When Kodak Filed for Bankruptcy, This Company Won

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In 1963, a young American physicist named Ray Dolby boarded a plane to India. He had a Ph.D. from Cambridge and a gig with UNESCO — helping build a scientific instruments lab in Punjab. The work was bureaucratic. So in his spare time, he wandered. He recorded local musicians playing sitar on a portable reel-to-reel tape recorder. And every time he played the tape back, the same problem appeared. A hiss. A low, steady, electronic hiss that buried the quiet notes. Years later, he told an interviewer he'd "had this thought churning around in my mind — how to reduce the hissing noise in recording." That thought became a company. That company now collects a royalty on almost every sound and image you consume.

I thought about Ray Dolby last week while watching a movie in my living room. The opening credits rolled. In the bottom corner — a small double-D logo. Dolby Atmos. Dolby Vision. I see those marks on my phone, my laptop, my headphones. I never think about what they cost the people who made those devices. But someone is paying.

Most people think Dolby is a speaker company. Or a movie-theater brand. It's neither. Dolby Laboratories is a licensing business — a royalty toll booth between the world's device makers and the technology they need to play sound and display images.

Ray Dolby founded the company in London in 1965, right after leaving India. His first customer was Decca Records. He spent the next decade solving tape hiss for recording studios and cassette makers. The company moved to San Francisco in 1976 and went public in 2005 at $18 a share. Today, it licenses its technology to roughly 1,000 electronics manufacturers around the world.

Here's how the money works. Every TV, smartphone, laptop, set-top box, soundbar, and car stereo that uses Dolby technology pays a per-unit royalty. In its fiscal year ending September 2025, Dolby collected $1.25 billion in licensing fees — 93% of total revenue. The cost to deliver those licenses was $84 million. That's a licensing gross margin above 93%. The company doesn't build your TV. Doesn't ship your phone. It just cashes the check.

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Think about that 93% number. Ninety-three cents of every licensing dollar drops almost straight to gross profit. No factory. No warehouse. No raw materials. The company employs 2,051 people. Its real asset sits in a filing cabinet — roughly 28,400 issued patents across more than 200 countries.

Those patents are sticky. Once a manufacturer builds Dolby's codec into its chipset, ripping it out means redesigning hardware, losing the Dolby brand on the box, and dropping compatibility with billions of songs and movies already encoded in Dolby formats. You don't switch away from Dolby. You just keep paying.

I find this part remarkable. Dolby has had a Consumer Price Index escalator clause in its licensing agreements since December 1993. Every year, the per-unit royalty adjusts upward by the change in U.S. CPI. The device maker absorbs the increase — or passes it to the customer. Either way, Dolby's revenue ticks up automatically with inflation. No negotiation. No announcement. The price just rises. Licensees pay anyway.

In January 2012, Eastman Kodak — the company whose name was on the theater where the Oscars had been held for a decade — filed for bankruptcy. Its naming rights went up for grabs. Ten bidders lined up. Dolby won. It signed a 20-year deal, and the Kodak Theatre became the Dolby Theatre. Think about what that says. The company that made physical film — gone. The company that licenses invisible technology for sound and image — still collecting. Every year the Oscars air, billions of viewers see the name. Dolby doesn't make movies. It doesn't hand out trophies. It just sits in the credits and collects.

The upgrade path is where you see the flywheel. Dolby started with audio codecs — basic compression technology. Then came Dolby Atmos, a spatial audio system that places sound in three-dimensional space. Then Dolby Vision, a high-dynamic-range imaging format. Each new layer adds another per-unit royalty on top of the last. A TV maker licensing basic codecs pays one fee. Add Atmos — the fee goes up. Add Vision — it goes up again. More technologies per device, higher royalty per unit.

WHY THIS WORKS

Dolby doesn't appear on most lists of royalty companies. It should. In fiscal 2025 alone, the company was issued 4,179 new patents — more than 11 per day — while the licensing machine Ray Dolby built 60 years ago in a London flat continues to reach into markets where over a billion mobile devices, 200 million TVs, and 90 million cars are sold each year.