Dolby Eyeing 3D Market

Dolby Laboratories Inc (NYSE: DLB) has been taking a keen interest in the 3D market. And thanks to it, we now have a new generation of 3D films. 2009 ended with “Avatar,” and “Alice in Wonderland” was recently released. The 3D market is dominated by RealD, but with Dolby’s 3D technology, even regular theaters can screen 3D movies. Let’s take a closer look.

Dolby’s association with 3D began with 2005’s “Chicken Little” when the company helped outfit theaters for 3D. Then in 2007, its 3D technology debuted on 75 screens in 12 countries for the release of “Beowulf.” The number of screens with Dolby 3D has grown three times from 128 in 2008 to 388 today. According to BusinessWeek, Dolby 3D accounted for about 12% of the 3D theater market in the United States last year versus RealD’s 83% or 2,700 screens in the United States and 4,800 screens worldwide. Technically, both RealD and Dolby 3D are comparable, but reviewers at Cnet and 3D Vision Blog have found Dolby 3D to have better color and clarity.

Regular theaters with a digital cinema system can now easily screen 3D films by installing the Dolby 3-D equipment for about $26,000, compared to about $20,ooo per year for RealD. However, they also need to buy Dolby’s reusable glasses, which are much costlier than the glasses used for RealD’s 3D screens. This week, Dolby slashed the price of the glasses from $27.50 to $17. RealD’s glasses cost less than a dollar, but Dolby claims its glasses are more durable and can be reused hundreds of times.

With the glasses cost drawback somewhat taken care of, will Dolby 3D be able to overtake RealD? In its recent first quarter results, Dolby with annual revenue of $719.5 million in fiscal 2009 reported strong demand for its 3D cinema systems with sales of more than 800 units, bringing the total to 2,800. Total first quarter revenue was 221.2 million, up 23%. Net income was $69.1 million, or $0.59 per share, compared to $78.1 million, or $0.68 per share last year. Q4 coverage is available here.

For 2010, Dolby raised its guidance. It now expects revenue to be $780 million to $810 million compared to the previous forecast of $720 million to $750 million. It expects EPS of $1.96 to $2.08 compared to its previous forecast of $1.85 to $1.96. The stock is currently trading around $57 with market cap of about $6.5 billion. It hit a 52-week high of $58.14 on March 12.

The success of “Avatar” has brought 3D to mainstream cinema, and over the next three years more than 40 films are expected to be released in 3D. It is no surprise then that 3D has become a key part of Dolby’s strategy. Last week, the company announced plans to bring its Axon 3D voice chat technology from the PC over to the Xbox 360, PlayStation 3, and the Mac. It is bringing 3D to all aspects of entertainment, just as it galvanized audio technology.

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