ray dolby/jan 99' Red Herring...
The only area in which Dolby Labs is not bullish is the Internet.
RAY DOLBY SOUNDS OFF
Ray Dolby leads Dolby Laboratories into new markets.
By Alex Gove
The Red Herring magazine
January 1999
The screening room at the office of San Francisco-based Dolby Laboratories, the longtime leader in noise-reduction technology, says a lot about this very private company. Despite the 45 tons of Sheetrock that line the walls of the theater, it literally floats on rubber: rubber blocks are sandwiched between the two 3.5-inch-thick concrete slabs that make up its floor. Even its beams have been insulated in rubber.
The room has been physically isolated from contact with the outside world in order to minimize noise from nearby freeways. But until recently, the company was isolated from the "noise" of Silicon Valley as well. Although dozens of unprofitable high-tech startups have raised millions from the public markets, Dolby Labs -- which has been solidly profitable since its founding in 1965 and earned revenues of $100 million in 1997 -- has stalwartly remained private. To this day, Ray Dolby, the founder and CEO of Dolby Labs, owns every share of his company's stock and is the sole member of its board of directors. In fact, the Red Herring named Mr. Dolby our 1997 antientrepreneur of the year (see "Against the Grain"), largely because of the success he has enjoyed despite his reluctance to take his company public or even to publicize it.
This reticence may be changing. Dolby Labs is becoming more open in response to market pressures. Although it has a lock on sound technologies for new digital-entertainment platforms like DVD and high-definition television (HDTV), its digital theater sound systems face increased competition, and the company has realized that it must update its trademark with consumers, many of whom still associate Dolby Labs with that cassette-tape player they bought in the '70s. This year the company hired an in-house publicist, and, to our amazement, its boss made himself available to talk to us.
PUMP UP THE VOLUME
Mr. Dolby's PR staff warns journalists who interview him to be prepared to discuss each of the milestones in his long career. His achievements are indeed impressive. While still a student at Stanford University, he helped Ampex invent the first videotape recorder. He graduated from Stanford in 1957 and won a Marshall scholarship to Cambridge University, where he earned a Ph.D. in physics in 1961. Mr. Dolby next worked as a United Nations adviser in India. By day, he helped Indian businesses develop scientific instruments; by night, he wrestled with a problem that had puzzled him for a long time: how to reduce extraneous noise in analog recordings. For many years, the industry had recorded music and other audio material by compressing and expanding sound signals through devices known as wideband companders. But this process distorted the signals. Mr. Dolby realized that noise is audible only at low signal levels. He designed circuits that would allow high-level signals to pass through the compander without being compressed and expanded. This process significantly reduced the noise in his recordings.
Energized by his discovery, he resigned from his U.N. post in 1965 and drove (yes, drove) from India to London to start Dolby Labs. With $15,000 he built a professional multitrack recording device using his encoding and decoding technology -- what the company would later dub Dolby A. It was particularly well received in the rock-and-roll world, where multiple-track recordings were becoming increasingly popular. (In the early '70s the Grateful Dead visited Dolby's London office and paid for one of the devices with a suitcase full of cash.) Dolby's fortunes really took off in 1972, when Henry Koss, who founded the speaker manufacturer Koss, asked Mr. Dolby to develop a consumer version of Dolby A that would reduce the hiss in cassette-tape playback.
Since the '70s more than 600 million consumer units have been sold with this decoding scheme, dubbed Dolby B. But though Mr. Dolby is proud of that technology, he credits its success to the innovative licensing plan he devised. (Dolby still makes all its professional equipment itself.) There are several elements to this plan. First, Dolby Labs does not charge the consumer: the company does not earn a penny in royalties from the sale of cassette tapes recorded with Dolby technology. Nor does it charge licensees exorbitant rates. But most important, it charges every supplier the same rate, which has also become the standard agreement for the consumer-electronics manufacturers that developed alternatives to Dolby B. Dolby Labs took care to be very open with its licensees, including working with them to make sure they did not repeat common design mistakes. Mr. Dolby intended to make Dolby technology ubiquitous as a sound standard, and his effort was a resounding success.
With the revenues from Dolby B, Mr. Dolby was able to work on applying his technology to movies, which at the time had the audio frequency range of a telephone conversation. Theater owners initially resisted investing in the expensive Dolby sound equipment, but by the mid-'80s, after movies like Star Wars and Apocalypse Now had been recorded with the company's technology, Dolby became the most recognized name in cinema sound. In 1997 roughly 60 percent of Dolby's sales derived from professional film industry equipment.
