How Dolby Became the Standard in Sound Technology

Inventor Ray Dolby’s name has become synonymous with superior sound in homes, movie theaters, and recording studios. The technology produced by his company, Dolby Laboratories, is part of nearly every music cassette and cassette recorder; prerecorded videotape; and, most recently, DVD movie disk and player. Since 1976, close to 1.5 billion audio products that use Dolby’s technology have been sold worldwide. More than 44,000 movie theaters now show films in Dolby Digital Surround Sound, and some 50 million Dolby Digital home theater receivers have been sold since 1999. Dolby technology has become the de facto industry standard for high-quality sound in the music and film industry. How did Dolby build this technology franchise? The story goes back to 1965, when Dolby Laboratories was founded in London by Ray Dolby (the company’s headquarters moved to San Francisco in 1976). Dolby, who had a Ph.D. in physics from Cambridge University in England, had invented a technology for reducing the background hiss in professional tape recording without compromising the quality of the material being recorded. In 1968, Dolby reached an agreement to license his noise reduction technology to KLH, a highly regarded American producer of audio equipment (record players and tape decks) for the consumer market. Soon other manufacturers of consumer equipment started to approach Dolby to license the technology. Dolby briefly considered manufacturing record players and tape decks for the consumer market, but as he later commented, “I knew that if we entered that market and tried to make something like a cassette deck, we would be in competition with any licensee that we took on. . . . So we had to stay out of manufacturing in that area in order to license in that area.” Dolby adopted a licensing business model and then had to determine what licensing fee to charge. He decided to charge a modest fee to reduce the incentive that manufacturers would have to develop their own technology. Then there was the question of which companies to license to. Dolby wanted the Dolby name associated with superior sound, so he needed to make sure that licensees adhered to quality standards. Therefore, the company set up a formal quality control program for its licensees’ products. Licensees have to agree to have their products tested by Dolby, and the licensing agreement states that they cannot sell products that do not pass Dolby’s quality tests. By preventing products with substandard performance from reaching the market, Dolby has maintained the quality image of products featuring Dolby technology and trademarks. Today, Dolby Laboratories tests samples of hundreds of licensed products every year under this program. By making sure that the Dolby name is associated with superior sound quality, Dolby’s quality assurance strategy has increased the power of the Dolby brand, making it very valuable to license. Another key aspect of Dolby’s strategy was born in 1970 when Dolby began to promote the idea of releasing prerecorded cassettes encoded with Dolby noise-reduction technology so that they would have low noise when played on players equipped with Dolby noise-reduction technology. Dolby decided to license the technology on prerecorded tapes for free, instead collecting licensing fees just from the sales of tape players that used Dolby technology. This strategy was hugely successful and set up a positive feedback loop that helped to make Dolby technology ubiquitous. Growing sales of prerecorded tapes encoded with Dolby technology created a demand for players that contained Dolby technology, and as the installed base of players with Dolby technology grew, the proportion of prerecorded tapes that were encoded with Dolby technology surged, further boosting demand for players incorporating Dolby technology. By the mid-1970s, almost all prerecorded tapes were encoded with Dolby noise-reduction technology. This strategy remains in effect today for all media recorded with Dolby technology and encompasses not only videocassettes but also videogames and DVD releases encoded with Dolby Surround or Dolby Digital. As a result of its licensing and quality assurance strategies, Dolby has become the standard for high-quality sound in the music and film industries. Although the company is small—its revenues were $327 million in 2005—its influence is large. It continues to push the boundaries of sound-reduction technology (it has been a leader in digital sound since the mid-1980s) and has successfully extended its noise-reduction franchise, first into films, then into DVD and videogame technology, and finally onto the Web, where it has licensed its digital technology to a wide range of media companies for digital music delivery and digital audio players, such as those built into personal computers and hand-held music players. Dolby has also licensed its technology for use in next generation DVD players—high-definition DVDs.