Interview: Spreading Sound Around Jon Kirchner is moving DTS beyond movie theater sound systems into a number of new businesses. By CARLOS MARTINEZ Staff Reporter At one time, nobody at Digital Theater Systems Inc. knew anything about DVDs or car stereos; now it’s a major part of the Calabasas-based company’s business. The privately held company, known for its high-end digital audio systems for movie theaters, CDs and video games, had its biggest year ever in 2001. Revenues went from $24 million in 2000 to about $30 million last year, and DTS CEO Jon Kirchner says it is on track to eclipse those numbers in 2002. Kirchner credits the company’s relative health to the consumer’s desire for the latest and best in sound equipment. It’s a niche market that thrives even as the company continues to market its so-called “digital surround sound,” Kirchner said. Sales of home theaters video and audio combos meant to mimic the movie theater experience have fed the company’s bottom line for the past three years, Kirchner said. The company, which began as a maker of movie theater sound systems in 1993, under Kirchner’s leadership has branched out to include consumer electronics, auto stereo equipment, movie subtitling equipment, sound systems for video games and its own record label for audio DVDs. As the company grew from a single product to a diversified entity, it has expanded into Europe, Latin America, Asia and most recently China where it has introduced home and auto sound systems along with its movie theater sound equipment. Kirchner, a CPA, was an expert on company turnarounds with PriceWaterhouse LLP when he got the offer to go to work at DTS in 1993. He worked his way up the ladder and became CEO in 2000, turning what was a fairly small firm just three years ago into a player in more than one field. Kirchner spoke recently with Business Journal reporter Carlos Martinez about the challenges he faces in leading the company as it diversifies into new businesses and new markets. Question: How did you get into the business? Answer: I worked for PriceWaterhouse in a financial capacity. I left the accounting side and got into the consulting side, did business recovery work which was dealing with business turnarounds, bankruptcies and restructurings of various kinds. Q: How did that background help you at DTS? A: There are a number of similarities between a business in trouble and a startup because the troubles in many cases are the same. There are cash constraints. There are priority challenges and there is a great deal of pressure to improve performance. I actually had a friend at DTS after it got started and he said they needed somebody with financial experience, so I came on board. I became executive vice president in ’98, the president in ’99 and CEO in 2000. Q: What issues were facing the company when you arrived? A: Things every business faces. We were thinly capitalized. We were breaking new ground technologically in an industry that does not typically change very fast. Film is a technology that’s been there for a hundred years and it hasn’t changed any. You can still put film in a projector that’s 80 years old and run it just fine. Q: What was the toughest period for the company? A: 1998. Even though we had started our launch into the cinema business, the expansion caused great stress and challenges for the organization. When you’re serving the studios (with digital sound systems), it didn’t take long for demand to grow. The studios said, “Service us in Europe, but you have to service us in Asia too.” So all of the sudden, whether you’re prepared or not, it leads you into an international business expansion and that was very expensive for us. We also looked at the consumer electronics industry and we realized that there was a great opportunity to develop high-quality audio technology. The trouble was, where do we get the money for that? We spent two and a half years developing it but we raised some institutional financing to help further develop our consumer electronics side of our business. Q: Why was the move into consumer electronics so important? A: We needed to branch out and diversify and take full advantage of our technology. We went into car stereos, home theaters, now into audio DVDs and video games. All of these things are natural progressions for us that allow us to further grow the business. Our cinema business is great, but we needed to branch out and expand our technology. Q: How did you happen to get into video games? A: We talked with Electronic Arts, who felt it would be a great opportunity to have digital surround sound for their games on PlayStation 2 last September. We think ultimately it’s one of the best applications for surround and the reason is that video games are part movie, part music soundtrack and part major effects. You put those three elements together and all of the sudden you have kids right in the middle of the action. If somebody is behind you, you’ll hear it behind you. If somebody is on the left of you, the sound will be on the left of you. All of the sudden, a game player has a far more real experience. Q: You’ve gotten into music too, just as CD sales have started to fall off. So what do you know that the rest of the industry doesn’t? A: There are 25 million home theater owners in the United States. We’re selling to that market. The fact that 13- to 15-year-old girls who make up most of that mass market aren’t buying as much music as they used to because there’s no new Britney Spears or whatever it may be doesn’t impact us. We’re selling a premium-priced disc retail for $24.97, but we’re selling a dramatically different experience. It has a stereo track, a 5.1 audio track; it has photo galleries, lyrics some have Web links so it’s a richer audio experience. Q: Why the sudden rapid growth in revenues last year? A: Entertainment delivery has been going through a pretty major change over the last decade and, with digital technology today, you can deliver ever higher quality of video and audio experiences. While there were leadership product areas where somebody’s technology was brought to bear first, it’s cascading now to everything, right down to the Walkman. We’re just riding a wave that is going to continue. Entertainment is a place where people are going to continue to spend money even in times of recession. We find ourselves riding on the back of this incredible revolution in entertainment. We don’t expect it to stop or slow down. It has a long way to go. Q: Your overseas market is also doing well. How do you account for that? A: Asia and Europe are in different phases of growth. They trail the United States in terms of some of the developments. We’re seeing very good traction in Europe in all of our business areas. China represents another sizable opportunity for DTS. We have tremendous brand recognition in China and, in the consumer electronics business, it’s very strong there. Q: Are there challenges involved with doing business in China? A: The revenue realization and collection can be a challenge for an intellectual property company. There are a number of rogue manufacturers who are pirating our trademarks or branding products as DTS that really are not DTS, or in some cases buying chips that have our technology but are not paying the appropriate royalties. We see China like everybody else. It’s a large consumer market. There’s 1.2 billion or 1.3 billion people in China, but that isn’t really the size of the market. At best it’s a market of a couple of hundred million people, which is the size of the market in the United States and Western Europe. Q: While your consumer electronics market grows, digital film technology is also progressing. What is the cinema side of your business going to be like in the future? A: It’s unclear how long that transition is going to take. While there are a lot of people handicapping that race, we believe it’s quite a ways off. However, we believe that it will occur and that DTS will play a part in that transition and we have certain technology that may be at risk in that change. SNAPSHOT: Jon Kirchner Age: 34 Title: President and CEO Education: B.A. in economics, Claremont McKenna College Most admired person: DTS chairman Dan Slusser Personal: Married
