Liquid Audio Unloads Intellectual Property Assets

With the results of a highly
contentious proxy battle
still up in the air, and on the verge of
liquidation just last week, digital music distribution player Liquid Audio
Monday got a helping hand from Microsoft .

Microsoft played the white knight by buying up the rights to Liquid Audio’s
patents for a cash consideration of $7 million.

Liquid Audio President and CEO Gerry Kearby, whose continued leadership of
the struggling company rests on the outcome of the proxy vote held last
Thursday, said the move plays into the firm’s new strategy of shedding
product development in favor of exclusive focus on the digital distribution
of media to retail.

The foreign and domestic patents Microsoft picks up through the deal
include digital rights management (DRM) technology, technology for secure
content transfer to portable devices, and technology which will allow it to
honor territorial restrictions for digital music content.

In addition to the cash consideration, Microsoft will grant Liquid Audio a
royalty-free license to continue to use its digital distribution system.

Founded in 1996, Liquid Audio carved out a niche as a secure,
copyright-friendly distribution network for record labels and artists that
won it partnerships with the likes of Amazon ,
and Sony Music Club. Liquid Audio’s fee-based download service allowed
users to download songs to a Liquid Audio player, but prevented copying.

But the company was quickly overshadowed by peer-to-peer (P2P) network
plays like Napster, which allowed users to copy content without a fee.

Everything came to a head last Thursday, in a proxy battle in which a
number of shareholders attempted to oust Kearby and fellow board member
Raymond Doig, the key figures behind a push to merge Liquid Audio with
privately-held Alliance Entertainment, a Coral Springs, Fla.-based
distributor of video games, CDs and DVDs. The dissident shareholders, led
by New York-based investor group MM Cos. (formerly, sought
to block the merger in favor of liquidating Liquid Audio’s cash reserves,
which totaled $80 million as of June 30.

MM Chairman Seymour Holtzman said last Friday that preliminary results of
the proxy battle gave him and his supporters 14 million votes among the
22.8 million shares outstanding, which would place him and partner Jim
Mitarotonda on the board, replacing Kearby and Doig.

Official results are expected Friday, Oct. 4.

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