Apple's iPod countersuit against Creative opens legal hornet's nest

Posted by Scott M. Fulton, III

Cupertino (CA) - Last Thursday's filing of a second series of intellectual property lawsuits by iPod producer Apple against Creative Labs - the company with the dubious distinction of peddling the world's #2 MP3 player - could perhaps be interpreted as Apple's way of demonstrating it's willing to go the distance in a legal dispute with its distant rival. Quite possibly, even if Apple loses - which, years hence, it feasibly could - it could still emerge the victor, because Creative may not make it that far.

The battle between the two companies began in earnest in August 2005. At that time, Creative Labs won a dispute regarding one of the patents pertaining to its Zen music player, specifically dealing with the way its menuing system categorizes songs. The system presents a subcategorized list of three or more tiers, and it is this feature which the Creative patent, filed in January 2001 and since upheld, seeks to protect. It doesn't seem like much, but in today's patent business, it doesn't have to be.

Creative Zen Vision:M

Creative Labs' Zen Vision:M series portable music players. (Courtesy Creative)

Negotiations between the two companies have been heated ever since, with Creative arguing that Apple owes it royalties for the way it subcategorizes song genres, and Apple countering that if Apple owes Creative for one thing, Creative owes Apple for any number of other things. "Any number" has since grown to seven, which is the number of patents Apple now contends the Zen infringes upon.

On 15 May, Creative petitioned the US International Trade Commission for an injunction preventing the further sale of iPod and iPod nano in the US, and then simultaneously sued Apple in US District Court for the Northern District of California, alleging patent violation. Creative refers to the patent under dispute there as "the Zen patent," and touts the IP it protects as though it were at the heart of the Zen device.

What's perhaps more interesting about Apple's countersuits than their own content is the way they were filed. The first round was actually filed last month in US District Court in Wisconsin, and pertains to four Apple patents which that company alleges Creative infringed upon. (Creative Labs is headquartered in Singapore.) Last week's round pertains to three more Apple patents, and was filed in US District Court in Texarkana, Texas, where a Reuters reporter noted a disproportionate number of IP cases are presently being tried.

While one patent attorney told the Associated Press today that the Wisconsin venue may have been chosen to help speed things along, Apple could have easily filed claims on all seven patents, at one location, if convenience or expedience were key factors to Apple's strategy. They apparently are not. Suing Creative not once, but twice, and at separate venues that may be costly to manage simultaneously, could be an effective demonstration that Apple has the time, the resources, the money, and the wherewithal to fight a two-front war. Creative, most likely, does not.


The long road to maintaining second place

Last month, Creative reported a fiscal third quarter sales decline of $108 million, down to only $225.7 million for the quarter, and a net loss for the quarter of $114.3 million. The company did not mention the Zen as a factor in that loss, but it probably didn't have to. In the wake of today's news, Creative Labs' stock value sunk over 5% on the Singapore exchange, to a five-year low.

So if Creative thought it had something to gain by pursuing a last-ditch effort at vanquishing its competitor legally, Apple may have already demonstrated that that particular door is probably closed. From here, one of the most likely next steps in the legal battle, believes In-Stat converging markets and technologies analyst Stephanie Guza, is for the entire dispute to be swept under the rug by both sides. "What I could see happen is Creative backing off, Apple backing off, and it just stopping," Guza told TG Daily.

From there, Creative's next step might be to reassess its combined product and service offering. Creative really was first in the MP3 player business, a true pioneer. But Apple defeated Creative soundly not just with the iPod, but with iTunes. The product + service offering provided the one-two punch. Last week, a Japanese newspaper spread a rumor that Creative might be among a group of companies willing to partner with Microsoft to build a competitive iPod/iTunes platform for the Japanese market. That rumor proved to be unfounded, but just the rumor alone helped make a very important point: Why aren't all these other companies producing a competitive platform?

Creative actually has a bit of a chance, Guza believes, if it concentrates on the new and burgeoning market in portable video: a market which Apple, admittedly, blew wide open late last year with its new video-capable iPod. "I think if [Creative] starts really focusing on their portable video products to see what they can offer," she said, "they have a second chance to gain a little bit of ground." The scenario she sees works like this: Microsoft leads the education effort regarding the existence of an alternative platform, and then companies like Creative, JVC, and Sony can build a kind of "co-brand" around this platform, similar to the UMPC.

"Then I would imagine that some of these services that tie to it would offer portable video," Guza continued. "I imagine they would be subscription-based, and I think there is a subscription model tied to movies, that people will be more willing to accept than subscription-based for music." Apple's masterstroke was the 99¢ per tune offer that launched iTunes. A similar price point has yet to be found for long-form portable video, even with Apple's efforts leading the way, although at this point, Guza believes, the market may be more willing to accept a subscription-based model for portable video. And a service without a history in pay-per-download, like iTunes, might have an easier time making inroads in this market.

"So if [Microsoft] can come up with a very tight message that helps educate consumers about which devices could work with this type of service, then I think it could be compelling. But people need to understand what that service is." This is where Creative comes in. The service has to have a face, and Creative's will need to look something like a Zen, the way Apple's looks like an iPod.

For Creative to start thinking about rethinking the Zen, argues Guza, it will need to stop the war in the courtroom(s). "If all these lawsuits were dropped, and Creative decided to focus its R&D efforts, and its sales and marketing, in a new vein other than legal activity, I would think they would need to start looking more closely at their portable video offerings, and how that market is going to pan out, rather than going back to just MP3 players."

Even then, Creative has the chance to build itself up from a distant second...to a closer second. It's a far cry from obsolescence, but already, with a new game already afoot, the handwriting on the wall appears to read, "Game Over." "Apple is the runaway leader when it comes to the music player in the US," Stephanie Guza concluded. "Whether they completely catch up to Apple...I really doubt that's going to happen."