Dolby Labs hit by Windows 8 decision

Back in January, Dolby Labs, a vital IP and audio CODEC supplier to the broadcasting and cinema industry, was trading at almost $70 a share. This week they hit an all-time low of just $27.

The past few months have seen good news, and bad, for San Francisco-based Dolby. The good came in the shape of a legal dispute against Research in Motion which ended two weeks ago with RIM agreeing to license Dolby’s IP in its BlackBerry phones. The deal is worth about $15 million in ‘back royalties’ to Dolby.

But the bad is very bad, and is a very heavy axe hanging over Dolby’s technology in the shape of Microsoft’s Windows 8 operating system. Windows 8 doesn’t contain Dolby’s CODECs, and when this news broke in August it caused an 18 per cent one-day drop in Dolby’s share price, and the slide has continued. Dolby, in its 2010 financials, revealed that the Windows licensing deal represented about 12 per cent of the company’s revenues.

Microsoft hasn’t commented, but it would seem has decided that people are no longer using the PC as a home entertainment device. This decision doesn’t mean that new PCs will not have Dolby software built in, it just means that Dolby itself must now negotiate licences with PC manufacturers. Dolby is present on Microsoft’s Xbox 360.

All of which doesn’t mean that Dolby is worthless. Far from it. It has gross trading margins of some 97 per cent which is spectacular by any measure, and retains its strong position in the film and broadcasting industries where its multi-channel Dolby Digital and Surround Sound options are present just about everywhere. It also has cash reserves worth about $10 a share, and has zero debt.

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