Apple Gets Creative

It's been a lousy few weeks for Apple (Nasdaq: AAPL  ) . Between an ongoing investigation into its stock options practices and heightened competition in the high-growth digital entertainment market, there's hasn't been much for investors to cheer. Till now, that is.

On Wednesday, Apple agreed to pay $100 million to settle its legal tussle with Creative Technology (Nasdaq: CREAF  ) over the iPod. In a statement, Apple CEO Steve Jobs said that the deal "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."

At issue was a Creative patent for navigating, organizing, and accessing music through software user interfaces, according to a report in The Wall Street Journal. If that sounds scary, it should. Much of the appeal of the iPod comes from its unique design.

Financial details of the agreement weren't immediately clear, although the Journal reported that Apple would record the Creative license as an asset on its balance sheet and then amortize the cost over many years. As a result, the Mac maker expects no material impact to earnings.

But there's more to this deal than a cheap out from potentially expensive litigation. Creative will join Apple's "Made for iPod" program by certifying earphones, headphones, and other future products for the iconic music player. And that should lead to revenue for Apple. As late as October, News.com was reporting that Apple demands a royalty equal to 10% of the wholesale price of "Made for iPod" products.

What's more, Apple is allowed to recoup costs if others agree to license Creative's patent. Will there be other deals? It's a good bet Creative will try to secure some; the $100 million the firm is getting from Apple will juice per-share earnings by $0.85 in the current quarter.

Plus, there are plenty of targets, with the biggest and most obvious being Microsoft (Nasdaq: MSFT  ) . Its planned Zune player is expected out before the holiday season. Creative could get ahold of a beta version of the device and, if there's evidence of a patent violation, file suit and petition for an injunction.

Apple would love nothing better, of course. But even if Mr. Softy and other i-wannabes avoid the courts, they're unlikely to avoid the extra time and expense of working around Creative's patent. That, too, is a win for the Mac maker. Well done, Steve.

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Fool contributor Tim Beyers owns LEAP options in Apple and a new MacBook Pro, which he occasionally uses to run Windows. Get the skinny on all of the stocks in Tim's portfolio by checking his Fool profile. The Motley Fool's disclosure policy rocks.


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