The sound of Hollywood
Strictly speaking, the theater didn't have a name before the Dolby agreement. For years, its moniker was that of another company closely identified with movie tech: Kodak. But after that entity's parent company, Eastman Kodak (OTC: EKDKQ.PK), filed for Chapter 11 bankruptcy protection, it was allowed to exit from that naming-rights deal earlier this year.
Eastman Kodak has fallen, and it'll probably never get up. Its shedding of assets hasn't yet lifted it out of the red, if it ever does at all. At the very least, the company won't be slapping its name on any theaters soon.
In contrast to that failing enterprise, Dolby's business is solid and robust. It's essentially the standard for movie-theater sound, and it has a powerful grip on the home-entertainment market as well. In fact, it was once the monopoly standard for the DVD format. Although DVD is fading, Dolby still provides the audio for many Blu-ray releases.
And it makes a tidy bundle doing so. All told, the company netted more than $300 million on revenue of $956 million in its last fiscal year, for an excellent margin of 32.4%. The latter figure was even higher in its most recent quarter, at nearly 34%.
Dolby's lead in theatrical exhibition is unassailable (one big reason for those fat margins), though that's not the case with the take-home variety. The company has to battle with DTS
From the cinema to the PC
The battle will get tougher for Dolby. DTS just announced an agreement to buy niche audio specialist SRS
But even though this move will make DTS a better-armed competitor, for the long term, Dolby's margins look safe. In the movie world, Dolby is the longtime industry standard that'll continue to underlie much of Hollywood's hardware -- in this case, the physical medium of film.
Besides, the company isn't wholly reliant on this high-profile but limited market. It just signed an agreement with Microsoft
Meanwhile, thanks to the marquee on that famous Los Angeles theater, it'll be even more strongly identified with the world of movies. And the sacrifice is fairly minimal; the naming rights cost "substantially above" the nearly $4 million per year Kodak had paid. Even assuming an exact figure of $4 million, the cost is less than 0.5% of the company's annual revenues and barely 1.3% of net. Dolby currently has around $654 million in cash and is completely debt-free, so why not spend a little cash for a lot of PR?
Times are good for Dolby, and they'll probably continue to be. The company's nearly synonymous with Hollywood, and now it'll be associated with its prized little statues. Start unfurling the red carpet -- ladies and gentlemen, the sound guys are entering the theater.
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Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft and Dolby Labs and creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.