Dolby Laboratories produces technology for producing and playing audio for films and television shows. Its AC-3 is the exclusive audio format for the DVD, meaning all DVDs and DVD-compatible audio-video equipment must license AC-3 technology from Dolby. Since 2000, the company has surfed the DVD tidal wave, with its revenue growing by around 150%.^[1] The advent of high-definition home entertainment, however, means that there is a new standard video format - Blu-Ray - which requires new audio standards. Fortunately for Dolby, its HD audio format is still used on Blu-Ray media; unfortunately for Dolby, so is the HD audio format of its main competitor, DTS, and both will be found on every Blu-Ray disc. This means that the company will no longer enjoy monopoly pricing on licensing to its most profitable customer (the home entertainment industry). To make matters worse, the overall DVD industry is in decline, with consumer spending falling thanks to digital piracy, video on demand, a slowing economy, and, of course, the introduction of high definition media.^[2]

One trend that works to Dolby's benefit is the emergence of the digital cinema market, as the company offers products and services for producing and playing digital films. Just 5.5% of the world's movie theater screens have been converted to digital thus far,^[3], and although declining movie attendance may slow the conversion to digital in the short term, Dolby is poised to benefit in the long term as its main competitor DTS divested its digital cinema segment.

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