Dolby Laboratories (DLB)

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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,^[3], and although declining movie attendance since 2007 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.

[edit] Business and Financials

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. In 2007, it made 80% of its money by licensing its technology to manufacturers of entertainment products, like DVD players, video game consoles, in-car audio systems and computer software DVDs. The remainder of revenues came from manufactured products for the digital cinema and live sound industries, and services that its engineers offer to different entertainment industries (film, music, video game). CyberLink Corporation, a manufacturer of personal computer DVD software, is Dolby's biggest customer at 10% of revenues.^[4]

Dolby's gross margins are high, at over 75%, and the company has grown steadily over the last few years thanks to growth in the home entertainment market. Operating margins, however, are less than half of gross margins because the company must spend on marketing its brand and protecting its intellectual property.^[5]

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.

Dolby's fiscal year ends September 30th.

[edit] Trends and Forces

[edit] The Shift from DVD to Blu-Ray Means Dolby Will No Longer Have a Monopoly on Home Theater Audio

In 1995, Dolby AC-3 was adopted as the standard DVD audio format for countries adhering to NTSC television standards, while audio technology from its main competitor, DTS, was relegated to the position of "optional".^[7] Since then, the company has grown on the back of the DVD market, which grew from 2000 to 2005 at an annual rate of 66%.^[8] Dolby enjoys a first mover advantage in this market, and its widely recognized brand name helps entice people to purchase audio systems using Dolby-licensed technology.

In 2006, consumer spending on home entertainment products, including DVDs, peaked at $24.3 billion.^[9] 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%^[10] as consumers waited to see which would win. In February 2008, however, Toshiba and its HD-DVD format backed out of the battle, as enough studios had aligned with Sony's Blu-Ray that around 75% of new home releases would be in that format.^[11] 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.^[12]

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 2007, rentals and sales of DVDs fell 2%, and as more consumers adopt Blu-Ray, this decline will continue, slowly cutting off Dolby from its largest source of revenue.

[edit] As Movie Theaters Transition to Digital Sound, Dolby Is Poised to Benefit

In 2008, 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); by the end of 2007, 5,500 of the world's screens had been converted to digital, up from 2,966 in 2006, and 78% of them were in the U.S.; this, however, is just 5.5% of the total screens worldwide.^[13] 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; since 2002, the number of tickets sold in the U.S. has declined by over 150 million.^[14] 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.

[edit] Dolby Rises with the Tide of the Home Entertainment Sector

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.

[edit] Competition

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. 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.^[15]

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.

[edit] References

1. ↑ DLB 2007 10-K, Page 39
2. ↑ Video Business: "The format war cost home entertainment in 2007"
3. ↑ Research and Markets: "Digital Cinema: Global and European Roll-out, Business Models and Forecasts to 2012"
4. ↑ DLB 2007 10-K, Page 5
5. ↑ DLB 2007 10-K, Page 39
6. ↑ DLB 2007 10-K, Page 86
7. ↑ BNET: "Dolby hails single DVD standard allowing worldwide use of Dolby AC-3; Disputes Philips's claims"
8. ↑ Business Week: "End of the DVD Party?"
9. ↑ AllBusiness: "Consumer Spending Reaches $24.3 Billion for Yearly Home Video Sales; DVD Players in More Than 82..."
10. ↑ Video Business: "The format war cost home entertainment in 2007"
11. ↑ Read Write Web: "Blu-ray Wins Format War - Much Longer HD Download Battle Lies Ahead"
12. ↑ Home Media Magazine: 2008 Off to a Good Start
13. ↑ Research and Markets: "Digital Cinema: Global and European Roll-out, Business Models and Forecasts to 2012"
14. ↑ http://www.boxofficemojo.com/yearly/
15. ↑ DTSI 2007 10-K, Page 18
16. ↑ DLB 2007 10-K
17. ↑ DTSI 2007 10-K