Dolby Laboratories produces technology for producing and playing audio for films and television shows. Its AC-3 is the exclusive audio format for the DVD, meaning all DVDs and DVD-compatible audio-video equipment must license AC-3 technology from Dolby. Since 2000, the company has surfed the DVD tidal wave, with its revenue growing by around 150%. The advent of high-definition home entertainment, however, means that there is a new standard video format - Blu-Ray - which requires new audio standards. Fortunately for Dolby, its HD audio format is still used on Blu-Ray media; unfortunately for Dolby, so is the HD audio format of its main competitor, DTS, and both will be found on every Blu-Ray disc. This means that the company will no longer enjoy monopoly pricing on licensing to its most profitable customer (the home entertainment industry). To make matters worse, the overall DVD industry is in decline, with consumer spending falling thanks to digital piracy, video on demand, a slowing economy, and, of course, the introduction of high definition media.
One trend that works to Dolby's benefit is the emergence of the digital cinema market, as the company offers products and services for producing and playing digital films. Just 5.5% of the world's movie theater screens have been converted to digital thus far,, and although declining movie attendance may slow the conversion to digital in the short term, Dolby is poised to benefit in the long term as its main competitor DTS divested its digital cinema segment.
Dolby Laboratories is an entertainment technology company, and is best known for its ubiquitous audio technologies, which are the standards for sound coding and playback in cinema, DVDs, and, more recently, Blu-Ray HD video. The company has its hands in a broad assortment of digital media which attractively diversifies the company’s offerings. In fact, it is nearly impossible to buy a consumer electronic device that does not feature at least one license held by Dolby. Of particular note, the company receives royalties for every version of Vista home premium or ultimate edition. Also, blue ray has been dubbed the standard of choice for high definition home film medium and Dolby receives royalties from each of these players as well. The company notes that notepads are just now beginning to be shipped with blue ray players and as this trend picks up, it will likely have a strong impact on 2009 revenues. The company received the vast majority of its revenue from the license segment instead of products and service. Since the license business carries higher margins, the profitability of the firm is very strong. CyberLink Corporation, a manufacturer of personal computer DVD software, is Dolby's biggest customer at 10% of revenues.
Dolby is an international firm, with customers throughout the U.S., Europe, and Asia. As emerging economies in Asia and elsewhere continue to develop, their consumers will start purchasing entertainment media, creating new growth opportunities for Dolby abroad.
In 2009, Dolby generated a net income of $243.0 million on revenues of $719.5 million. This represents a 21.8% increase in net income and a 12.4% increase in total revenues from 2008, when the company earned $199.5 million on $640.2 million in revenues.
The new Blu-Ray standard, which has the ability to hold both "lossless", high-quality audio and high-definition video, means consumers are going to want home-entertainment systems that allow them to take advantage of these new features. Dolby's TrueHD audio format is one of three formats that Blu-Ray supports, the others being DTS's DTS-HD Master Audio and a standard digital coding called Linear Pulse-Code Modulation (Pulse Code Modulation was also required for DVDs). Now that DTS's audio coding technology is mandatory in all Blu-Ray films, the market for home theater equipment has expanded; consumers actually have a choice between Dolby-compatible DVD players and surround sound systems and DTS compatible DVD players and surround sound systems. Furthermore, hardware manufacturers can also choose between audio formats, so Dolby can no longer charge the same high licensing rates that it could when it had a veritable monopoly on the home audio market. Aggravating this effect is the slow but imminent demise of the conventional DVD market.
In 2010, most movies shown in theaters are analog, with projectors shooting images from rolls of film onto the screen. Slowly, however, digital cinema projectors and screens are proliferating. This technology uses digitized audio and video, rather than traditional film (think MPEGs instead of video tapes). Dolby sells products and services for mastering, packaging, loading, storing, decoding, and delivering digital films, making it one of the greatest potential beneficiaries of a transition to digital cinema. The speed with which this transition will occur is unpredictable, however, as factors like digital piracy have cut into movie attendance, making movie theaters less profitable. With ticket sales down, theater owners are less likely to upgrade their screens to digital, slowing the overall progress of the transition. If the movie market improves, then the adoption of digital cinema will speed up, and Dolby will profit as the new theaters implement its technology.
Dolby technologies are used in films that are shown both in theaters and in people's homes. As the home entertainment sector grows, so does Dolby's revenues. Dolby's position as a licenser of the standard audio format for DVDs, and (among others) for Blu-Ray, allows it to take licensing revenue from both the film and video game industries, which will help it capitalize if the home entertainment sector continues its growth.
Dolby's main competitor is DTS. In the past, Dolby was the standard audio formatting for DVDs, while DTS was relegated to another supported position, but the growing popularity of Blu-Ray, which must support both Dolby and DTS audio formats, means that Dolby no longer has a monopoly over the market for home theater audio.
Competitors for Dolby's other licenses include DivX, Sony, Philips, RealNetworks, Microsoft. Many of these companies are much larger than Dolby, and have greater financial strength, allowing them to spend more on developing new technologies, marketing them, and enforcing their licenses and patents. Furthermore, as media becomes increasingly linked to the internet, Microsoft and RealNetworks have the advantage of being experienced in web media. These two companies, aside from being familiar with the existing technology for web entertainment, also develop well-known internet media systems (RealPlayer and Windows Media Player, respectively); if either of these companies develops new entertainment technology, they can package it with a new release of the media player, thereby integrating the technology into an already existing medium - an advantage that Dolby does not have, as it would have to find a media system vendor to license its technology to.
Some of Dolby's competitors are also its customers; Sony owns the Blu-Ray format, for example, and Universal uses many of the company's cinema products and services, despite being a shareholder of DTS.