In a world of currency fluctuations, import tariffs, research and development costs and many other industrial factors, it is becoming increasingly difficult to make a business successful. Many companies are looking for ways of cutting costs in order to be competitive in international markets; some methods may be totally legitimate, others highly questionable.

How can a company survive in this competitive world? Well, there is a way ...

One can visit a supermarket; fill the shopping trolley with quality goods then pass by the check-out without paying. Using this method, and having on hand a friendly chef it is possible to destroy the business of any small local restaurant. This may seem drastic but it happens every day in the competitive field of consumer electronics.

It seems that Creative Labs, a company based in a tax haven country, Singapore, is using a non-creative method for gaining an unfair advantage over its competitors: copying other people's patents.

One of the most popular home electronics appliances around these days is the MP3 player, for instance Apple sold 14 million iPod players in the fourth quarter alone of 2005. A huge leap from 4.5 million in the same period of 2004. MP3 players show up everywhere; school kid's use them as do adults, some models are incorporated in cell phones, cameras and even sunglasses. Many of the higher priced products, such portable audio and video devices (PAVs) now come with small screens able to show MPEG videos as well as reproduce audio. Well, behind these massively popular products, there lies relative patent portfolios that cover these technologies.

Hundreds of producers of MP3 players and PAV devices have taken licenses for such technologies. They then follow their usual business channels in order to bring their products to the market. Many of these companies are renowned names, such as Apple Computer, LG Electronics, Motorola, Nokia, Samsung and hundreds of others. In today's age of technology, what can the future be for a company that doesn't respect intellectual property?

Creative Labs knows the answer to that question.

Creative has been accused of patent infringement by a series of patent holders, from among which Compression Labs, Lucent Technologies, MPEG LA, Dynacore Holdings and Advanced Audio Devices. Well, Creative may not be so creative in their business approach, but they are certainly very creative in their methodologies for avoiding royalty payments. In fact, in Creative's 2005 Annual Report they even state that they have valid defences against any claims asserted against them. They then go on to say that even if any claimant should win their suit or claim against them they don't expect there to be any adverse effects on its financial position or operations.

MPEG LA alone manages more than 100 essential patent families. Are we to assume that Creative considers them all invalid and if they are valid then no royalties will exchange hands?

Another example ...

Bells Labs, the R&D division of Lucent Technologies, has generated more than 31,000 patents since 1925 and has played a pivotal role in inventing or perfecting key communications technologies. Scientists from Lucent/Bell Labs have received six Nobel Prizes in Physics, nine U.S. National Medals of Science and eight U.S. National Medals of Technology.

From Creative's Annual Report it seems clear that the MPEG LA and Lucent patent portfolios are worth little more than the paper they are printed on.

Doesn't the supermarket metaphor used above spring to mind?

Perhaps Creative should reconsider their statements concerning the fact that no adverse effects will occur to its financial position or operations. What happens when criminal seizures of it's products occur and the products are physically removed from the stores, or when a court injunction forbids them from selling their products?

According to an Italian online journal, Hardware Upgrade, a David and Goliath style battle is currently underway between a small European company called Sisvel, which has the exclusive rights to license a number of MP3 patents, and Creative Labs. Court injunctions, seizures and messy legal battles are apparently underway across Europe. Creative is facing similar such battles in the USA with a subsidiary of Sisvel called Audio MPEG. It is interesting to note that Creative, through the sale of its MP3 players plans to topple Apple's market domination in this field - it certainly has an advantage over Apple: it pays nobody. Nonetheless, Standard & Poor's Equity Research analysts have downgraded shares Creative to "sell" from "hold" citing increased competition from Apple Computer in the MP3 player market. Maybe this goes towards explaining why Creative's stock has nosedived almost 50% in the recent 52 week period!

Creative's continual strategy of not recognising intellectual property rights could lead to very serious results. The courts don't hold much esteem for offenders of intellectual property when found guilty. For instance, The maker of the BlackBerry handheld devices (RIM) as part of a court settlement, agreed to pay US$450 million in exchange for NTP granting the right to continue its BlackBerry-related wireless business without further interference from NTP or its patents. A different field of technology, but it stresses a point.

In cases such as these, when a rapid agreement isn't reached litigation often leads to stock prices dropping like a rock, good faith being literally destroyed and shop keepers becoming dubious whether to stock goods or not for fear of seizure.

In fact, as mentioned above, over the last year Creative's stock value (CREAF - Nasdaq) has lost almost half it's value. Will it lose even more? I wonder if holding on to Creative stock is a good idea for the future?