Reuters
Forbes 1
Forbes 2
This intrigued me, and so I do what I do best, browsed Dolby's 10-k. Let me share what I found:
To the extent that sales of personal computers with Dolby technologies level off or decline, our licensing revenue will be adversely affected.
Historically, PC manufacturers have frequently included DVD playback functionality as part of the software applications included in their products. Microsoft introduced its Windows Vista operating system in 2007. Two of the six editions of this operating system, the Windows Vista Home Premium Edition and the Windows Vista Ultimate Edition, include Dolby technologies which help enable DVD playback functionality and DVD authoring capabilities. In addition, many major PC manufacturers continue to include additional DVD software applications which offer added DVD functionality not included in the Microsoft operating systems. In the future, PC manufacturers may elect to exclude additional DVD software application on personal computers that include the Windows Vista Home Premium Edition. Additionally, it is unclear at what pace business customers will migrate from their current operating systems to the Windows Vista operating system, what the adoption rate of the Ultimate Edition will be, and how such adoption will impact sales of software DVD players for business PCs. In addition, a growing number of netbooks (or sub-notebooks) are being sold which do not have Microsoft Vista operating systems or contain optical disc drives and do not always have DVD playback functionality or Dolby technologies. Consumers may elect to purchase these netbooks instead of computers with DVD playback functionality and Dolby technologies. Further, equipment manufacturers experiencing pricing pressure may elect to exclude optional DVD playback functionality from their products, thereby requiring an additional cost to add this capability, which would adversely affect demand for our technologies. Future shipments of notebooks with Dolby technologies could also decline. If any of the foregoing occur, our licensing revenue will be adversely affected.
Ok, so Dolby is not only in the business of making surround sound for DVDs, they also collect royalties based on the sales of Microsoft Operating System. If you need further proof:
Historically, the consumer electronics market, which is driven primarily by revenue attributable to sales of DVD players, has been our largest market, generating approximately 45% in fiscal 2006 and just under 40% in fiscal 2007. However, in fiscal 2008, it declined to just over 25% and was surpassed by our personal computing market, which represented our largest market in fiscal 2008.
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Licensing. The 28% increase in licensing revenue from fiscal 2006 to fiscal 2007 was primarily due to increased revenue from our personal computer market and broadcast market, and to a lesser extent, from our consumer electronics and gaming markets. The increase in revenue from our PC market was primarily driven by continued growth in shipments of notebook computers, the release of Microsoft Vista Home Premium and Ultimate Editions, which contain Dolby technologies, as well as the continued inclusion of additional software DVD player applications by PC manufacturers. The increase in revenue from our broadcast market has been driven by growth in sales of digital televisions and cable and satellite set top boxes that incorporate our technologies. Our consumer electronics market benefited from continued diversification of consumer electronics products containing our technologies, including home-theater-in-a-box systems, audio/video receivers, camcorders and portable media devices.
And,
In fiscal 2008, Microsoft Corporation, one of our licensees, accounted for more than 10% of our total revenue.
Finally, as the above Forbe's link indicates, Dolby technologies will be included in Windows 7 and therefore Dolby will continue to enjoy their royalty payments (licensing fees). What a nice symbiotic relationship.
That is pretty awesome, but also makes a lot of sense. I can't wait to increase their stock price by later purchasing a receiver with the capabilities of decoding Dolby TrueHD, which is definitely a sign of our species evolution.
ReplyDeleteI think you should start debating selling DLB in your fantasy stock trader league and look into programming a better and more cost effective DVD playback functionality for Microsoft. An 18% return is pretty decent, you might consider locking that down.
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