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article imageApple Gets Lucky, Settling iPod Patent Dispute with Creative for $100 Million

By Christopher Hogg     Aug 24, 2006 in Business
Digital Journal — Most hardcore Apple fans will tell you one of the greatest things about the iPod is its navigation and interface. According to the latest news, you can thank Creative for that.
Apple Computer has agreed to pay $100 million (US) to Singapore’s Creative Technology to settle litigation over Apple’s iPod music player. The agreement gives Apple a licence to use Creative’s patent in its music player and other products and settles the> ongoing legal battles between both companies.
“This settlement resolves all of our differences with Creative, including the five lawsuits currently pending between the companies, and removes the uncertainty and distraction of prolonged litigation,” Apple CEO, Steve Jobs, said in a statement.
What Jobs really means to say is Apple couldn’t find a way to sneak out of this, so it had to give in and admit the iPod infringes on Creative’s patent. “Creative is very fortunate to have been granted this early patent,” Jobs said.
Creative is the world’s second largest MP3 maker. The company sued Apple in May, alleging its iPod interface infringed on the patent for Creative’s Zen player. Dispute arose over navigation, as Creative’s patent covers the way in which tracks are selected, using a hierarchy of three or more successive screens. On the iPod, Apple allows users to scroll from artists, to albums to songs.
The news also comes on the heels of news that Apple has sent cease-and-desist letters to other companies (including one woman who makes laptop covers out of spandex tights) claiming trademark infringement.
In all truth, Apple got lucky. In a meeting with Digital Journal earlier this week, Creative Senior Director of Corporate Communications, Phil O'Shaughnessy, said despite the fact that both companies had lawsuits pending, Creative had the backing of an ITC ruling against Apple that could have stopped the California-based company from importing iPods because they are made overseas. Apple having no iPods would have devastated the company, so a settlement works very well in favour of the company.
Furthermore, if the patent dispute had gone to court, Apple could have been slapped with product injunctions and royalty payments on iPod sales far exceeding the $100 million (US) settlement amount.
Surprisingly to some, however, is that the deal also allows Creative to become a member of Apple’s “Made for iPod” program, in which companies are permitted to develop accessories for the iPod and other products.
While this might open up new opportunities for Creative, the unfortunate wording of a “made-for-iPod” program might downplay the company’s products (they do make very good MP3 players) and can easily be misperceived as an announcement that Creative is now an iPod brand.
“This was a very broad settlement,'' Craig McHugh, president of Creative Labs, told San Jose’s Mercury News. Creative Labs handles all the worldwide marketing, sales and operations for Creative Technology. “We have the opportunity to now enter the iPod ecosystem and sell our accessories such as speakers and head phones. It's wonderful. We felt this was for the best.”
Michael Gartenberg, vice president and research director at Jupiter Research, told the Mercury News this is only going to reinforce Apple’s position in the industry. “It vindicates Apple's place as a leader,'' he said. “Creative is now a made-for-iPod licensee, which really drives home Apple's position in the marketplace.”
Apple also got really lucky with a settlement of only $100 million (US) considering the company has used Creative’s patent for a number of years and its market capitalization is worth $57.4 billion (US) — a settlement of this size chump change for a company that large.
On the other hand, having the ability to make iPod accessories could turn Creative around, as the company reported another loss for Q2 this year. But after the news broke, Creative shares skyrocketed up 32.8 percent during pre-market trading on the INET electronic exchange this morning. Apple shares rose slightly.
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