By TODD BISHOP

The Seattle Post Intelligencer

USA - Apple Computer`s iconic iPod still has the huge advantage in the market -- but rival Microsoft suddenly has some bragging rights in the patent office.Creating a surprise twist in the portable music wars, the U.S. Patent and Trademark Office has denied Apple`s application to patent its method of using hierarchical menus to navigate through the iPod`s contents.

The basis for the denial: A similar method outlined in a Microsoft researcher`s patent application, filed after the iPod was introduced but before Apple sought its own patent.

``I`m sure there`s a certain amount of glee among Microsoft executives,`` said analyst Michael Gartenberg, research director at Jupiter Research. The situation has to be ``somewhat frustrating`` for Apple executives, he said.

For now, the outcome is uncertain. Apple plans to appeal the ruling, and even if it`s upheld, a Microsoft official pointed out that the two companies have a tradition of licensing patented technology to each other.

But analysts said the situation could prove troublesome to Apple. The company would no doubt prefer to avoid paying royalties to its rival, especially in a field Apple popularized.

``It`s incredibly embarrassing,`` said industry analyst Rob Enderle. ``That just makes it look like someone at Apple wasn`t on the ball in terms of filing the patent at the right time.``

But the practical implications may be less significant. Although the Apple patent application at issue focuses on the on-screen menu, many other factors -- including the device`s distinctive click wheel and its general trendiness -- also have contributed to the iPod`s success.

In a statement on the issue yesterday, Apple spokeswoman Natalie Kerris said the company ``invented and publicly released the iPod interface before the Microsoft patent application`` cited by the patent office in its ruling.

``Apple has received many patents for inventions related to iPod, and has many more patents pending,`` Kerris said. ``The U.S. patent process is often a lengthy one, involving much back and forth with the U.S. patent office. Apple will continue to pursue this patent application, as well as the many others covering iPod innovations.``

The initial rejection of Apple`s patent, and the approval of Microsoft`s patent, could make it possible for other device makers to more closely follow the on-screen design of the iPod in their own music players. Microsoft works with hardware companies, including Royal Philips Electronics, Samsung Electronics, iRiver and others who use its digital-music software.

Regardless of the outcome, Microsoft doesn`t intend to try to block Apple from the market, said David Kaefer, business development director for Microsoft`s intellectual property and licensing group.

``We have a long-standing practice of licensing things to Apple and licensing Apple`s patents to use in our products,`` Kaefer said. ``Our approach is to recognize that, frankly, we`re both mutually dependent on the good ideas of one another.``

Apple has ridden the popularity of the iPod to dominance in the digital music field, leaving Microsoft and its hardware partners struggling to catch up. And the stakes go beyond digital music. A Microsoft Windows executive, Will Poole, acknowledged last month that the popularity of the iPod is generating new interest among consumers in Apple`s rival Macintosh computers.

The first iPod was introduced in 2001. Apple`s patent application for the on-screen menu was filed a year later, in October 2002, according to patent records. The inventors listed on the application include Apple Chief Executive Steve Jobs.

In the meantime, in May 2002, John Platt, a Microsoft researcher, had filed his own application for ``auto playlist generation with multiple seed songs.`` That application has received preliminary approval, pending the completion of final paperwork.

The patent examiner on the Apple case cited Platt`s pending patent repeatedly in last month`s written decision, saying it precluded approval of the Apple application. Patent language can often be interpreted in multiple ways, and Apple had disputed the examiner`s view of the similarities between the applications. But he wrote that he disagreed with the company`s analysis.

News of the Apple patent rejection first surfaced in an online report by AppleInsider.com earlier this week.

While it`s possible that Apple could ultimately be required to license rights to Microsoft`s patent, the issue isn`t as clear cut as seeing which company filed its patent application first, said Rob Merges, a UC-Berkeley law professor who specializes in patent issues. What matters instead in the U.S. system is determining who came up with the idea first.

But even if Microsoft prevails in the patent process, it probably wouldn`t be in the company`s interests to hold Apple`s feet to the fire, Merges said.

``If Microsoft plays hardball with this one, Apple may play hardball with the next one, and that`s not a good thing`` for Microsoft, he said.

The iPod accounts for 75 percent of all MP3 players sold in the United States, according to the NPD Group Inc. Apple has shipped 21.8 million iPods since Jobs introduced the player in October 2001, with 18.1 million units sold in the last four quarters alone.

Ultimately, if Microsoft is to prevail over the iPod in the digital-music market, it will have to work with its hardware partners to come out with more compelling devices, and to give a clearer message to consumers, Jupiter Research`s Gartenberg said.

``Microsoft can declare this as somewhat of a minor victory,`` Gartenberg said. But ``at the end of the day, it`s going to take an awful lot more than this to unseat Apple from their position.``