure, because there's no way that world trade is going to double by 2009.

So where does all this scaremongering lead us? Eric Schine has the story.

Companies don't need to spend megabucks to get a modicum of protection. That's a good thing, because even your basic bottle of $10 wine can be faked. Typically, a counterfeiter in China or Thailand will collect or fabricate Bordeaux bottles, refill them from tanks of cheap wine, and affix a false label. Since 2005, Geneva-based Algoril has signed up nearly two dozen Bordeaux producers. For a few cents per bottle, Algoril prints labels that give each one its own code, which customers can match against a database using their cell phones. Dominique Meneret, who just signed up with Algoril for his Domaine de Courteillac and Château de Brondeau wines, hasn't yet been faked, but "I prefer to take insurance for the future," he says.

Both Domaine de Courteillac and Château de Brondeau are, I'm sure, perfectly good, workmanlike wines, which retail for about $15 a bottle. And I daresay that a determined counterfeiter, if he put his mind to it, could do a reasonable job at faking those bottles. But the fact is that neither I nor you nor anybody that either of us knows has ever heard of either of those wines – certainly not the latter one, anyway. And if a counterfeiter is going to go to the effort of counterfeiting an established wine label, he's likely to choose one which retails at a much higher price, therefore increasing his profit opportunities. A counterfeit Petrus, I can see. A counterfeit Brondeau? I very much doubt it.

Nevertheless, Algoril has managed to sell its technology to those wines' maker, who thinks that he now has "insurance for the future". But of course the chances of someone discovering a bottle of Château de Brondeau to be a fake by using their cellphone in a wine retailer are lower even than the chances of such a fake bottle existing in the first place.

And it's also worth stopping to wonder how much Dominique Meneret would really lose even if his wines were faked. The answer is far from clear, but it involves working out the probability – which is probably low – that a purchaser of a fake Brondeau would otherwise have bought a real one. (Remember, here, that if the retailer is stocking fake Brondeau, he almost certainly has little if any legitimate connection with the makers and distributors of the real wine.) There are also tougher questions involved about what exactly a "loss" is.

In fact, the losses from counterfeiting can, in the real world, be negative. Dolce & Gabbana, for instance, is notorious within the anti-counterfeiting community for being quite uninterested in prosecuting those who counterfeit its goods. And I suspect that the reason is not that they're a lazy company or one which isn't interested in stemming any real losses. Rather, I think the reason is that they have no interest in stemming losses which don't actually exist. When someone buys a fake D&G handbag, that person would not otherwise have bought a real one at a hundred times the cost. But they are buying into and publicly advertising the desirability of the D&G brand. Which means there's just as much reason to believe that D&G makes money from counterfeiting as there is to believe that it loses money from it.

Add it all up, and there is really no chance that the anti-counterfeiting industry is selling a useful product to the makers of $10 bottle of wine. This is a $500 million industry, and it's growing, we're told, at a double-digit rate. And it's using fear to sell its products, rather than economic logic.