Dolby Rolls Out the Red Carpet for Oscar

Dolby Laboratories (NYS: DLB) will now be identified with the movie industry's highest-profile happening of the year: the Academy Awards. The company, one of the technical mainstays of Hollywood, has bought the naming rights to the theater hosting the Oscars, and those rights will last for 20 years. Not coincidentally, the theater's operator agreed to a new deal with the Academy for the event to be held there for -- you guessed it -- the next 20 years. That's quite a powerful one-two punch for Dolby.

The sound of Hollywood
Strictly speaking, the theater didn't have a name before the Dolby agreement. For years, its moniker was that of another company closely identified with movie tech: Kodak. But after that entity's parent company, Eastman Kodak (OTC: EKDKQ.PK), filed for Chapter 11 bankruptcy protection, it was allowed to exit from that naming-rights deal earlier this year.

Eastman Kodak has fallen, and it'll probably never get up. Its shedding of assets hasn't yet lifted it out of the red, if it ever does at all. At the very least, the company won't be slapping its name on any theaters soon.

In contrast to that failing enterprise, Dolby's business is solid and robust. It's essentially the standard for movie-theater sound, and it has a powerful grip on the home-entertainment market as well. In fact, it was once the monopoly standard for the DVD format. Although DVD is fading, Dolby still provides the audio for many Blu-ray releases.

And it makes a tidy bundle doing so. All told, the company netted more than $300 million on revenue of $956 million in its last fiscal year, for an excellent margin of 32.4%. The latter figure was even higher in its most recent quarter, at nearly 34%.

Dolby's lead in theatrical exhibition is unassailable (one big reason for those fat margins), though that's not the case with the take-home variety. The company has to battle with DTS (NAS: DTSI) , the Pepsi to its Coke. It's an endless and probably unresolvable debate which format is the better one at producing the truest sound -- and so it's tough for either one to dominate the segment.

From the cinema to the PC
The battle will get tougher for Dolby. DTS just announced an agreement to buy niche audio specialist SRS (NAS: SRSL) for nearly $150 million in cash and stock. SRS concentrates on enhancement technologies for sound, which should help DTS boost the quality of its noise. The former company has a big patent and trademark portfolio, which in this Age of Patent Litigation might prove to be an extremely valuable set of assets indeed.

But even though this move will make DTS a better-armed competitor, for the long term, Dolby's margins look safe. In the movie world, Dolby is the longtime industry standard that'll continue to underlie much of Hollywood's hardware -- in this case, the physical medium of film.

Besides, the company isn't wholly reliant on this high-profile but limited market. It just signed an agreement with Microsoft (NAS: MSFT) to include its Digital Plus technology in the software giant's upcoming Windows 8 PC and tablet operating system. Microsoft will pay Dolby on a royalty basis for its technology, and the sound company will begin taking in that money in mid-2013.

Meanwhile, thanks to the marquee on that famous Los Angeles theater, it'll be even more strongly identified with the world of movies. And the sacrifice is fairly minimal; the naming rights cost "substantially above" the nearly $4 million per year Kodak had paid. Even assuming an exact figure of $4 million, the cost is less than 0.5% of the company's annual revenues and barely 1.3% of net. Dolby currently has around $654 million in cash and is completely debt-free, so why not spend a little cash for a lot of PR?

Times are good for Dolby, and they'll probably continue to be. The company's nearly synonymous with Hollywood, and now it'll be associated with its prized little statues. Start unfurling the red carpet -- ladies and gentlemen, the sound guys are entering the theater.

Dolby has always made its money by providing some of the best technology in its field, which also goes for three companies that operate on the cutting edge and are poised to profit handsomely doing so. Find out which companies they are by downloading our free report, "3 Stocks to Own for the New Industrial Revolution."

At the time thisarticle was published Fool contributorEric Volkmanowns no stocks mentioned in the story above. The Motley Fool owns shares of Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Microsoft and Dolby Labs and creating a bull call spread position in Microsoft. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.