Dolby Labs – A Real IP Company

Dolby has similar clout as a brand in Audio technologies as Intel has in PC market. For namesake, there are multiple technology licensing companies (perhaps numbering in thousands), but there are only few who have brand recall like that of Dolby. Other than creating breakthrough technologies, Dolby also makes money and enough of it. For starters, it made more than $700 million dollars for year ending Sept, 2009 with around $250 million profits. That is more than what ARM makes being the number one IP company.

Dolby Labs develops and markets products and technologies related to audio entertainment and are standard in a wide range of entertainment platforms. Dolby’s compression technologies, noise reduction technologies and surround sound are used in DVD players, PC DVD playback software, DTVs, STBs, PMPs, gaming systems, a/v receivers etc. Primarily, it makes money by licensing its technologies to consumer electronics manufacturers and media software vendors. This makes up more than 80% of the total revenue. The remaining part comes from selling products and services to entertainment content producers and distributors.

Licensing revenue can be split into following major chunks – PC market, broadcast market and consumer electronic market and other nascent markets like mobile, gaming and automotive market.

– PC market makes up around 35% mainly driven by the inclusion of Dolby’s technologies in media applications and operation systems. Microsoft is a major customer with almost 10% revenues coming from it. It is also a competitor to Dolby in one way. Dolby Digital and Dolby Digital Plus are the key technologies employed in this segment.

– Consumer electronic market is around 25% [mobile market is treated different from consumer electronics]. Dolby Digital and Dolby Digital Plus are mandatory audio standards for Blue-ray format, so Dolby’s technologies become part of every Blue-ray players. Earlier, it enjoyed the same privilege in DVD players.

– Broadcast market which is mainly about STBs and TVs constitutes around 25%. This segment has shown an exceptional growth benefiting from increased global shipments of set top boxes and digital televisions. Here again Dolby Digital, Dolby Digital Plus and HE-AAC are the major technologies minting money for Dolby.

– Mobile, Gaming, Automotive and Licensing services cover up the remaining pie of the total Licensing revenues. Mobile markets are primarily driven by AAC and HE-AAC technologies, whereas Gaming and Automotive are driven by Dolby Digital, ATRAC and Dolby TrueHD.

Besides licensing revenues, product sales consist of revenue from sales of equipment to cinema operators and broadcasters representing around 15% of total revenue.

Dolby’s current position in these markets offer a decent growth for next few years. The real upside can come from mobile market where it is trying to increase the scope of its technologies. With the increasing processing capabilities of Smartphones and Internet Tablets, there are lot more things that Dolby can do to improve consumer experience. So in short Dolby is well positioned to ride on the success of mobile devices.

Dolby has also introduces many new technologies like Dolby Volume, Dolby Mobile, Dolby Axon and dynamic range image technologies. These technologies will start adding to topline in coming years. In addition, increasing penetration of CE device is developing nations like India and China will increase Dolby’s prospects [Dolby’s licensing deals are based on number of devices sold by the system licensee].

Geographically, Dolby is well diversified as it enjoys more than 65% revenue outside US. The major competitors include companies like DTS, DivX, Fraunhofer Institute, RealNetworks, Sony, SRS Labs and Thomson. The major competitive advantages of Dolby are 1) its brand, 2) its technologies, 3) its close relationships with content producers and distributors and 4) its clout with the standard licensing bodies. Dolby has almost 1600 patents issued and 2000 are pending in multiple countries.

Here come the numbers. Dolby has grown 80% in last three years and maintained profit margins of more than 30% last year. It employs around 1000 employees and with around $720 million dollars revenue and $250 million profit, the productivity is quite high. By Sept, 2009, it had cash and cash equivalent of $450 million dollars. Return on equity is around 20%. The market cap of Dolby is around $7billion.

A company worth keeping a close watch.

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