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The Day Creative Technology Ltd sued Apple Inc

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In 2006, Singapore-based Creative Technology Ltd sued Apple Inc for patent infringement over a menu interface for an MP3 player. It was an epic corporate story of David versus Goliath and pitted Singapore entrepreneur, Sim Wong Hoo squarely against the late Steve Jobs.

But the outcome was beyond what most people had expected. In fact, Apple had actually agreed to pay Creative Technology Ltd a massive USD100 million to settle the suit.

The battle against Apple marked a turning point for Creative Technology, which at that point of time, had been searching for another holy grail to replace its blockbuster SoundBlaster audio systems. More than a decade has gone since the legal dispute, but Creative Technology is no longer the force it used to be. Although it has won the corporate battle, the business had declined to an almost unbelievable level.

Creative Technology

Sales for the fiscal year 2005 was at a peak of USD 1.2 billion but by fiscal 2016, the sales amounted to only a paltry of USD 84.5 million. That was a massive decline by any standard and something must be done before Creative Technology free fall from the cliff. It seems that the victory against Apple had brought more harm than good for this once-mighty technology company. What the hell happened to Creative? Has talented Sim Wong Hoo lost his Midas touch?

Regarded as the hero of our times, Sim Wong Hoo became the youngest billionaire in Singapore after building his early success with SoundBlaster audio cards. His Creative products used to dominate the computer market in the 80s and 90s and they were extremely popular among gamers. However, since 2000, OEM computer makers began to integrate sound board with the motherboard, marking the start of the decline for Creative Technology.

Against this backdrop, Sim Wong Hoo started to venture beyond computer industry into the consumer electronics and cell phone markets. He correctly predicted that the future lies literary in the hand of the consumers, who are inclined to a mobile lifestyle – listen to music, watch videos and obtain the latest news all on the go. Apparently, Sim Wong Hoo’s team had figured out how to successfully compress digital music and subsequently launched a series of digital audio players like NOMAD, MuVo and Zen. He also filed a patent for browsing music files in MP3 players.

Unfortunately, at that point of time, Apple entered the market and its Ipod was gaining more market share. Thus, when Creative Technology obtained the patent in 2005, it filed suit against Apple for infringement. It was a move widely regarded by many as a desperate attempt to counter the giant’s rising market share in digital audio players. Nonetheless, this led to Apple counter-suing Creative Technology for infringement in four patents in its hand-held players.

Eventually, Apple decided to settle the suit by paying Creative Technology USD 100 million. This was because Apple felt that a court injunction that results in the Apple and Creative products not being exported would only cause more damage to both parties. Hence, Apple wanted to settle the suit and move on as soon as possible.

Although USD100 million was a huge amount of compensation, for Apple, it was considered to be peanuts. To rub salt into injury, the late Steve Jobs even said in a press release “Creative is very fortunate to have been granted this early patent. 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”.

Whether who was right or wrong does not matter because Apple had clearly put the whole episode behind and never looked back. In 2007, Steve Jobs declared that Ipod would be obsoleted in the near future with several new upcoming Apple projects – Iphone and Ipad. His words turned out to be prophetic. On the other hand, Creative Technology seemed intoxicated by the windfall and struggled to compete against rivals in the ensuing years.

As a Singaporean, sometimes I feel sorry for Sim Wong Hoo. He had put Singapore brand onto the world map and make us proud. Who would have thought that a small nation like Singapore could produce a remarkable engineering talent and then went on to pit against the big boys? But the corporate world is known to be ruthless and there are no room for sentiments. With falling revenue from product sales, Creative Technology must fight gravity at all cost. It is now or never.

Share price has free fall from a high of $40 in 2000 to the current $1. This represented massive value destruction for long term investors still holding on to its shares. The collapse in the share price is justified as business fundamentals had been spiralling downwards since the victory against Apple. On the latest quarterly results, the company recorded losses of USD4.6 million. Losses for nine months amounted to USD17 million. On the basis of the current results, Creative Technology is fighting for its life.

Surprisingly, the balance sheet looked strong with current assets amounting to USD105 million while total liabilities amounted to only USD37 million. There were no borrowings. Net asset value was USD1.14 per share and Net Current Asset Value Per Share was USD0.90. In view of this, the shares seem fairly undervalued.

But then again, Creative Technology is burning cash at the moment. For nine months ended 31 March 2017, there was a net outflow of USD17 million, against USD4.6 million last year. This means that the operating activities were unable to generate sufficient cash.

Can Sim Wong Hoo turn the tide and revive Creative Technology’s fortune? I certainly hope so. But time is running out and the Singapore tycoon must find that holy grail soon before things turn for the worse. Given the business performance and the cut-throat competition in the IT industry, I would not be investing in Creative Technology anytime soon. Until then, enjoy the ride.

Read my other article on Creative Technology:

  1. Creative Technology won the battle but lost the war

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6 Comments

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  1. Although we have never met, Sim Wong Hoo and I attended the same secondary school in the 1970s. Indeed, wish him the success in his future endeavours.

  2. Hi Jeffrery,

    So cool. Yes, lets all wish Sim Wong Hoo all the best and hope he can achieve a turnaround for Creative Technology like what Ron Sim did for Osim.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  3. At the current price, Creative trades at ~0.93x P/B. The group has proposed a dividend of $0.05, taking its full year pay-out to $0.15, which represents a yield of 6.7%.

  4. Hi Regina,

    Thank you for pointing. As indicated in my article, I also think Creative Technology is currently undervalued.

    But with the company making losses, I would not be entering this counter until I see signs of turnaround by the management.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  5. I think Creative make good affordable products. I have 2 headphones, desktop speakers and 2 earpieces from them. Sad that many young Singaporeans today may not have heard of them. Their new push into high end speaker systems may be worth watching.

  6. Hi K,

    Thanks for the comments. Indeed, as audio specialist, Creative Technologies make very good and affordable products. Hopefully they can come out with another blockbuster audio product.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

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