No news was more illuminating this month than Dolby and Doremi’s announcement on February 24 of an agreement for Dolby to acquire Doremi. Doremi, the little upstart that would never be without Dolby’s failures in digital cinema, was valued at US$112.5M, of which $92.5M will be paid upfront, and $20M payable on a contingent basis over a four-year period. Years of poor strategy and indecisiveness have prevented Dolby from making its own way to the top. But with $1B in the bank, Dolby is now determined to buy its way there. Thus, the humorous rebranding suggestion, shown above, sent to this journal.
Doremi’s success can be attributed to its willingness to meet evolving studio requirements in the early days of digital cinema through its agile software model. Doremi was first embrace license-free JPEG2000 compression, while Dolby was touting the virtues of licensed MPEG. Doremi’s agile software model allowed it reduce testing requirements, and thus time to market, while developing close relationships with exhibitors to address bugs. Dolby’s more traditional product development model requires up to two years of development and design reviews before a product can enter the market. By that time, more issues emerge that the competition has addressed, but in which Dolby is hopelessly behind. The clash of strategies, and the company cultures that drive them, couldn’t be stronger.
In terms of worldwide market share, it is estimated that Doremi has 45%, GDC 30%, with the remainder divided between Dolby, Sony, and Qube. With this acquisition, Dolby will now have around 60% worldwide market share. In terms of markets, Dolby and Doremi interleave nicely. Doremi’s sales have been strongest in the US and Europe, while Dolby has a strong presence in the BRIC countries, where brand history combined with a lack of exhibitor experience in digital cinema technology has worked to Dolby’s advantage.
Doremi will give Dolby a strong platform from which to encourage Atmos installations. Cinemark, with 5500 screens in the US, made a strategic decision to install Auro 3D, rather than Atmos. No doubt there will be some arm twisting with Cinemark once the acquisition is closed. Having a strong cinema base also won’t hurt Dolby’s ability to bring Dolby Vision, introduced at CES last month, into the cinema.
However, the pros of this deal are unlikely to topple the cons. At best, business journals give acquisitions a failure rate of 70% – 90%, indicating the challenge ahead. Insiders say Dolby intends to operate Doremi as a stand-alone entity, so as not to burden Doremi with its extraordinary overhead and thick layers of management. But the sales boom is over, and with lackluster sales ahead, combined with Dolby’s divisive internal politics, Doremi will be less likely to maintain autonomous status, and more likely to be absorbed. Leading to another branding suggestion:
Another point often made by business journals is that acquisitions are usually over priced. In Doremi’s case, many in the industry would have estimated its value at about 1/3 of that which Dolby will pay. This is good news for Doremi’s owners. But overall, it’s not clear that this deal is good for the industry. Unless Dolby pulls a miracle and preserves the agile culture and operations behind Doremi’s success, the industry may have lost its most innovative player.