DTS likes sound of high definition

Firm to exit theatrical biz in shift to consumer electronics sector

Founded in 1990 to bring digital, studio-quality surround sound to the movie masses, DTS counted director Steven Spielberg and Universal among its early investors. The company received a boost in 1993 by making sure that 876 of the theaters in which "Jurassic Park" opened were equipped with DTS playback systems. Since then, the company has gone public (its stock is up 20% so far this year), and it has decided to seek a buyer for its digital-cinema/theatrical equipment business so it can focus on the consumer. CEO Jon Kirchner recently spoke with The Hollywood Reporter West Coast business editor Paul Bond.

The Hollywood Reporter: Why is it so hard to make money in the theatrical business?

Jon Kirchner: Ultimately, billions of dollars will be spent in the digital-cinema conversion. We've got a great platform of technology and global infrastructure to service that market, but it's definitely in a state of transition, and the scale and opportunities are still developing.

THR: Is your intention to hang onto at least part of the theatrical business?

Kirchner: Our intention is to exit completely.

THR: Your technology is used by every major studio. What about your competitor, Dolby Laboratories?

Kirchner: For content, studios typically use both, so we have overlapping technology on a film print. A theater typically buys our equipment or a competitor's equipment to play the content back.

THR: What's your biggest business and opportunity?

Kirchner: Consumer licensing represents 60% of our business, and the move to high definition in the consumer electronics space is our biggest opportunity in the next five years.

THR: Will the format war between HD DVD and Blu-ray Disc hinder that opportunity?

Kirchner: Clearly there's a fair amount of confusion in the marketplace, but we support both equally. Ultimately, we'd like to see market resolution so consumers can accelerate their purchases of these units.

THR: Are you deriving more revenue from Blu-ray or HD DVD?

Kirchner: We do not disclose that. What I can say is that last quarter, 12% of our revenue came from the high-def formats, and the biggest driver is the game platforms. Obviously, the PS3 is doing the most unit volume for us.

THR: Is your technology also in Xbox 360 and Wii?

Kirchner: It is on the Xbox 360 accessory drive for HD DVD, which is not shipped standard with the main console. We're not in Wii.

THR: How does that 12% number compare sequentially and with a year ago?

Kirchner: In the first quarter it was 5%, and a year ago it was zero.

THR: That's big growth.

Kirchner: It's tremendous growth. We think the opportunity in the HD cycle is the single biggest one we have in the consumer space.

THR: And music?

Kirchner: We got into surround music a number of years ago for a niche market. But at the same time, we're looking at the future in terms of portable music. That's a business we're heading toward, but it's not a significant part of our business today. We have a number of products in the development stage.

THR: Do you make money on each disc with DTS technology in it that is sold?

Kirchner: No. We sell encoding equipment to the content providers, and they're free to encode as many discs as they wish, then we license embedded software to the boxmakers who pay us a royalty for each box.

THR: How will entertainment evolve in the next 10 years?

Kirchner: You'll see entertainment move to portable devices. We will see true convergence and true mobility. And you'll see ever-higher quality driven by high-def displays, HD DVD and Blu-ray and immersive audio.

THR: So Blockbuster and Netflix don't have to worry about DVDs becoming a thing of the past?

Kirchner: Not in the next 10 years. You'll see electronic downloads increase, but for the next 10 years, physical media will remain the dominant force.