Avoiding the â€œuncertainty and distractionâ€ of a prolonged court battle in the midst of increased competition, Apple Computer will be moving on after paying $100 million last week to avoid several lawsuits over its famed iPod music players.
At the core of the suit was the deviceâ€™s menu navigation system. Creative Technology, a Singapore-based firm, had claimed that Appleâ€™s iPod had violated its patent for the menu.
Had five lawsuits over the patents gone to court, there was a possibility that a judge could move to grant Creativeâ€™s request that import shipments of all iPods into the United States be stopped.
The settlement could be especially timely for Apple as additional threats to its iPod player loom on the horizon. Software giant Microsoft recently became an iPod rival when it announced that later this year it would release its â€œZuneâ€ media player which would compete for the digital music device market. Meanwhile, memory card makers San Disk emerged with a new media player last week, posing yet another challenge to iPod.
For Creative, the settlement will provide an influx of cash into its sagging bottom line and the opportunity to market its iPod accessories under the coveted status of official Apple partner, using the Made for iPod branding and licensing initiative.
Sim Wong Hoo, chairman and CEO of Creative said he was â€œvery excited about this new market opportunity.â€
However, the opportunity may not be as promising as he hopes. Apple takes approximately 10 percent of wholesale prices on the sales, and the iPod aftermarket is already crowded with companies such as Belkin and Griffin Technology which offer similar products.
Lawsuits Had Roots in Old Conversations
The contention between the companies stems from talks of a joint venture which went nowhere several years ago, according to Creative.
According a complaint Creative filed with the U.S International Trade Commission in May, both companies met in 2001 to discuss ways to create portable media players together. It was at that time when Creative allegedly showcased the navigation system in development for its Nomad mp3 player - the same system it would later accuse Apple of taking.
Apple requested to license the technology, and even suggested that Creative spin off its music player business, where Apple would be the primary investor. Creative declined both, however, and Apple released its own music players in October of 2001. Those iPods went on to dominate the digital music player industry, gaining 75 percent of the market.
Creative didnâ€™t stand still, however. It filed to patent the menu technology, a process that was not approved until 2005. The court complaints came quickly thereafter.
Some Positives for Both Parties
Last weekâ€™s settlement ending the dispute was welcome news to investors. The market cheered as it sent shares of Creative and Apple up.
The Settlement may be especially welcome to Apple. Legal action could have cost the company significantly more than the $100 million it paid out, and may have been detrimental to its iPod business.
While the money coming to Creative represents just over 1 percent of Apple's cash on hand, which totaled more than $9 billion at the end of the second quarter, Piper Jaffray analyst Gene Munster wrote in a research note.
If Creative had been able to win any favorable rulings in the five outstanding lawsuits, Apple could have faced headaches, he said, such as costly appeals and the risk of having courts decide both future and historical royalty payment rates. We believe the settlement will prove to be the right course of action.
Creative, on the other hand has already posted a loss of $118.2 million for 2006 alone, which makes the settlement significant.
We expect that the one-time licensing payment of $100 million will contribute approximately $.85 of earnings per share to our current quarter, Sim Wong Hoo, chairman and CEO of Creative said.