Liquid Audio Sells Patents to Microsoft

Potentially bolstering its appeal to entertainment companies, Microsoft Corp. has acquired patents from Liquid Audio Inc. covering the secure delivery of digital movies, music and other media through the Internet.

Redwood City, Calif.-based Liquid Audio, which announced the pact Monday, will receive $7 million and a license to keep using the technologies covered by the patents, the company said.

Microsoft already is a leading provider of digital rights management technology for downloadable music from the major record companies, with Liquid a top competitor. “The rights that we’ve acquired today we view as being important to efforts down the road with regard to DRM technologies,” spokesman Jon Murchinson said.

The software powerhouse is embroiled in a patent fight with InterTrust Technologies Corp. of Santa Clara, Calif., which says that Microsoft’s latest operating system and numerous other products infringe its security and rights management technologies. Talal Shamoon, an InterTrust senior vice president, said Liquid Audio’s patents won’t have any effect on the dispute. Murchinson declined to comment on the issue.

Digital rights management software is a key tool in the emerging business of delivering songs, movies, books and games electronically. The software enables companies to place rules for how a digital file may be used, such as letting consumers play a song twice for free before requiring them to buy or discard it.

Although Liquid Audio has struggled to sell its vision of digital delivery to the major record companies, the company’s patents cover at least two technologies that are particularly significant to distributing entertainment online.

One protects identifying information hidden on a watermark within a file, even if the file is compressed. Microsoft officials have been skeptical about the effectiveness of watermarks, but Hollywood studios are eager to see them deployed to help fight piracy.

The other enables online distributors to limit the countries or territories where their files can be delivered. These restrictions are critical to the music and movie industries’ business models, in which the rights to songs and films are parceled out on different terms to partners around the world.

The deal comes as Liquid Audio is being acquired by Alliance Entertainment Corp. of Coral Springs, Fla., a leading distributor of CDs, DVDs, videotapes and games. Dissident Liquid shareholders are trying to block the transaction and liquidate the company, but company officials say they expect the sale to be completed by the end of the year.

Liquid Audio Chief Executive Gerald W. Kearby said his company “will be concentrating on the distribution aspect of our business rather than the technology aspect” after the merger, so it made sense to “get out of the tech game and concentrate our engineering on distribution.”