Dolby Gets Ready To Make A Big Noise

You see the name at virtually every movie theater in the world. The majority of households have at least one device containing its technology. And most people are as familiar with the brand as they are with Kodak (EK ) or Sony (SNE ). Yet for all this renown, Dolby Laboratories Inc. remains a veritable mystery. "The general public has absolutely no idea what Dolby is, even though almost everyone owns a product with its technology," says Brent Butterworth, editor-in-chief of Robb Report Home Entertainment and Design.

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%.

By Linda Himelstein in San Francisco

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