Shares of Creative Technology, the Singapore consumer electronics group, fell on Friday after Apple Computer filed a counter-suit in an expanding legal dispute over patent rights involving their rival digital music players.
The fall came as analysts warned that a protracted and costly court battle could distract Creative's management as the company struggles to prevent further losses from its ambitious foray into the MP3 market.
Apple alleged Creative infringed four patents for user-interface systems on the digital music players. The suit was filed in response to a similar allegation against Apple by Creative, which is seeking damages and the suspension of sales of the Apple iPod in the United States.
Sim Wong Hoo, Creative founder and chief executive, last year decided to challenge Apple for dominance of the MP3 player market but the effort appears to have proved quixotic.
Apple has 77 percent of the U.S. market, while Creative has less than 10 percent.
Creative this month reported a record quarterly loss of $114 million, which it blamed on falling prices in the digital player market and unsold inventory.
Apple's decision to file a counter-suit against Creative did not surprise analysts since Apple's iPod is the U.S. company's fastest-selling product, which has produced big earnings.
Creative has been seen as one of Singapore's few successful entrepreneurial companies, largely due to its popular Sound Blaster sound card in the 1990s.
But its financial performance has deteriorated as the competitive MP3 player market has led to price cuts, while sales of its MP3 players fell 51 percent from the previous quarter.
Creative said it would return to profit in the second half of the current financial year due to cost-cutting and product shifts. But analysts are suggesting that Creative should abandon the MP3 market and focus on niche products.
Creative faces an uphill struggle to remain a producer of MP3 players since it is also being challenged by Samsung and Sony, while Nokia and Motorola are adding MP3 functions to their mobile phones.
"The court filings should be seen as separate from Creative's near-term prospects with MP3 players since the legal process is likely to take a long time. Even if Creative abandons the MP3 business, it could still extract a lot of money from Apple if it wins a patent dispute," said Patrick Yau with Macquarie Research in Singapore.