Dolby Sees 2013 as ‘Transitional’ Year For Windows 7 and 8
Following concerns over the role Dolby Labs would play in the Windows 8 ecosystem without de facto optical disc support in Windows Media Player, Dolby CEO Kevin Yeaman said on the company’s fiscal Q2 earnings call that Microsoft’s decision to incorporate Dolby technologies for online and file-based content into all versions of Windows 8 is a “significant step forward” in Dolby’s efforts to bring “premium media experiences” to the cloud and portable devices. Microsoft’s use of Dolby Digital Plus in Windows 8 “ensures the presence of our format and the Windows’ ecosystem beyond DVD” while offering a “differentiating audio experience to Windows-based PCs and tablets,” he said.
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Under the new agreement, OEMs will be required to pay Dolby a base royalty rate in exchange for the rights to use Dolby technologies in all channels of content “aside from DVD or digital broadcast,” Yeaman said. In addition, the agreement provides OEMs a path to supporting optical disc playback on PCs, and OEMs will pay a higher per-unit rate than in the past on Windows 8 PCs that also support DVD or digital CD playback, Yeaman said. Every copy of Windows 8 will include online playback, and the OEM will pay that royalty rate directly to Dolby, he said. The base package for online playback includes Dolby Digital two-channel encoding and Dolby Digital Plus multi-channel decoding, said Chief Financial Officer Murray Demo. Dolby will offer a “value proposition above and beyond this” at a higher royalty rate for Dolby Headphone and other functionality, he said.
Under Windows 8, Dolby’s revenue mix will shift largely to OEMs, whereas in the past most of the royalties came from Microsoft and independent software vendors, Yeaman said. In 2011, Dolby realized about $240 million of PC revenue, with roughly $80 million of that coming from a second decoder. At “full deployment” of Windows 8, Dolby’s target PC revenue number is about $160 million “based on our belief that OEMs are going to want to support DVD playback in the PC-based ecosystem,” he said. The combination of online playback revenues and the option for DVD playback from OEMs could result in revenues “higher than that $160 million,” Yeaman said. He added that 2013 is going to be a “transitional year,” with a mix of Windows 7 and Windows 8 products in the market, especially in the enterprise segment.
In mobile devices, Dolby is now on roughly 200 handset models, including more than 30 from Samsung, Yeaman said, and the company’s PC Entertainment Experience (PCEE) technology is now included in more than 500 PC and tablet SKUs worldwide. More than 100 million PCEE-enabled products have shipped to date, he said. Lenovo announced in the quarter that it would integrate PCEE v4 into most of its IdeaPad and ThinkPad notebook models, he said.
Among cloud service providers, Microsoft’s Windows Azure Media Services, Encoding.com, Zencoder, Digital Rapids, Nativ and LinkoTec will use Dolby Digital Plus in their platforms to support premium video content, Yeaman said. They join existing content providers Netflix, Amazon, Vudu, HBO Go, Apple TV, and CinemaNow.
In international markets, Dolby is expanding Dolby Digital Plus globally across digital broadcasts, Yeaman said, and in Q2 the European pay-TV provider Canal Plus launched on-air in Dolby Digital Plus in France. Dolby is focused on India, Russia and countries that have not mandated their terrestrial broadcast plans, said Ramzi Haidamus, executive vice president, sales and marketing, and the company recently added a new HD channel in India, bringing the number of Indian HD channels using Dolby Digital Plus to 11. Similar activities are going on in Russia and in other countries where Dolby hasn’t been mandated as a TV audio format, he said.
For the quarter, Dolby reported revenues of $260.3 million, compared to $250.0 million for Q2 of fiscal 2011. Income for the 2012 quarter was $88.1 million, or $0.81 per diluted share, compared to $82.1 million, or $0.72 per diluted share, for the 2011 quarter, the company said. Dolby shares closed 17.5 percent higher Friday at $44.22.