Doing a little homework on their licensing practices and Recoverables. From the most recent 10-K.
We have various licensing models: a two-tier model, an integrated licensing model, a patent licensing model, and collaboration arrangements.
Two-Tier Licensing Model
. Most of our consumer entertainment licensing business consists of a two-tier licensing model whereby our
decoding technologies, included in reference software and firmware code, are first provided under license to semiconductor manufacturers whom we
refer to as “implementation licensees.” Implementation licensees incorporate our technologies in ICs which they sell to OEMs of consumer
entertainment products, whom we refer to as “system licensees.” System licensees separately obtain licenses from us that allow them to make and
sell end-user products using ICs that incorporate our technologies.
Implementation licensees pay us a one-time, up-front fee per license. In exchange, the licensee receives a licensing package which includes
information that is useful in implementing our technologies into their chipsets. Once implemented, the licensee sends us a sample chipset for quality
control evaluation, and following our validation of the design, the licensee is permitted to sell the chipset for use solely to our network of system
licensees.
System licensees provide us with prototypes of products, or self-test results of products that incorporate our technologies. Upon our
confirmation that our technologies are optimally and consistently incorporated, the system licensee may buy ICs under a license for the same Dolby
technology from our network of implementation licensees, and may further sell approved products to retailers, distributors, and consumers. For the
use of our technologies, our system licensees pay an initial licensing fee as well as royalties, which represent the majority of the revenue recognized
from these arrangements. The amount of royalties we collect on a particular product depends on several factors including the nature of the
implementations, the mix of Dolby technologies used, and the volume of products using our technologies that are shipped by the system licensee.
Integrated Licensing Model
. We also license our technologies to software operating system vendors and to certain other OEMs that act as combined implementation and system licensees. These licensees incorporate our technologies in their software used on PCs, in mobile applications, or in ICs they manufacture and incorporate into their products. As with the two-tier licensing model, the combined implementation and system licensee pays us an initial licensing fee in addition to royalties as determined by the mix of Dolby technologies used, the nature of the implementations, and the volume of products using our technologies that are shipped, and is subject to the same quality control evaluation process.
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Settlements & Back Payments From Licensees: Licensing revenue recognized in any given quarter may include back payments and/or settlements with licensees. Settlements and back payments are collectively referred to as "recoveries." Such recoveries have become a recurring element of our business and are particularly subject to fluctuation and unpredictability.
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Inaccurate Licensee Royalty Reporting
. We generate licensing revenue primarily from OEMs who license our technologies and incorporate those technologies into their products. Our license agreements generally obligate our licensees to pay us a specified royalty for every product they ship that incorporates our technologies, and we rely on our licensees to report their shipments accurately. However, we have difficulty independently determining whether our licensees are reporting shipments accurately, particularly with respect to software incorporating our technologies because unauthorized copies of such software can be made relatively easily. A third party may disagree with our interpretation of the terms of a license agreement or, as a result of an audit, a third party could challenge the accuracy of our calculation. We are regularly involved in discussions with third party technology licensees regarding license terms. Most of our license agreements permit us to audit our licensees’ records, and we routinely exercise these rights, but audits are generally expensive, time-consuming, and potentially detrimental to our ongoing business relationships with our licensees. In the past, licensees have understated or failed to report the number of products incorporating our technologies that they shipped, and we have not been able to collect and recognize revenue to which we were entitled. We expect that we will continue to experience understatement and non-reporting of royalties by our licensees. We have been able to obtain certain recovery payments from licensees (either in the form of back payments or settlements), and such recoveries have become a recurring element of our business; however, we are unable to predict with certainty the revenue that we may recover in the future or if we will be able to continue to obtain such recoveries at all.
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