Creative Technology Takes on Apple

Failing to beat the iPod maker in the market, the Singaporean outfit has hit Jobs & Co. with a patent suit

Sim Wong Hoo's strategy was simple and bold: Attack Apple Computer's iPod business by competing on price, features, and flexibility -- without the need to be tied down to Apple's iTunes Music Store for songs purchased online.

His Singapore-based Creative Technology (CREAF) produces digital music and media players that in a straight, feature-by-feature comparison are arguably better than the iPod. The problem is, it doesn't sell that many. Creative is losing money, in part because of unsold inventory of MP3 players. Meanwhile its stock is down more than 63%, from a high of $15.82 in January, 2005.


  So what does Creative do to fight back? It's suing Apple (AAPL) in a U.S. court over a patent that it says Apple's player infringes. Among other things, it's seeking an injunction that would ban the import of the iPod into the U.S. from where it's made overseas. It would also bar the sale of the device in the U.S.

The lawsuit smacks of desperation -- but it may be about the only thing that could save Creative's MP3 player business now. Creative claims that the iPod infringes a patent on the menu for an MP3 player. Apple had sought to obtain a patent on a similar interface pertaining to the iPod, but its application was rejected in July, 2005.

Apple was beaten to the patent punch by a matter of months. The computer maker first filed in October, 2002. Creative filed the previous May. What's more, while the final patent was awarded in August, 2005, Creative claims it first started using the interface method on its Nomad hard-drive-based players in September, 2000, nearly a year before the release of Apple's first iPod in October, 2001.


  Long-shot lawsuit or no, Apple stock dropped $2.81, or more than 4%, on the news, despite a coincidental announcement of the long-awaited launch of a new line of Apple notebook computers. Creative's stock gained 29 cents, or more than 5%.

Creative's case in court will hinge on whether menu-interface systems, like that on the iPod and the Nomad, existed before MP3 players were popularized. "It seems to me that menuing structures like this have been around for years," says analyst Michael Gartenberg of Jupiter Research in New York. "It's hard to see exactly what the innovation was. If there's only one way of expressing a particular idea, then it's hard to patent it."

But interface design is only part of what has made Apple successful in music players. Simple synchronization with personal computers, and the inclusion of features that improve, rather than complicate, the user experience, are also part of the package, Gartenberg says.


  Then there's the simple lineup of products. Creative offers no fewer than 25 different models of digital media players, an utterly confusing array versus the seven offered by Apple. Creative's Zen brand alone has 10 different variations ranging from the Jukebox Zen Xtra to the Zen Nano Plus and all the way up to the Zen Vision, all with different feature sets, capacities, and so on.

Maybe it's consumer confusion, then, that has left Creative as the perpetual worldwide Number 2 in MP3 players. In 2005, Creative sold 8 million players worldwide, compared with 32 million sold by Apple, according to market research firm iSuppli. But Creative has fallen below the No. 2 spot in the U.S. market behind SanDisk (SNDK).

Meanwhile, Creative's sales are slumping. Even as the larger MP3 player business booms, Creative's revenues for the first nine months of the year fell to $896.7 million, from $919 million a year earlier. The loss in the most recent quarter was $114 million on sales of $225.7 million. The company will need better luck before the judge than it has had at the hands of consumers.

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