Congratulations to Mr Sim Wong Hoo. After multiple suits and counter suits centering around Creative's MP3 patent, which describes a method of arranging music tracks in a hierarchical order in a portable music player, Apple has finally agreed to settle the litigation with a US$100 million paycheck.

Creative's shares surged 37 percent to US$8.25 on NASDAQ according to news reports. And what did Steve Jobs have to say? "Creative is very fortunate to have been granted this early patent," said Jobs, Apple's CEO. Gee, does that sound like sour grapes?


Anyway, back when Creative instituted the lawsuit earlier this year, many skeptics were giving the Singapore-based company the thumbs down, adding that it would take too long, that Creative couldn't hope to beat Apple in the US, blah blah blah. I gave Mr Sim the two thumbs up then, saying that Creative's poor technology roadmap ahead should not be confused with its right to enforce its patent. The Creative-Apple suit is a watershed case for Sim's company because, if successful, it means Creative can now enforce its patent against other MP3 makers for license fees. Even though this case was settled and not adjudicated by the Court, the fact that big boy Apple is paying money to settle it lends weight to the strength of Creative's patent.

According to a joint statement by Apple and Creative, the former can recoup a portion of its payment if Creative is successful in licensing this patent to others. This simply means that it would actually be in Apple's interest to help Creative get its licensing fees from the other vendors.

Creative's lawsuit in the US against Apple was a very interesting case. Apart from suing in the Courts, Creative brought its case to the US International Trade Commission, requesting for a permanent injunction (meaning a prohibition order to stop selling Apple's MP3 products) against Apple. Here's the juicy bit. The patent belongs to Creative's US subsidiary. The US Trade Commission protects fair trade in the US, especially for American companies. Apple is a US company. So is Creative's US subsidiary. Apple's iPods are made in China. Creative's basis for the action to the Trade Commission was on the basis that China products were entering the US and harming a US company because it was infringing on the intellectual property of a US company. What irony.

My original blog is reproduced here or you can view it here.

The Creative MP3 patent
Creative finally sued Apple to enforce its patent, which describes a method of arranging music in a hierarchical order in a portable music player. A lot of buzz has been generated, mostly negative, about Creative. iPod fans are crying foul, saying that Creative is stifling innovation. Securities analysts here are skeptical, observing that Creative still needs a better product roadmap, and that the recent stock price increases after the announcement of the lawsuit are just a knee-jerk reaction.

I say Creative is doing the right thing. If it wins this lawsuit, it will become rich. All MP3 makers and phone makers in the world will have to start paying royalties for every device that is made. This is the kind of stuff that big IT and consumer electronics companies dream of all the time. So I think a lot of people are missing the woods for the trees. First of all, for those who say Creative is stifling innovation, please note that the entire patent structure is to protect and reward innovation. And for the equities guys, please give credit where it is due. Creative could be getting rich here. Don't mix this patent suit with its product roadmap--they are two separate issues. The crux of the issue is whether Creative's patent is itself inherently strong enough to win the Court's approval. If and when it does, you can bet that a new constant revenue stream will now be available to Creative.

Here is the joint press release:

Apple And Creative Announce Broad Settlement Ending Legal Disputes Between the Companies

CUPERTINO, California and SINGAPORE, August 24, 2006--Apple and Creative Technology, Ltd. today announced a broad settlement ending all legal disputes between the two companies. Apple will pay Creative US$100 million for a paid-up license to use Creative's recently awarded patent in all Apple products. Apple can recoup a portion of its payment if Creative is successful in licensing this patent to others. In addition, the companies announced that Creative has joined Apple's "Made for iPod" program and will be announcing their own iPod accessory products later this year.
"Creative is very fortunate to have been granted this early patent," said Steve Jobs, Apple's CEO. "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.

"We're very pleased to have reached an amicable settlement with Apple and to have opened up significant new opportunities for Creative," said Sim Wong Hoo, chairman and CEO of Creative. "Apple has built a huge ecosystem for its iPod and with our upcoming participation in the Made for iPod program we are very excited about this new market opportunity for our speaker systems, our just-introduced line of earphones and headphones, and our future family of X-Fi audio enhancement products. We expect that the one-time licensing payment of US$100 million will contribute approximately US$.85 of earnings per share to our current quarter, ending September 30, 2006."