By Katie Marsal

Published: 09:00 AM EST

A bitter defeat handed to Microsoft in an audio patent lawsuit late last week became a hollow victory for its rivals, as the new legal precedent threatened to swallow the digital music business whole.

Microsoft was dealt a serious blow late on Thursday when a federal jury handed Alcatel-Lucent a hefty $1.52 billion-dollar payout in a patent dispute, agreeing with the plaintiff that Redmond had illegally used technology from fifteen patents relating to the MP3 music format in Windows Media Player. The damages were based on Dell and Gateway PC sales since the suit began in May 2003, as both system builders were the defendants until attention shifted to Microsoft's jukebox software.

Alcatel-Lucent successfully claimed in court that its co-development of the audio codec with Germany's Fraunhofer Institute, and the resulting patents gleaned from its half of the process, gave it the right to license the technology to companies that wanted MP3 playback in their hardware and software. This left Microsoft -- which had taken the industry-standard route of licensing through Fraunhofer for a much smaller $16 million -- more than slightly upset over the ruling.

"Today's outcome is disappointing for us and for the hundreds of other companies who have licensed MP3 technology," Microsoft said in a statement after the decision. "We contend that there was no infringement of any kind and that we have paid the appropriate license fees for any technology that is used in our products."

Predictably, the company intends to fight tooth-and-nail against the ruling and said it would ask the presiding judge to override the jury's opinion based on both the lack of merit and the seemingly excessive penalty fee. An appeal would follow if the judge upheld the verdict, Microsoft said.

If the software developer loses its case, however, the ramifications could be as grave as the company suggests. A definitive Alcatel-Lucent win would give the latter potential free rein over almost any business that has dealt in MP3 music, many of whom logically assumed that a license from Fraunhofer was the only license they needed.

The situation would be especially damaging to Apple. Most of what the Cupertino-based firm has developed in the past several years, from its iTunes software (preloaded on every Mac sold) to the iPod, has depended on MP3 support as a key selling point and could be the target of legal action. Future devices and programs could also be subjected to higher licensing fees for MP3 decoding if Fraunhofer continues to ask for a separate share.

Observers may get a taste of what's to come for Apple by tracking the success of Alcatel-Lucent's next moves: the America-France partnership already has a string of lawsuits in the works against Microsoft covering a wide array of other patents that might have been infringed, affecting everything from digital video to the Xbox 360.