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 , 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."