What Lies Behind the Apple-Creative Settlement?

August 23rd, 2006 at 3:00 PM - Reports by Brad Cook

With Apple and Creative settling their legal dispute, questions remain about the settlement terms. Apple is paying US$100 million to Creative for the use of its patented MP3 player navigation technology, but it could recoup much of that money if Creative can obtain licensing fees from other companies, a curious arrangement for such a situation.

Meanwhile, Creative will produce iPod accessories, but it didnit say if it will also stop making its own MP3 players; iPodObserver.com had a request in for comment from the company as this article was posted.

"This settlement suggests that Apple thought they could lose the case," noted law professor Lars Smith, who teaches at the University of Louisvilleis Louis D. Brandeis School of Law. "This was more than a nuisance payment, and the legal fees if they had pursued this in court would have been a lot less than $100 million."

He added: "Thatis not to suggest Apple did anything wrong, however. Patent filings are kept secret for 18 months after theyire filed, so both companies could have been working on the same thing at the same time, but Creative beat Apple to the filing."

Piper Jaffray analyst Gene Munster pointed out in a research report he issued on Thursday: "If Creative had been able to win any favorable rulings in the five outstanding lawsuits, Apple could have faced headaches including: further appeals, product injunctions, future and historical royalty payments, etc."

Not only that, said Mr. Smith, but "Apple, as the biggest player in the market, could have anti-trust issues. If they had an exclusive license for Creativeis patent, they could have been challenged in court."

The professor also pointed to Microsoftis impending entry in the market, the Zune MP3 player. "Apple could be worried about that," he said. "And Creative canit compete against Microsoft too." He agreed that, if Microsoft has to license Creativeis technology for Zune, Apple could reap the benefit by seeing some of its $100 million payment come back via one of its staunchest rivals.

Addressing Creativeis announcement that it will produce iPod accessories through the "Made For iPod" program, Mr. Munster said: "We see it as a turning point in Creativeis thinking on the space. Over the last several years, Creative has been focused on head-to-head competition with the iPod and it appears that the company is now embracing the iPod ecosystem as a way to grow revenue. We see this as a subtle admission by Creative that iPod does in fact dominate the MP3 player market (~75% U.S. market share according to NPD) and more may be gained from "coopetition" than direct competition."