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Digital Audio Firm Picks Up Video Counterpart

With the $92.5 million acquisition of Doremi Labs in Burbank, one of the country’s biggest audio firms will increase its market share at movie theaters. In a deal that closed last month, Dolby Laboratories Inc. in San Francisco picked up Doremi, which makes servers that play movies in digital cinemas. The cash deal includes an additional $20 million in contingent earn-outs over the next four years. Dolby is one of the largest makers of audio equipment for theaters, providing speaker systems, hardware and software to ensure high-quality sound from digital films. By joining the two companies, Dolby hopes to sell both visual and audio equipment to exhibitors. It has tried to enter the market on its own. “We can offer both the leading audio processing technologies and the leading digital cinema video playback platform,” said Dolby spokesman Sean Durkin, in an email. The main question mark surrounding Dolby’s acquisition strategy is whether the market for digital film servers and audio equipment will remain viable. Last year a report from research firm Screen Digest Ltd. found that 90 percent of theaters have moved to digital and the market was “approaching the end game.” Steven Frankel, senior research an-alyst for Minneapolis investment bank Dougherty & Co. LLC., noted that Dolby is already in the market. “Doremi is the No. 1 server maker. Dolby was in that business, but didn’t have a lot of market share,” he said. Doremi was founded in 1985 and is headquartered in an 18,000-square-foot building at 1020 Chestnut St. Its founder, Camille Rizko, is also associated with the entity that owns the building, Great Stone Properties LLC. The company has additional offices in France and Japan. At the time the Dolby deal was first announced in February, Doremi said its equipment was in nearly 60,000 theaters worldwide. Durkin at Dolby said his firm is working to create a structure that retains all key talent from Doremi. Rizko will directly oversee the engineering and operations functions of the Doremi business. Mike Archer, who was vice president of digital cinema sales at Doremi will become head of worldwide cinema sales for Dolby. “Doremi employees based in Burbank will stay in that office for the time being,” Durkin added. Dolby expects the deal to be immediately beneficial, as the company estimates it will add between $35 and $50 million to its revenue next year. Still, that’s a small chunk, as Dolby management has set its revenue guidance at $1 billion. “This is not a make-or-break strategic acquisition for Dolby, but it’s a nice takeaway,” said Frankel. But Eric Wold, an analyst at L.A. investment bank B. Riley & Co. LLC, said there is limited long-term growth available, as the digital upgrade cycle has almost come to an end with a potential replacement cycle years off. “The product division has been a drag on overall revenues (at Dolby) and earnings for some time,” he said. “Unfortunately, Doremi is also experiencing declining sales, so its addition to the line-up will also add to those headwinds as opposed to an acquisition that would help to lessen the pressure.”

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