Dolby Keeps Ear To The Ground

The Dolby brand is so ubiquitous you're just as likely to run into it inside an elevator as you are an automobile, a dentist's office or a PC. But that doesn't mean the people running audio technology giant Dolby Laboratories aren't looking over their shoulders.

In an annual report to shareholders in December, the San Francisco company made it clear it sees potential competition on the horizon from some strong companies. "Some of our current and future competitors may have significantly greater financial, technical and marketing resources than we do, or may have some more experience or advantages in the markets in which they compete," the company wrote.

"For example, Microsoft and RealNetworks may have an advantage over us in the market for Internet technologies because of their greater experience in that market," Dolby wrote. "In addition, some of our current or potential competitors, such as Microsoft or RealNetworks, may be able to offer integrated system solutions in certain markets for sound or non-sound entertainment technologies, including audio, video and rights management technologies related to personal computers or the Internet, which could make competing technologies we develop or acquire unnecessary. By offering an integrated system solution, these potential competitors also may be able to offer competing technologies at lower prices than our technologies, which could adversely affect our operating results."

Dolby is even worried about some of its big-ticket customers—Sony, for example, could become a major competitor in the consumer and professional segments.

It is responding to those threats the way it has in the past: through aggressive R&D and integration of its audio technology into a series of products designed for home, car and PC integration. At the 2007 Consumer Electronics Show, Dolby fired off some announcements aimed at keeping the bar high.

Dolby TrueHD audio, "a 100 percent lossless" technology that delivers high-definition sound for optical media and video-on-demand services.

Toshiba, Panasonic, LG Electronics, Samsung, Sony and Onkyo integrating Dolby's audio technology into HD DVD and Blu-ray disc technology.

The integration of Dolby Digital 5.1 audio into Microsoft's Vista operating system.

A series of products from headphones to speakers, all based on Dolby audio technology.

With those announcements, Dolby continues to provide technology that even potential rivals like Microsoft and Sony find they need to integrate into products.

Everybody is worried about Microsoft, say some solution providers and system builders who acknowledge the software giant's stated goal of expanding its presence in PC-based living room entertainment and the gaming space. But to match the strength of Dolby in the area of audio means reaching a high barrier of entry, said David Chang, president of Agama Systems, a Houston-based system builder.

"If Microsoft decides to do it, they can do it," Chang said. "But do they see it as a big market for them?" he pondered, asking rhetorically if Microsoft sees enough opportunity to warrant the investment in developing technology and integrating it with sound cards, speakers, subwoofers and other A/V hardware. "I think in the future the guy who is going to win in audio is the guy who wins on the design side."

Today, Dolby is the same firm founded in 1965 by Ray Dolby, whose audio technology had become famous with its use in motion pictures, albums and CDs through the '70s and '80s. Its annual revenue of $392 million—a drop in the bucket vs. Microsoft's $45 billion—includes technology licensing, product sales and services. It maintains a roster of a dozen A/V solution providers, but its core technologies are shipped through the broader IT channel that includes tens of thousands of system builders, solution providers and home integrators.

Tough competition could come from aggressive adoption of Microsoft's new technologies. But slower adoption could slow some of Dolby's product revenue in the home integration space. Meanwhile, it seems, the channel could be ready to maximize whichever technology emerges as tops in the crossover IT-home integration space.

"Microsoft isn't just trying to get into more hardware, but they're trying to become branded in the living room and bedroom," Chang said. And that is a prospect over which Dolby may want to make some noise.