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The name Dolby is almost synonymous with good sound. In 1966, the first generation of Dolby noise reduction (A-type NR) was used in Decca professional noise reduction units; two years later, the Dolby B-type NR logo first appeared on a consumer product. By 1970, no self-respecting audiophile would own a cassette deck not sporting the Dolby logo. During that decade, Dolby forged the way into theater sound and, in 1982, introduced Dolby Surround. Ten years later, Batman Returns was the first film released in Dolby Digital Surround.

Speed (1994) marked Dolby's 18th straight Academy Award for Best Achievement in Sound. It was also the first Dolby Digital film to win the award. One year earlier, however, a contender for the digital surround market entered the ring. In 1993, dts was introduced via Steven Spielberg's blockbuster, Jurassic Park. Five years later, all five Best Picture and Best Sound nominees were released in dts and Saving Private Ryan, a Spielberg dts release, won for Best Sound.

Considering the fact that the total number of movies released worldwide in Dolby Digital last year was 703 and dts releases totaled 242, this is no small feat.

Needless to say, the Jurassic Park co-venture proved to be a tremendous success. In fact, the dts experience was so successful that both Spielberg and MCA/Universal Studios immediately invested in Digital Theater Systems, and have since committed all of their major film productions to dts surround.

Compression is where the differences between Dolby's version of surround and dts' surround begin. Dolby Digital and dts save space by transmitting only the data that is necessary to portray the original sound, in essence throwing away the rest. Dolby compresses these 5.1 channels of digital audio down to a data rate of 448kbps. With a data rate of approximately 1.5mbps and a much lower compression ratio, dts employs less data compression--about 4:1 compared to Dolby Digital's variable 10-12:1. The higher dts data rate means potentially higher quality audio, particulady in dynamic range and signal-to-noise measurements. Dolby Theater Systems (dts) also claims effective 20-bit resolution for each of the six channels (much better than CD standards allow). According to dts' director of marketing, David DelGrosso, "It is a matter of sonic perfection vs. space consumption."

In the DVD market, Dolby clearly has the edge. Because Dolby is one of the most recognizable names in audio, an emergence as the standard for HDTV broadcast, and stares as one of the two mandatory audio formats for DVD-Video discs, it has a daunting lead in the race for surround sound superiority.


Artisan Entertainment's director of DVD production, Michelle Friedman, says she thinks "dts is just about the best sounding thing out there," but still comes up against the space versus sound issue on a regular basis. She says, "In the past, from what my authoring houses tell me, dts' bit rate was much larger. Thus, if you choose dts you have to sacrifice everything else on the disc. As I understand it, Universal and DreamWorks put out dts-only versions because of that." In Friedman's experience, DVD buyers are checking the boxes for the extras--commentary tracks, deleted scenes, bloopers--and she has had to allocate the space to these elements. However, she is planning to include a dts soundtrack on an upcoming release of Terminator, both because she believes movies warrant the best sound available and because she thinks that consumers want to hear what dts will sound like. "They see the dts logo and want to be able to hear both and compare the two."

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That's all about to change. After 39 years as a private business, Dolby is preparing to go public. Assuming all goes according to plan, the San Francisco company that made its name in noise-reduction technology for audiotape and then parlayed that expertise into theater sound systems likely will hold its initial public offering late this year.

It could be a blockbuster. Dolby pulled in revenues of more than $200 million in 2003 and enjoys fat profit margins of 20% to 40%. Revenues come from the sale of its own sound systems for theaters and from licensing fees, which average 75 cents, that Dolby collects for every consumer product shipped with its audio technology. This includes video-game consoles and DVD players. And growth prospects look strong: Its technology is the U.S. standard for digital television sets, which are expected to soar, from 3.7 million units sold last year to 29 million by 2007, according to researcher In-Stat/MDR. Analyst David Farina of investment bank William Blair & Co. says, based on comparable companies, Dolby's value should top $1 billion. "Dolby should get a huge premium for its brand," says Farina. "This is about as good as it gets in this business."

Why is Dolby going public? In a rare interview, founder Ray Dolby, who still owns 100% of the stock, tells BusinessWeek that his own mortality is driving the decision. At 70, he says he must get serious about estate planning. With the liquidity of publicly traded stock, his family will be able to pay the necessary estate taxes when he dies. "I have to pay death taxes sooner or later," says Dolby, who spends less time at the office now and more time flying his airplane and helicopter. "It's the right time to let go of my baby."

Not that letting go is easy. To prepare for the IPO, Dolby is making fundamental changes, including assembling its first board of directors and installing a more elaborate financial system. "In the past, people might have asked to spend $75,000 on something and I'd just say yes," explains N.W. "Bill" Jasper Jr., who has been Dolby's chief executive since 1983. "Now, they have to bring in a capital-authorization request. We are having to introduce more and more bureaucracy."

Such change produces shudders in people like Dolby and his 125-plus engineers. For years, the inventor, with 50 patents to his name, has fielded buyout offers and queries to go public. But he has always balked for fear of seeing his company's engineering-driven culture perish in the hands of outsiders who wouldn't understand the technical vision. Indeed, one of the reasons Dolby has been so successful is its willingness to spend heavily on research and development.

Now, however, may be the right time for the company to raise more capital. After dominating much of the sound world for years, serious competitors are emerging, most prominently Digital Theater Systems Inc. (
DTSI ). That company made its first splash when Steven Spielberg chose its technology for his blockbuster Jurassic Park. Although the company is a quarter of Dolby's size, with $50 million in revenues, its technology is in almost as many theaters as Dolby's. And it's expanding in consumer gear, from home-theater systems to game consoles.

MEATIER MEDIA. To stay ahead, Dolby is putting more resources into cutting-edge products, particularly as both cinema and consumer electronics move from analog to digital technologies. Dolby has made three acquisitions geared toward the digital-cinema market, including a small film-encryption business and a video-compression upstart. Both deals fit into Dolby's long-term strategy of moving beyond sound. "We're not just an audio company anymore," says Jasper. "We're more of an entertainment company."

Perhaps it's not surprising, then, that Dolby changed its mission statement in 2002 from "Sound for the Next Century" to "Entertainment for the Next Century." With a successful IPO, the company may live up to that aspiration.

Corrections and Clarifications
"Dolby gets ready to make a big noise" (Information Technology, Feb. 9) stated that the technology of Dolby Laboratories Inc.'s chief rival, Digital Theater Systems Inc., "is in almost as many theaters as Dolby's." Dolby says its technology is in about 53% of movie theaters in North America, while DTS says its technology is in about 35%.

Dolby meanwhile went on to develop noise reduction technologies for audio recording by using his genius for analog signal processing, which is somewhat ironic as the company is now known for its digital technologies, something that must gnaw at Dolby. I say this because some years ago the company did a demonstration at its private theater in San Francisco where Dolby himself adamantly showed the superiority of analog sound technologies over digital.
Those days are over as the company has gone into both digital sound and digital video with the rollout of its digital cinema hardware and software systems that theaters are adopting like crazy. Most of the theaters in the U.S. are expected to go 100-percent digital within the next five years, according to Dolby's market experts.
The reasons are obvious when you hear the sales pitch: it's all about the money. Besides the fact that the movies do not degrade with use and are more crystal clear and stable, a theater with a blockbuster on its hands can as easily run 20 screens from the digital master as it can run one screen. In today's environment any surprise hit requires more cans of film to show on multiple screens. By the time the additional prints are manufactured the moment is usually over. But the irony here for Dolby is these new digital systems have been standardized by the industry and the days of Dolby locked down licensing fees are over. They now have to work for a living.
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