updated 06:05 pm EDT, Wed May 17, 2006
Creative lawsuit will cost
Analysts suspect Creative's new legal action against Apple will disrupt management turnaround efforts despite higher share prices, according to Reuters. Creative on Monday filed a patent complaint with the U.S. International Trade Commission requesting that the Commission institute an investigation of whether Apple has violated Section 337 of the Tariff Act of 1930. "The stock price is just a knee-jerk bounce," CIMB-G.K. Securities analyst Jonathan Ng said. "The lawsuit will be a long process, and even if they win, any damages awarded will be a one-off gain. This does not change Creative's business fundamentals and the fact that there is nothing much to look forward to on the operations front."
Creative is seeking an exclusion order and cease and desist order against Apple to prohibit the Cupertino-based company from engaging in sales, marketing, importation or sale after importation into the United States, or other infringing activities in the United States with regard to the infringing iPod and iPod Nano products. Creative also filed a lawsuit against Apple in the United States District Court for the Northern District of California that seeks an injunction and increased damages for Apple's willful infringement of the Zen Patent.
The market reacts
Shares of Creative today soared 9.3 percent to $10 on thin volume during the morning hours, backed by news of the patent infringement suit. Apple shares, conversely, fell more than 4 percent on Tuesday as a result of the patent lawsuit and concerns that its business may be slowing.
A costly fight
Apple is not likely to give up its profitable iPod business without a long, expensive fight that will cost time and money that Creative can't afford, according to Kim Eng Securities analyst Gregory Yap.
"Creative's suit against Apple may bring relief to the share price in the short term, but in the long term, it will distract and divert management attention and company resources when both are needed to turn around the ailing business," Yap said.
Creative in early April warned shareholders of an operating loss in its fiscal third quarter that ended in March, blaming lower margins and inventory write-downs. Shortly afterward the company slashed prices on its MP3 players in an attempt to lure consumers away from Apple's market-leading iPods. Apple, meanwhile, posted a quarterly profit of $410 million for its March quarter, beating analyst estimates.
Creative is expected to post a net loss of $116.6 million for the entire year ending June 30th, according to an average forecast from 10 analysts polled by Reuters.