Online music company Liquid Audio said Monday it agreed to sell its digital encoding patents to Microsoft for $7 million in cash, opening the door for its proposed merger with Alliance Entertainment.

The agreement will allow Microsoft to own Liquid Audio's patented digital rights management and secure file-transferring technologies. Along with the $7 million in cash, Liquid Audio will receive a royalty-free license to continue using the patents.

Once the patents are sold, Liquid Audio said it will focus on selling digital distribution technology to online retailers, a move that will complement Alliance's existing business of distributing media in the offline world.

The sale came after a shareholders meeting last week where Alliance's buyout offer was considered. The meeting had its fair share of controversy since a group of dissident shareholders have been seeking to oust Liquid Audio's board of directors, shutter the company and return its cash reserves to investors.

Liquid Audio is expected to announce the results of the Alliance merger vote on Friday.

The sale to Microsoft concludes Liquid Audio's quixotic journey to create a business selling digital music downloads. The problem was that despite playing ball with copyright holders and record labels, Net users gravitated to file-swapping services such as Napster and Kazaa to download virtually any song for free. On top of that, record companies only opened a limited amount of songs for Liquid Audio to sell, often at an expensive price for one song.

It's no surprise that Liquid Audio has been struggling financially for years. For the second quarter this year, the company reported a loss of $5.6 million on revenue of $151,000. Still, it has a sizeable nest egg of cash, totaling $81 million as of June 30.