A man walks into a widget shop with the intention of buying a widget. He picks
out a nice widget for $100, but just as he’s about to take it to the counter
to pay for it, he gets an urgent phone call and rushes out of the shop, which
has a 30% profit margin on its widgets. The question is: How much has the shop
lost because of the phone call?
a) The shop has lost nothing. A man walked in, a man walked out. Where’s the
b) The shop has lost $30: the profit it would have made on the sale of the widget.
c) The shop has lost $100: the amount of money it would have received had the
man not received the phone call.
I’m inclined to go with (a) on this one. But let’s say that the shop starts
seeing a pattern: people walk in and always seem to get urgent phone calls just
before they buy their widgets. The manager of the shop calls me up, and says
"we’re losing thousands of dollars a month because of these urgent phone
calls". I can see that, too.
As long as this kind of mathematics stays on the anecdotal level, none of it
really matters. But when corporations spend millions of dollars to work out
exactly what they’re "losing", and newspapers write long articles
on the subject, then it’s worth revisiting the question of what losses, really,
In case you haven’t worked out where I’m going with this, it’s my favourite
subject: counterfeiting. Today’s question (or yesterday’s, actually: we’ll get
to that in a minute) is this: if a Zippo lighter costs $25, and a counterfeiter
sells a fake Zippo for 37 cents, how much has Zippo lost?
a) Nothing. If it’s not there on the P&L, it’s not a loss.
c) $25 muliplied by p, where p is the probability that the
person buying the counterfeit Zippo would have bought a real Zippo were the
counterfeit Zippo not available.
d) The answer from (c), multiplied by the profit margin on a $25 Zippo. Or,
to put it another way: if Zippo makes $10 in profit on every $25 lighter, then
$10 multiplied by p.
Which brings us to yesterday’s news: two big articles fronting the Marketplace
section of the Wall Street Journal. I don’t have an online subscription, but
a link that Google says leads to a story entitled "China Policy Lets Counterfeiters
Off Lightly", and here’s
a link to the other article, entitled "Estimates of Copyright Piracy Losses
Let’s take the second article first. "Counting the losses from piracy
isn’t a science – it’s an art," says Geoffrey Fowler, who even quotes
Keith Jopling, at the International Federation of the Phonographic Industry,
saying that "we will never know 100% the exact loss". Fowler’s article
is reasonably fair: it even makes the point that some people who download music
illegally actually buy more money on legitimate music as a result.
As Sasha Frere-Jones points
out in last week’s New Yorker,
The Arctic Monkeys built their audience by playing live shows—constantly,
all over England—and by giving away its songs as MP3s on Myspace.com.
When their remarkable album, “Whatever People Say I Am, That’s
What I’m Not,” was released, in January, it sold more than three
hundred and fifty thousand copies in the first week, making it the fastest-selling
début in British history. (So much for the idea that giving away your
music hurts sales.)
Still, there’s a difference between an artist using the internet to market
their work, and a counterfeiter selling bootleg CDs. In the latter case, a criminal
is making money from selling intellectual property which he doesn’t own. But
it’s the next logical step which gives me pause: the idea that if a criminal
is making money, then somebody else must be losing money.
Theft of IP is theft, by this logic, and if you steal something from someone,
then they lose something of value.
In the case of IP, however, the owner of the IP remains the owner of the IP
even after it’s been stolen. It’s not like anybody ever steals a copyright.
So I’m not convinced that the sale of a counterfeit Zippo, or the sale of a
bootleg CD, actually causes any measurable loss at all to Zippo or to EMI.
And that’s where Fowler’s article is weak: he implies that the uncertainty
about losses due to piracy is epistemological rather than ontological. The only
question, in his mind, is over how big they are, not whether or not they exist.
But to give you an idea of how meaningless most of these numbers are, let’s
say that the MPAA is right when it reports that Hollywood studios collectively
lose $6.1 billion per year to piracy. What does that mean?
a) If there weren’t any piracy, then the profits of Hollywood studios would
be $6.1 billion greater than they are now.
b) If there weren’t any piracy, then the gross revenues of Hollywood studios
would be $6.1 billion greater than they are now.
Judging by Fowler’s article, it’s the latter: he notes at one point that "not
every pirated disc equates to lost revenue". So what would $6.1
billion in lost revenue equate to in terms of lost profit? Now there’s
an unanswerable question. But let’s use Disney’s profit margin of 8.22%: it
works out at almost exactly $500 million, which, divided among all the Hollywood
studios, seems a big but hardly enormous number. Is this really the statistic
that some studios were afraid of releasing for fear that its magnitude was so
great it might spook the markets?
And then there’s this very silly bit near the end of the article:
The Business Software Alliance’s Asia regional director, Jeff Hardee, says
the group’s studies show a nearly one-to-one ratio between decreases in piracy
and increases in legitimate sales, suggesting that, on average, people are
willing to "replace" pirate software with the real thing.
Which sounds very impressive until you stop to wonder what these "decreases
in piracy" are, and how they might be measured. It turns out that the BSA
measures piracy by a very simple method: take the retail value of all the software
installed on all the computers in the world, subtract total global software
sales, and the rest is piracy. Now I very much doubt that there’s any market
in the world which has seen the total value of software installed ever go down.
Which means that if the BSA measures a decrease in piracy, then the only way
that’s going to happen is if legitimate sales rise. No wonder there’s "a
nearly one-to-one ratio between decreases in piracy and increases in legitimate
Now, let’s return to those Zippos, as reported by Nicholas Zamiska. The story
is this: Chinese authorities raided a factory which turned out to have 32,980
fake Zippo lighters. Here’s Zamiska:
The problem stems from the way China values seized knockoffs. Unlike many
wealthier countries, China values them at the price the counterfeiter meant
to sell them at, not at the retail price that legitimate versions go for.
Yes, that’s "the problem".
To be fair, Zamiska does report both sides of the story. He gives the Chinese
view, which seems sensible to me:
Chinese courts have defended the practice by arguing that valuing seized
goods at the prices they would fetch in developed countries would grossly
distort penalties for counterfeiters, who stand to make a pittance in comparison.
At a news conference in April, Xiong Xuan Gao, the vice president of China’s
Supreme People’s Court, brought up an example of counterfeit watches, pointing
out that even though a genuine luxury watch might be worth more than $12,500,
the vendor sells it for only about $1.25.
"The sentence of conviction and criminal punishment should be measured
by the real profits he has made for himself, from the viewpoint of social
harmfulness," Mr Xiong said, according to an official media report. "On
one hand, we should make more efforts on cracking down on the infringing upon
intellectual property rights; on the other hand, we also need to be fair on
the suspects and protect their own rights."
The main thrust of the article, however, is that this policy is extremely misguided
My view is that China, with its weak IP laws, is actually much better placed
to be an economic powerhouse in the 21st Century than economies which stifle
innovation with draconian copyright laws. The Zippo lighter is a design icon
because of its beauty and simplicity – in that respect it’s very similar
to the Noguchi table which
I’ve blogged about in the past. We live in a world where great simple design
can and will be brought to the masses cheaply. The successful companies of the
future will be the ones who embrace that fact; the failures will be those who
litigate against it. Law might be on their side, but history will not be.