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Lucent's Pyrrhic Patent Win

A legal victory risks causing a rift with Net video partner Microsoft.

A big court win has Alcatel-Lucent (ALU) traipsing down a lucrative litigation path -- but perhaps at the expense of a key sales opportunity.

A federal jury in San Diego determined that


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should pay Alcatel-Lucent $1.52 billion for MP3 patent infringement. Thursday's decision, which Microsoft will likely appeal, throws open the potential for many more settlements with heavy users of the leading digital music compression technology.

But in pursuing its case against Microsoft, Alcatel-Lucent may have upset a partnership formed two years ago to develop Internet protocol TV systems that allow telcos such as


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to compete with cable companies.

"A check in the mail is great, but we think the whole ordeal has strained the relationship between the two companies," RBC analyst Mark Sue wrote in a research note titled "I Sue, You Sue, We All Sue."

The apparent disharmony between the IPTV pioneers comes just as the technology is on the verge of taking off. It also comes in the wake of yet another weak sales performance at Alcatel-Lucent. The company, now based in Paris, posted a weak fourth quarter and offered soft first-quarter guidance earlier this month.

Now a rift with Microsoft may allow rivals to push Alcatel-Lucent aside as they seek to forge their own arrangements in big growth areas such as Internet video.

"Competitors such as

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may potentially take advantage of this rift and try to wedge themselves as a partner of choice for Microsoft," Sue writes.

The legal wars have been heating up between Microsoft and Alcatel-Lucent this past year. In April, Lucent charged Microsoft with violations of video decoding patents used on its Xbox 360. A month later, Microsoft sued Lucent over infringement of data management software for voice and video communications.

The MP3 legal battle started in 2003, when Lucent first brought the patent infringement case against Microsoft. Karlheinz Brandenburg is known as the "father of the MP3." He worked in conjunction with Germany's Fraunhofer Institute at AT&T's Bell Labs when some of the digital compression patents were filed.

Microsoft had argued that it had licensed the technology from Germany's Fraunhofer Institute for $16 million. The San Diego jury didn't quite see it that way, awarding Alcatel-Lucent $1.52 billion for the 720 million or so computers sold with Windows Media Player software.

The award stands to be the largest patent infringement penalty in history, says Lee Bromberg with intellectual property law firm Bromberg & Sunstein in Boston.

"This grabbed the attention of everyone in the business," says Bromberg, referring to both the MP3 companies and the patent litigation industry.

Typically, defending patents and pursuing sales are parallel activities for most companies. The fact that Alcatel-Lucent has been very actively protecting the valuable Bell Labs patent portfolio at a time when its sales are tumbling is "coincidental," says Bromberg, who is not involved with the case.

One thing seems clear: The big jury award doesn't exactly bring Microsoft and Alcatel-Lucent closer as partners.

"There was opportunity for business resolution to take place," says Bromberg, "but a big amount like this could make it harder for working out a global resolution."