Dolby's ZTE Deal Is Bigger Than You Think

Earlier this week, Dolby Laboratoriesannounced its Dolby Digital Plus audio standard will be incorporated in a wide array of smartphones and tablets from Chinese mobile specialist ZTE.

Of course, I wouldn't blame you for wondering why this matters. After all, when all was said and done in 2012, ZTE didn't even make research firm IDC's list of the year's top five smartphone vendors. Instead, the company got buried firmly in the "Others" category:

Vendor2012 Unit Shipments2012 Market Share2011 Market Share2011 Unit ShipmentsChange (YOY)
1. Samsung


30.3% 94.2 19% 129.1% 
2. Apple135.9 19.1% 93.1 18.8% 46.9% 
3. Nokia35.1 4.9% 77.3 15.6% (54.6%) 
4. HTC 32.6 4.6% 43.6 8.8% (25.2%) 
5. BlackBerry  32.5 4.6% 51.1 10.3% (36.4%) 
Others 260.7 36.5% 135.3 27.5% 92.7% 
Total712.6 100% 494.6 100% 44.1% 

Source: IDC. Numbers in millions.

In looking at the list, it's no surprise Samsung, Apple, Nokia, HTC, and BlackBerry stood atop the rest.

But take a look at what happens when we instead zoom in a bit to focus on IDC's smartphone figures for just the fourth quarter of 2012:

Vendor4Q 2012 Unit Shipments4Q 2012 Market Share4Q 2011 Unit Shipments4Q 2011 Market Share Change (YOY)
1. Samsung63.729%36.222.5%76%
2. Apple47.821.8%37.023%29.2%
3. Huawei10.84.9%5.73.5%89.5%
4. Sony9.84.5%6.33.9%55.6%
5. ZTE9.54.3%6.44%48.4%



Source: IDC. Units in millions. 

Curiously enough, when we consider just the fourth-quarter figures, we see that ZTE, Sony, and Chinese competitor Huawei all managed to muscle their way past the struggling likes of Nokia, HTC, and BlackBerry, effectively skyrocketing out of the "Others" zone and into the top five.

So what happened to change the tide? While ZTE initially rose to prominence as a "low-end mobile phone vendor" selling  primarily to emerging markets like China and India, the company has been working diligently to change its image to reflect its high-end device aspirations. Sure enough, the efforts seem to be paying off, as ZTE managed to double the number of smartphones it shipped in 2012, with smartphones now accounting for 70% of its total sales.

Even so, according to ZTE management, "mobile phones with a price above 1,000 yuan ($160) contributed only 10% ZTE's handset revenues globally," and the company hopes to increase revenue from these higher-end devices to represent a full 25% of its total sales by the end of 2013.

All roads lead here
That, my friends, is where Dolby's technology comes into play. Much in the same way that is using Dolby to differentiate its Kindle Fire HD devices, ZTE's move to embrace better sound in its smartphones and tablets will help dispel any preconceived notions of its "low-end" roots.

Perhaps most important for Dolby, however, is that this deal goes a long way toward addressing investors' concerns over whether the 48-year-old company can successfully transition away from its historical reliance on the sluggish PC and DVD player markets. In addition, if ZTE continues its meteoric rise, the advantages of adopting Dolby's technology will become even more pronounced to other vendors hoping to stay ahead of the curve.

In the end, I'm betting this is just one of many signs that Dolby's best days are yet to come.

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Fool contributor Steve Symington has no position in any stocks mentioned. The Motley Fool recommends, Apple, and Dolby Laboratories. The Motley Fool owns shares of and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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