DTS produces technology used in producing and playing audio for the entertainment industry. Since DTS' main competitor, Dolby Laboratories, became the audio standard for DVDs, DTS was only able to catch the tail end of the DVD growth wave. The advent of high-definition home entertainment, however, means that there is a new standard video format - Blu-Ray - which requires new audio standards. Unfortunately for DTS, Dolby's HD audio format is also required on Blu-Ray media, but so is DTS-HD Master Audio, and both will be found on every Blu-Ray disc. This means that the switch to high-definition home movies presents an opportunity for DTS to finally compete with Dolby on a level playing field. Furthermore, the company is seeing most of its sales growth in international markets like Japan and South Korea, where economic growth is fueling spending on luxuries like car-stereo systems. Though DTS has many competitors for its other licenses, its main opposition in the film audio market comes from Dolby Laboratories.
DTS, Inc., is a provider of entertainment technology, products and services to the audio and image entertainment markets worldwide. It also provides image processing services to film studios to prepare and enhance film, television, DVD, and Blu-Ray content for presentation. It used to provide products and services to film studios, production companies, and movie theaters to produce, release, distribute, and play back digital multi-channel film soundtracks, pre-show entertainment content, subtitles, captions and descriptive narration, but it sold the segment in May of 2008 in order to focus on its audio technologies. Playback systems for DTS-formatted soundtracks have been installed in over 28,000 movie screens worldwide.
DTSI is a cutting-edge technology company, and so must constantly innovate in order to stay competitive; the company spends around 12% of its revenues on research and development.
In 1995, Dolby, DTS's main competitor, saw its AC-3 adopted as the standard DVD audio format for countries adhering to NTSC television standards, while audio technology from DTS, was relegated to the position of "optional". Since then, Dolby's revenues exploded, growing on the back of the DVD market, which grew from 2000 to 2005 at an annual rate of 66%; since Dolby audio was the standard, people were more likely to purchase audio systems using Dolby-licensed technology, and the company saw revenues grow by almost 150% since 2003. DTS, on the other hand, trailed behind, with revenue growing by just 50% since 2003.
In 2006, consumer spending on home entertainment products, including DVDs, peaked at $24.3 billion. In 2007, two competing video formats - HD-DVD and Blu-Ray - entered the home entertainment spotlight, sparking the "HD wars" and causing consumer spending in the industry to decline by 3.1% as consumers waited to see which would win. In February 2008, however, Toshiba and its HD DVD format backed out of the battle after enough studios aligned with Sony's Blu-Ray that around 75% of new home releases would be in that format. Since the new format has been standardized, spending has already picked up; in the first quarter of 2008, spending on DVDs and Blu-Ray films has increased 1% year on year, to $5.51 billion.
The new Blu-Ray standard has the ability to hold both "lossless", high-quality audio and high-definition video, and consumers are going to want home-entertainment systems that take advantage of these new features. Unlike in 1995, when DTS's technology was rejected in favor of Dolby's, DTS-HD Master Audio compatibility is now required on all Blu-Ray media, along with Dolby's TrueHD and a standard digital coding called Linear Pulse-Code Modulation (Pulse Code Modulation was also required for DVDs). With DTS's audio coding technology mandatory in all Blu-Ray films, the company has a much better opportunity for growth. Consumers can now choose between Dolby-compatible DVD players and surround sound systems and DTS compatible DVD players and surround sound systems, unlike with DVDs, where not all DVD films/games supported DTS audio. Furthermore, hardware manufacturers now have a choice between audio formats, so DTS has a chance to compete with Dolby for licensing fees. In 2007, rentals and sales of DVDs fell 2%, and as more consumers adopt Blu-Ray, this decline will continue, meaning DTS' competitive position will improve over time.
The film industry is undergoing a transition in its most prominent venues: movie theaters. 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. These theaters use digitized audio and video, rather than traditional film (think MPEGs instead of video tapes), and by the end of 2007, 5,500 of the world's screens had been converted to digital, up from 2,966 in 2006, 78% of them in the U.S. However, this is just 5.5% of the world's overall screens. DTS sold its digital cinema business, which sells products and services for producing and playing the soundtracks, pre-show entertainment, captions/subtitles, and descriptive narration of digital films, in May of 2008, for $3.3 million to Beaufort California, Inc., a subsidiary of UK's Beaufort International Group PLC. The deal leaves open the possibility of DTS receiving $11.7 million over subsequent years, "under certain circumstances" (nor further clarification was given). Since factors like digital piracy have cut into movie attendance, movie theaters have become less profitable; since 2002, the number of tickets sold in the U.S. has declined by over 150 million. Thus in the short term it is unlikely that digital cinema will proliferate in the industry, but in the long term DTS may be missing out on a major growth opportunity as its key competitor Dolby profits from the conversion to digital.
DTS technologies are used in films that are shown both in theaters and in people's homes. As the home entertainment sector grows, so does DTS' revenues. DTS' new position as a licenser of the standard audio format 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.
From 2005 to 2007, DTS' revenue in Japan increased by about 37% and in South Korea increased by 71%, while domestic revenues decreased by 42%. Domestically, the decline can be attributed to falling movie attendance and a declining DVD market, but the company's gains in Japan and South Korea can be attributed to each country's tech-savvy cultures. Blu-Ray was released in Japan in 2003, well before its commercial release in the U.S. Furthermore, the car audio and personal computer sales for DTS both increased across the globe, as economic growth fueled car and PC adoption. From 2005 to 2006, DTS's car audio technology licenses increased by 81% and its PC technology licenses increased 20%, and from 2006 to 2007, its car audio licenses increased 45%. As international economies grow, the market for DTS' technologies will expand, and the company's revenues will grow.
DTS' main competitor is Dolby Laboratories. In the past, Dolby was the standard audio formatting for DVDs, while DTS was relegated to an optionally supported position, but the growth of Blu-Ray means that Dolby no longer has a monopoly over the market for home theater audio and DTS can actually compete equally. Furthermore, while both Dolby and DTS are used by the major film studios for audio formatting in theatric releases, most of the films released in 2007 used DTS audio technology.
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Competitors for DTS's other licenses include DivX, Sony, Philips, RealNetworks, Microsoft. Many of these companies are much larger than DTS, 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 DTS does not have, as it would have to find a media system vendor to license its technology to.