SOUNDING THE COMPETITION
Still, in recent years, Dolby Labs has had to stay on guard. In 1992 a small company called Digital Theater Systems (DTS) "scared the hell out of Dolby," in the words of Bill Mead, a onetime Dolby veteran now with Sony's cinema products division. In partnership with Steven Spielberg, who owns 26 percent of the company, DTS offered a system that was cheaper than Dolby's; moreover, Mr. Spielberg recently required that every theater showing Jurassic Park use DTS sound equipment. (DTS could not be reached for comment.) Dolby fell behind DTS as the leading supplier of theater sound systems. At about the same time, Sony introduced its own digital theater sound system, called Sony Dynamic Digital Sound (SDDS).
Although initially stunned, Dolby rose to the challenge. After developing a five-channel digital sound system, the company began investing more money into marketing than it had in the past. Last May the Society of Motion Picture & Television Engineers reported that Dolby had finally pulled ahead of DTS in total worldwide digital screens using its technology. DTS is still No. 1 in the United States, but in the past year Dolby has been closing the gap in the U.S. market. (SDDS is a distant third.)
IS THE AUDIENCE LISTENING?
Dolby's recent announcement of its partnership with Lucasfilm THX, a service business whose main goal is to maintain high sound quality in movie theaters, shows how important marketing has become for the company. As part of the partnership, Dolby will offer six audio channels, giving movies richer, more realistic sound effects at a minimal upgrade cost to theater owners.
THX's catchy trailers (which use computer-generated imagery engineered by Lucas Digital's Industrial Light & Magic division) have led moviegoers to believe that THX is responsible for cinema sound recording as well as playback. But Dolby executives maintain that THX is far less crucial to high-quality theater sound than Dolby is. (In an interview before the partnership announcement, Mr. Dolby sniped that THX "takes credit for everything.") Dolby Labs evidently hopes its partnership with THX -- and the release of its own snappy trailer -- will once again establish Dolby as the preëminent brand name in theater sound.
Will Dolby's initiatives work? Maybe. But there's one difficulty: thanks in large part to Mr. Dolby's pioneering work, sound recording and playback technology has become so sophisticated that a casual listener cannot detect the difference between competing formats. Likewise, noise reduction is now so refined that even Mr. Dolby agrees that most people will not be able to appreciate any further technical improvements.
Fortunately, Dolby has a few aces up its sleeve. Unlike DTS and Sony, it has developed both professional and consumer applications for its digital noise-reduction format, called AC3, which is the audio standard for all DVD players as well as HDTV broadcasts in the United States, Taiwan, Australia, Canada, and South Korea. Although Dolby does not expect significant revenues from HDTV licenses for the next five years, it has already licensed the technology for 3.3 million DVD playback units and DVD-ROM drives for PCs.
The DVD market still represents less than 3 percent of Dolby Labs' revenues; but DVD units are selling even faster than CD players and VCRs did when they were introduced -- a good sign for Dolby's future. Moreover, Dolby is confident that HDTV has good growth potential: the company has already developed equipment that will let the thousands of broadcasters and production facilities with two-channel sound systems upgrade to the five channels necessary for HDTV without having to discard their existing equipment.
AUDIO PILOT
The only area in which Dolby Labs is not bullish is the Internet. Although the company's MP3 compression technology, which enables consumers to download and distribute music files over the Internet, has been licensed by Liquid Audio and RealNetworks, Dolby president Bill Jasper says he doesn't see how the company will make money on the Web. But Dolby does have its Internet enthusiasts -- Mr. Dolby says that every time they meet at the watercooler, the head of his Internet division hollers at him to be more aggressive about the Web.
Clearly Mr. Dolby is not a technology faddist. The charming sexagenarian almost made this reporter fall out of his chair by asserting that the problem with the music industry is that all of the best music has already been written. (He holds similar views on movies and sound technology.) But Dolby's status as a private company means that Mr. Dolby can say and do what he wants. Although he admits that it is sometimes hard to recruit top talent without offering stock options, he calls Silicon Valley a "madhouse" and adds that many of his employees have been through the startup mill and prefer Dolby Labs' stability. Dolby could undoubtedly reap rich rewards if it went public, but Mr. Dolby and Mr. Jasper say they don't need the aggravation of running a company that is driven by quarterly results.
Dolby Labs is obviously doing something right. The company's staying power is unusual in the frenetic world of high technology. As competition in the digital-film business increases and the company waits for revenues from its DVD and HDTV products to kick in, analysts predict a period of flat growth. Nevertheless, Mr. Dolby has a lot of experience with "experts" telling him that his market is saturated. "There are a lot of naysayers in the world," he says. He'll let his technology do the talking.
Dolby Laboratories at a glance
CEO Ray Dolby
LOCATION San Francisco, California
PHONE 415/558-0200
URL www.dolby.com
OWNERSHIP Private
FOUNDED 1965
EMPLOYEES 500
PRODUCT Noise-reduction and other audio technology for consumer and professional entertainment equipment
PARTNER Lucasfilm THX
COMPETITORS Digital Theater Systems, Sony
REVENUES FY97 $100 million
INVESTOR Ray Dolby
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