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Dolby Drama Drives DVD Dirge

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Is this finally the end of the DVD? Ever since streaming became the preferred means of accessing video (well, it will be, once it reaches critical mass), people have been predicting the end of DVD sales and with it the decline of Netflix (Nasdaq: NFLX  ) , Redbox, and Blockbuster. Oh, wait, Blockbuster's already just about gone.

Cry me a stream
Yet the fears never materialized. Even as Netflix added streaming video to its repertoire (heresy!), DVD rentals still rose. Coinstar (Nasdaq: CSTR  ) reported last quarter that its kiosk rentals have never been better. And though YouTube, Hulu, and the various cable services report increasing growth of streaming video, the DVD has continued to look healthy enough to survive for a few more years.

But Netflix is planning for the next stage by bifurcating its revenue streams, with separate plans for DVDs and streaming. Once the DVD is gone, viewers won't complain about paying for streaming -- though the kvetching is fairly loud now.

Now we're seeing the end game, though. I'm referring, of course, to the bombshell that Dolby Labs (NYSE: DLB  ) dropped in its earnings report the other day, saying that at the moment Microsoft (Nasdaq: MSFT  ) has declined to include its sound technology in the latest iteration of its operating system it's building. So important has Windows been to Dolby's own success that the markets sold off Dolby's shares almost 20% before the bloodletting ceased.

For all the complaints tossed Microsoft's way over the bloat in its OS, carving out the bit that improves the audio experience for users hardly seems smart.

Crazy like a fox?
Or maybe it is. The DVD player on PCs is no longer a heavily used component. Even mundane system updates are achieved through downloads rather than by sliding a disc into the tray. Moreover, media itself is being encoded with Dolby's technology at the front end. Microsoft may look at the iPad's absence of a DVD player -- and the huge success (and profits) Apple has (Nasdaq: AAPL  ) realized regardless -- and came to the realization it can cut the cord and not include a DVD-player codec either.

Of course, maybe it's just a negotiating tactic, too. As the largest buyer of Dolby licenses, it's no small chunk of change it pays for the privilege for having Dolby codecs embedded in the OS. Putting those playback codecs elsewhere, such as in the computers themselves, can save itself some money -- unless it can negotiate lower licensing fees.

I'm pretty sure Dolby can survive this brave new world. But there's no guarantee that Dell (Nasdaq: DELL  ) or Hewlett-Packard (NYSE: HPQ  ) will be willing to pony up, either, or that the independent sales vendors Dolby currently sells to will want to pay more. I believe, though, that although they may initially balk at paying for what was once a given, ensuring that the end user receives the best possible sound experience will force their hand. Maybe Microsoft, too, since the Windows experience is almost routinely critiqued as suboptimal.

Can you hear me now?
An investment in Dolby at the moment might be a dicey proposition because of the many unknowns at play, but regardless of how the Windows 8 drama actually plays out, it looks like we've seen the first real sign that the DVD is on its last legs. That sound you hear is a dirge playing its demise.

The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft, Apple, Netflix, and Dolby Laboratories, creating bull call spread positions in Apple and Microsoft, and buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Rich Duprey owns shares of Dolby but has no financial position in any of the other stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 13, 2011, at 5:43 PM, SwiperFox wrote:

    The Dolby experience hasn't been optimal for years. At this point they're just living on their reputation. Too bad MPEG-LA isn't a publicly traded company.

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