DTS Highly Dependent on Blu-Ray Amid Streaming Content World

Potentially slow adoption of Blu-ray players, and competition from streaming content where there’s no standard for multi-channel audio, could strike a blow to future DTS, Inc. revenue, the company said in its 10-K filed with the SEC last week. Blu-ray is a “significant driver” of the high-definition audio company’s revenue and future growth, the company said.

While movie and music content for the last 15 years has been primarily bought and consumed via optical media, a shift to home network and cloud-based content acquisition is occurring in various parts of the world, DTS said. Those emerging digital content services are “not generally governed by international or national standards” and are free to choose any media format to deliver their service, it said. This freedom of choice “could limit DTS’ ability to grow if such content providers do not incorporate DTS’ technologies into their movies,” it said.

DTS believes that its mandatory position in the Blu-ray Disc standard will give it the ability to extend its technologies to applications beyond optical media and noted it signed agreements with digital media player makers, network connected digital television and mobile handset manufacturers to incorporate DTS decoders into their products. “One of the largest challenges that we face is the growing consumer trend toward open platform, on-line entertainment consumption and the need to constantly and rapidly evolve our technologies to address the emerging markets,” the company said.

DTS believes the transition to an open, online platform will take “many years.” Playback devices will have to be capable of processing content encoded in any form, whether disk-based or on-line, DTS said, which creates a “substantial opportunity for our technologies to extend into network connected products that may not have an optical drive.” During the transition period, DTS expects both optical media and on-line entertainment formats to “continue to thrive."

For the near term, DTS is well-positioned for Blu-ray revenue based on growth in the category. Citing data from the Digital Entertainment Group, IHS Screen Digest and other sources, DTS said more than 120 million Blu-ray devices have shipped since the 2006 launch, and household penetration of Blu-ray players reached 34 percent in 2011, an increase of 10 percent from 2010. With prices reaching as low as $39.99 last holiday season, Blu-ray players “are now mainstream,” DTS said, and Blu-ray movies are following suit, narrowing the cost of discs relative to that of DVD.

Screen Digest, a research firm, said the average price for a Blu-ray disc in 2009 was $25 and is expected to be $20 this year, DTS said. Shelf space at retail is “rapidly shifting to Blu-ray,” DTS said. Annual Blu-ray disc sales in the U.S. reached $2 billion last year, representing more than 11 percent of total home entertainment sales, DTS said. Blu-ray movie sales in the U.S. grew by 67 percent to 127 million units sold to consumers, it said. More than 5,000 individual Blu-ray titles are available in the U.S. market, it said, and more than 3,000 of the Blu-ray releases available in North America include a DTS-HD Master Audio soundtrack, it said. Citing Nielsen figures, DTS said 86 percent of the top 100 Blu-ray titles sold in 2011 were encoded with DTS-HD Master Audio.