Company settles iPod lawsuit

Apple’s cash cow has become a cash drain.

In a surprising concession, company has settled a series of patent-infringement lawsuits by Korean competitor Creative for a one-time payment of $100 million.

Creative, which makes the Zen brand of portable music and video players, is one of the many competitors that have just a small fraction of the market share of the iPod, which controls about 80% of the market.

Company sued Apple in May, alleging that the iPod stole Creative’s user interface, for which it received a patent last August. Suit alleged that Apple CEO Steve Jobs got a look at Creative’s interface while trying to arrange a joint business venture before he launched the iPod in 2001.

Several days after Creative’s lawsuit, Apple fired back with a copyright infringement of its own against Creative.

Despite the countersuit, Apple apparently didn’t feel too good about its chances, as the $100 million payment will purchase for Apple a license to use Creative’s patents in all its products.

It may recoup a portion of that payment if Creative licenses the patent to others. Given the iPod’s dominance of the digital music player space, though, any other licenses likely will be a small fraction of Apple’s payout.

Though the payment is sizable, it’s nominal compared with the $1.5 billion in iPod revenue it made last quarter alone.

In a terse statement implying the settlement was due more to timing than innovation, Jobs said, “Creative is very fortunate to have been granted this early patent.”

As part of the deal, Creative also will start selling iPod accessories, such as headphones and speakers, later this year as part of Apple’s “made for iPod” program. It also will keep marketing the Zen as competition against the iPod.

News comes as Apple is in the midst of an internal investigation into stock option grants between 1997 and 2001 that may not have been accounted for properly. As a result, it may have to restate past financial statements to record charges for the options.

Shares in Apple were virtually flat in after-hours trading following the settlement after closing at $67.31.

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