Dolby Eyes Multimedia Smartphones, As U.S. CE Revenue Dips

With Dolby’s licensing revenue from CE products in decline and projections for PC shipments lowered, executives said in their fiscal Q4 2010 earnings webcast last week that the company will focus on “new geographies,” online content, smartphones and mobile entertainment devices for long-term growth. For the fiscal year, Dolby reported total revenue of $922.7 million, compared with $719.5 million the previous year. Fiscal year net income was $283.4 million, compared with $243 million.

CFO Murray Demo said Q1 will be the company’s “lowest revenue quarter” of the 2011 fiscal year, because of “higher PC channel inventory.” Q4 revenue in the CE segment -- including DVD players and recorders, Blu-ray players, camcorders, AV receivers and home-theater-in-a-box systems -- slipped 3 percent both year to year and quarter to quarter, Demo said. Revenue from the CE market made up 22 percent of company licensing revenue in fiscal 2010, compared with 24 percent the previous year, he said. Growth from Blu-ray revenue “more than offset the decline” in DVD revenue, he said. In its broadcast segment -- TVs and set-top boxes -- Q4 revenue grew 33 percent year over year driven by higher TV unit growth, increasing European attach rates and higher set-top box unit growth, he said. Sequential growth in broadcast of 16 percent was driven by growth in set-top boxes, he said. Broadcasting accounted for 27 percent of licensing revenue in fiscal 2010 compared with 25 percent in 2009. Q4 revenue from other markets, including mobile, gaming and automotive, jumped 78 percent from a year earlier and 27 percent from Q3. Product revenue was 40.3 percent of total revenue Q4, Demo said, up 99 percent from a year earlier and 24 percent sequentially, partly from increased unit shipments of digital cinema and 3D systems, he said.

Dolby’s attach rate for digital TV worldwide rose 15 points to just over 50 percent, according to CEO Kevin Yeaman, who said “every region is focused on getting to digital TV and we're well positioned to meet their audio needs,” citing North America, Europe and Japan as the regions with the highest penetration. In China, Dolby ended the fiscal year with 13 TV channels broadcasting in Dolby Digital Plus, an “optional standard” in China, he said. “It’s always beneficial to be mandated but we've succeeded in many markets in digital broadcasts through de facto standards or on an operator-by-operator basis,” Yeaman said. Dolby is “pleased with its progress in China,” he said. Dolby Digital Plus was also adopted by Chinese IPTV provider Best TV, Air Tel in India and the largest pay-TV operator in Spain, he said.

There’s a growth opportunity for Dolby in the domestic TV market through connected TVs, according to Ramzi Haidamus, executive vice president of sales and marketing, calling them a “very valuable proposition to the consumer” whether through streaming Netflix movies or downloading them. Attractive promotional pricing of “sub-$500” for connected TVs and a drop of average selling prices bodes well for category sales, he said. “I don’t think we're going to be waiting very long before people are replacing the TVs they bought two years ago,” Haidamus said. Mass adoption of 3D TV will take longer, he said. “The question is the number of titles necessary to get consumers to upgrade,” he said.

Dolby is continuing to extend its audio technologies into new channels of content distribution, including mobile and online, along with the devices that play back content, Yeaman said. The company’s effort to extend multichannel formats into online and mobile distributions mirrors the approach it took with broadcast, he said, focusing on “growing the presence of the format throughout the online ecosystem.” Yeaman cited recent announcements with Netflix for 5.1-channel surround-sound encoding for streaming TV shows and movies and with Sony for the PS3. More devices, he said, “will be added over time.” He noted that Dolby Digital Plus is now found in Sonic’s Roxio Now platform offered by Best Buy and Blockbuster as well as Amazon, Apple TV and Vudu.

In other areas of online and mobile content, music site Rhapsody and Omnifone have adopted Dolby Media Generator encoding tools “to help content creators improve quality of service.” Rhapsody will encode 9 million music tracks using Media Generator, he said, and Omnifone more than 6 million. Several service providers on the NTT Docomo network in Japan have employed Media Generator, he said, adding, “The more we help to ensure quality of content the better we provide value at device level.”

Dolby continues to expand into mobile handsets, Yeaman said. Dolby Mobile is on more than 60 handsets including 30 from LG, more than 20 from NTT Docomo and products from HTC, he said. Dolby Digital surround sound is found on five handsets -- two from Nokia and three from Pantech -- he said, marking a shift in how consumers will source their video content in the future. Dolby expects a trend of consumers’ playing “a rich multimedia movie” from a mobile handset, Haidamus said. “That’s why we've seen phones like the Nokia N8 coming with an HDMI out that plugs directly into a home theater,” he said. The N8 isn’t an anomaly, he said. “We believe other companies will do the same, and Nokia will come out with additional SKU’s,” he said. In addition to continued side-loading of content from one device to another, Dolby forecasts a momentum gain in adoption of Dolby Mobile technology “to improve the handset experience based on post-processing technology,” Haidamus said.

As consumers increasingly use portable devices for entertainment content, “we believe they'll seek a higher quality entertainment experience and greater compatibility with the existing entertainment ecosystem,” Yeaman said. “We're providing solutions across the chain.” The company expects to continue to sign new mobile handset customers and increase penetration in fiscal 2011, he said, with a focus on smartphone and media-enabled handsets that make up 40 percent of mobile phone shipments. “The same factors driving success in mobile handsets market will drive success in other portable device markets such as tablets,” he said.