History 2001: Philips and Ritek at War

Appearances are clearly deceiving: an official photograph taken January 29, 1999, at the Grand Hotel in Taipei, Taiwan unmistakably shows Gordon Yeh, Aitek’s president and CEO with Wim Dolmans, GM of Philips General System Components, and both are all smiles.

Each holds their own bottle of champagne, which they are pouring into a cascading pyramid of glasses in celebration of a new joint venture, Primedisc, for the manufacture of CD-A and CD-AW media in Germany. Yet today, Philips, the main inventor of the CD-A and Aitek, the number one WW manufacturer of the media, are far more likely to toss their glasses in each other’s faces – the 2 are at war.

Everything started in Taiwan, where, a few weeks ago, the Taiwan Fair Trade Association, judging that royalties on CD-As were too high, sued Philips. The Taiwanese government condemned Philips to pay NT$8 million ($4.6 million) in compensation. The other rights holders, Tayo-Yuden and Sony, were fined NT$4 million each.

In retaliation, Philips unilaterally terminated its patent licensing agreement with Aitek.

“All CD-R disc manufacture and/or sold by Ritek are unlicensed products,” stated Philips.

But the story doesn’t end there. We also learned that the Dutch firm had a substantial shipment of Ritek CD-Rs seized in Rotterdam. How did we get here? One thing is sure – a number of companies, and Taiwanese firms in particular, jumped into CD-A manufacturing, which led to significant overstocks and subsequently, an unbelievable drop in prices, below 20 cents per disk, according to Yeh.

At one point, it seemed possible that Ritek was slashing prices deliberately, in order to eliminate some of its competitors. Its business plan certainly left a lot to be desired: Ritek would sell to just about anybody, even directly to dealers, leaving its own wholesalers out in the cold.

It appears, though, that the owners (and bankers) of several Taiwanese manufacturers had recently been concerned by the trend, and ordered their companies to raise prices again in order to return to profitability.

Of course, one less orthodox way to return to profitability without really raising prices, was to pay less royalties on the products shipped. Through the intermediary of their own Taiwan Fair Trade Association, it seems clear that local manufacturers were hoping to bring Philips around. Philips did reduce the royalty from ¥10 to ¥6.5 (6 U.S. cents), which nevertheless still represents nearly 30% of the price.

“We never meant to fight with Philips. We’re just requesting a reasonable royalty charge rate,” said Yeh.

But is it Philips fault that prices fell so low? On December 6, 1999, The Taiwanese police, accompanied by Philips representatives, raided a company based in Chungli, Taiwan, and seized 300,000 CD-Rs for unlicensed manufacture.

Philips will probably not take such extreme measures against Ritek, given that the local authorities are not on its side.

Who will be the first to give in? Obviously, if Philips arranges for the systematic seizure of all Ritek CD-Rs entering any country other than Taiwan, the Taiwanese manufacturer will soon be in trouble, since the local market will certainly not sustain the company. Of course, it’s also possible that this type of border intervention, not just vs. Ritek but also against the other Taiwanese producers, could eventually lead to shortages, and thus a rise in prices. Which means that royalties will have less impact on the price.

Perhaps then everyone would be happy again – except, it goes without saying, the users.

This article is an abstract of news published on issue 157 on February 2001 from the former paper version of Computer Data Storage Newsletter.