As if the recent quarterly earnings reports from Warner Bros, Walt Disney and News Corp were not proof enough that the entertainment industry is far from recession proof, news is out that Dolby Laboratories will be closing down its UK manufacturing operation. Some 60 people will lose their jobs from the shuttering of their UK manufacturing base. From BBC news website:
The company, which provides products for the cinema industry, is closing the manufacturing arm of its UK operation in Wootton Bassett in April.
It blamed “changing market conditions” for its decision to close the site which employs 170 people.
Dolby says other business activities at the site will be not be affected.
This is a bitter blow for a company that started in the UK and whose British operation still sees itself as the carrier of founder Ray Dolby’s torch, even when the man himself moved back to the UK and most of the company’s activities is out of San Francisco these days. But it would not be true Brit grit if they did not put a brave face on the decision and declared in their recent earning’s statement: “Having concluded a comprehensive consultation process with our UK employees, the proposal to close our UK manufacturing operation at Wootton Bassett and consolidate manufacturing operations at a single facility has been accepted.”
One could blame digital cinema, where Dolby is actually doing very well thank you, for taking away the market for some of Dolby’s more traditional products. It recently announced new 3D installations and unlike the studios above, the company had good news at the recent quarterly results that resulted in the shares shooting up by a fifth. From Forbes:
Shares of Dolby Laboratories shot up nearly 20.0% Thursday as the entertainment products company got a boost in the wake of strong first-quarter earnings. Dolby (nyse: DLB – news – people ) was upgraded from “sector perform” to “outperform” by Pacific Crest Securities, which believes that the company will benefit from changes in Microsoft Windows 7. Analyst Andy Hargreaves thinks Dolby’s licensing growth will add 30 cents a share to its 2010 earnings per share, thanks to wider use of Windows Media Center.
But that is of little comfort to those joining the ranks of the unemployed in Wiltshire. And it is clear that investor excitement is about licensing rather than cinema equipment, which is showing a clear pattern of decline if you look at the past few years. From the company’s quarterly earnings report:
Product sales consists of revenue from sales of equipment to cinema operators and broadcasters representing 14%, 11% and 10% of total revenue in fiscal 2007, 2008 and the first quarter of fiscal 2009, respectively.
Our cinema products represented approximately 75% of product sales in fiscal 2006, 71% of product sales in fiscal 2007 and 55% of product sales in fiscal 2008.
These figures are obviously trending in the wrong direction. Dolby hopes to offset this with the rise of digital cinema (which, the company dryly notes “unlike traditional cinema, does not include our proprietary audio formats. “) In fact, product sales are the only area where Dolby is losing ground year-on-year. Below is another interesting passage from the earnings statement that discusses how gross margin is going to be adversely affected because of cinema products and leads to the consolidation of manufacturing:
Product Sales – The 10% decrease in product sales from the first quarter of fiscal 2008 to the first quarter of fiscal 2009 was primarily due to a decrease in sales of our traditional cinema products and, to a lesser degree, our broadcast products. These decreases were partially offset by increased sales of our 3D products and digital cinema accessories. We have not recognized most of the revenue related to sales of our digital cinema servers due to certain obligations, which we have yet to satisfy. We currently have approximately $31.2 million of deferred revenue related to digital cinema server and certain 3D product sales. [emphasis added]
What this means is that the company is not counting those digital cinema servers deployed to Kinepolis and elsewhere. Coming back to the UK:
During the second quarter of fiscal 2009, management committed to a plan to consolidate all manufacturing operations into our Brisbane facility and as a result we will have limited internal manufacturing capacity for low volume products and prototypes and will work with contract manufacturers for higher volume products as necessary. This hybrid model will enable us to lower manufacturing cost and increase our average utilization rates while also giving us the capacity to scale production when needed. We believe this hybrid model may favorably impact our product sales gross margins in future periods. However, actual results may differ from our expectations.
What we are effectively seeing (and credit to my colleague JSR for highlighting this in a wider context) is that digital cinema levels the playing field between technology vendors (by removing proprietary technology). Dolby is now experiencing the same thing that almost every equipment manufacturer is experiencing: shrinking margins, increased competition, decreased sales and a need to reexamine how they do business. Don’t be surprised if other cinema equipment manufacturers announce similar types of cost cutting moves in the near future.