Dolby Sounds Good in 2012

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The big story for Dolby Labs (NYS: DLB) in 2011 was its contracting a case of tinnitus from Microsoft's (NAS: MSFT) decision to eliminate the sound specialist's codecs from the new build of its Windows operating system. With the big hole that's likely to leave in 2013's financial statements, lend me your ear and I'll show you how it overcomes that and more starting on Jan. 1, 2012.

Knowing what to look for as possible catalysts enables you to better determine whether a company is running on all cylinders and operating according to plan.

Play it again, Sam
Although the PC market has been key to Dolby's success over the years because of its inclusion of DVD players as the primary playback mechanism, the changing face of the entertainment market means that's no longer the case. This year marked the first time revenue from TVs, set-top boxes, and mobile devices exceeded that received from the Windows OS, PC-based software players, and DVD and Blu-ray discs. Non-optical-disc based revenue comprised an estimated 52% of its licensing business, compared with 45% in 2010 and 44% in 2009.

This delineates the three-pronged approach from where Dolby sees its future growth:

  • Content creation.
  • Distribution.
  • Playback.

Three-headed hydra
Many movie, TV, music, and video game studios produce content encoded with Dolby technologies. Broadcasters use the technology to encode high-quality surround-sound content for cable, terrestrial, and satellite transmissions. End users are then able to consume the content in a number of ways, including TVs, mobile devices, and, yes, DVD and Blu-ray players. Dolby will use its technological lead to ensure a high-quality audio experience from any device.

While the TV market in the U.S. has already been conquered, that's not the case elsewhere in the world, where, in emerging markets like China, India, and Russia, there are still huge runways in front of Dolby, though much of the growth will actually come beyond 2012.

Then there is the burgeoning proliferation of mobile devices and smartphones. Currently, smartphone shipments represent about 4% of royalties Dolby recognizes for its multichannel technologies, which it expects to hit the low to mid-teens next year. Dolby Digital Plus is already on more than 30 handset models from LG, Nokia (NYS: NOK) , and Pantec.

Movies represent still a third arena for Dolby to put its name up in lights. Most people connect Dolby with the sound quality they hear at the theater, and it's a dominant player in the digital equipment theaters use, with a 30% market share outside North America for 3-D cinema products, though that share is declining as more competitors move into the space.

And yes, PCs, too!
Despite Microsoft's untethering from Dolby, the PC market remains a key component of the sound specialist's future success. But rather than having just one channel to apply its codecs -- and from what Dolby suggests was a somewhat limiting one at that -- it will be able to provide PC makers Dell (NAS: DELL) , Hewlett-Packard (NYS: HPQ) , and Acer with a more substantial sound experience for end users than they were able to achieve beforehand.

The PC isn't so much dying as evolving and may be a hub through which users consume entertainment from a variety of sources. Streaming is key to how video will be enjoyed, and Dolby has its imprint on some of the biggest, most influential players there: Amazon.com (NAS: AMZN) and Netflix (NAS: NFLX) . PCs will remain a relevant revenue stream for Dolby in 2012 and for some time after.

Sound good?
No doubt Dolby needs some time to adjust to the new realities of the entertainment industry's landscape, but it will be one that is better able to capitalize on the opportunities coming. The mobile revolution will probably define how we consume content, and you can find the one stock The Motley Fool believes is in the enviable position of powering a mobile Trillion-Dollar Revolution from the inside. The report is free, but it's around for only a limited time, so check it out today.

AddDolby Labsto the Fool's free portfolio tracker, which can find all of our Foolish analysis on it and all your other stocks.

At the time this article was published Fool contributorRich Dupreyowns shares of Dolby Laboratories, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Amazon.com and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Dell, Dolby Laboratories, Microsoft, Netflix, and Amazon.com and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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