The problem IS real world though: I can think of several situations in our own company where a programmer would have to manipulate a set of data, find common occurences and order them. Of course each specific problem is complicated by the data and the data source but the fundamental problem stays the same: and so the question IS valid.
The input data doesnt matter (though briefly recognising it is flawed instils confidence).
In terms of your other point about how people write code.. im not 100% sure I agree. As an engineer I break a problem down into I/O machines. Where the input comes from is immaterial so long as it is in a form that is usable. The important consideration is engineering the output.
Your right: he did see the problem with the suggested data set and that is the kind of thing that saves companies money. BUT he hammered that like it was the only issue and (by his own admission) barely considered the actual practical engineering problem. To me that would tell me he is a fairly ok programmer and is bright enough to spot problems - but he is no engineer and I wouldnt hire him :) (that said it is only a small subset of the interview and based on other stuff I have read from the guy I suspect I would find him suitable to hire: he just screwed up the one question)