The Decision to License Consumer Technology

Dolby undertook the development of a consumer version of his noise reduction system at the urging of Henry Kloss, an American audio pioneer and entrepreneur who at the time was president of KLH Research and Development Corp., a manufacturer of home hi-fi equipment. The result in 1968 was the introduction of Dolby B-type® noise reduction, based on yet another new principle. Like A-type, B-type processed only low-level signals. But instead of dividing the signal into fixed multiple bands, B-type NR used a single, less-costly sliding band of compansion. This sliding band accomplished noise reduction in the higher-frequency hiss region, where most of the noise at consumer tape recording speeds resides, with much the same freedom from side effects as A-type.

Dolby B-type noise reduction, like A-type NR, is a complementary compression/expansion system, requiring encoding when a recording is made, and decoding when the recording is played back. To be successful, therefore, it had to be incorporated into products that would wind up in consumers' homes. As work on the B-type system neared completion, Dolby made a significant decision: Dolby Laboratories would manufacture professional audio products only, and it would license technology appropriate for consumer applications. This was truly a watershed decision, followed very closely by one of nearly equal importance.

Dolby and the Compact Cassette

The first consumer product to incorporate Dolby B-type noise reduction, under an exclusive license lasting until 1970, was an open-reel tape recorder brought to market by KLH in 1968. While this unit offered high performance, it nevertheless stuck with the cumbersome open-reel format, which never enjoyed wide consumer acceptance. Dolby had already realized that if tape was to do so, it would be with an easy-to-use cartridge format.

The KLH Model 40 open-reel recorder, the first consumer licensed product to incorporate Dolby B-type noise reduction (1968).

Dolby and his staff undertook an investigation of the then-available cartridge tape formats, and concluded that the Compact Cassette, which enclosed two reels within a cartridge small enough to fit into a shirt pocket, had the greatest potential. Introduced by Philips a few years earlier as a voice recording device, it made no pretense to high fidelity.

As a result of a narrow 1/8-inch tape width and a slow 1-7/8 inches per second recording speed, the cassette's fidelity was limited primarily in three areas: speed stability, frequency response, and background hiss. The first two were surmountable, and had already shown signs of improving through better tape drive mechanisms, heads, and tape formulations. But the hiss remained an insurmountable barrier—until the advent of Dolby B-type noise reduction. By combining Dolby B with the best available cassette decks, Dolby Laboratories was able to demonstrate cassette recordings that rivaled LP records for high fidelity.

Believing in the potential of the Philips-type cassette combined with Dolby B-type noise reduction, Dolby Laboratories set out to license Dolby B to tape recorder manufacturers worldwide. This was a second key decision in the establishment of the Dolby licensing program: to license a seemingly esoteric development in terms of a specific, potentially popular application.

Dolby Licensing Takes Off

In the summer of 1970, the first cassette recorders with Dolby B-type NR—all built by Nakamichi, at that time an exclusively OEM manufacturer in Japan—were introduced by Advent, Fisher, and Harman Kardon. The concept met with instant acclaim, and four more manufacturers were licensed by the end of 1970. Dolby acquired the necessary expertise early on to deal effectively with manufacturers in Asia, which has been critical to the success of Dolby's licensing program. Today the company has its own licensing liaison offices in Tokyo, Shanghai, and Beijing to serve its many Asian licensees.

One of the first cassette decks with Dolby B, the Harman Kardon CAD-5 (1970).

In 1971, with a growing number of licensees, Dolby introduced a simplified license agreement granting patent, trademark, and know-how rights, and a new royalty structure based on the number of Dolby circuits sold per quarter. This program remains the basis for Dolby licensing today, and the modest royalty rates have had much to do with the willingness of consumer electronics manufacturers to turn to Dolby Laboratories for technology and know-how. That the company has never competed with them by making its own consumer products further fosters the cordial relationship between Dolby and its licensees.

As licensees began to include companies catering to the middle and lower ends of the market, the need arose for more formally stated and enforced quality standards. The company then set up a formal quality control program for its licensees' products, which prevents products with substandard performance from reaching the market, thereby maintaining the quality image of products featuring Dolby technology and trademarks. Today, Dolby Laboratories tests samples of hundreds of licensed products every year.

Signetics' B-type IC made it far easier to incorporate Dolby B in consumer products (1973). Each new Dolby consumer technology since has been made available to licensees in dedicated IC form.

Another key piece of the Dolby licensing program also fell into place in 1971: Dolby and Signetics Corporation began to cooperate in the development of a dedicated integrated circuit (IC) embodying key elements of the Dolby B-type circuit. That first IC and its many successors greatly simplified the implementation of Dolby technologies, widening the range of products in which they could be used and thus considerably increasing the size of the potential market. Today there are many IC iterations of both analog and digital Dolby technologies, all developed with Dolby's close cooperation, available to licensees for incorporation within their products. Costs for developing these ICs are borne by their manufacturers. Dolby, however, earns no royalties on the ICs themselves nor charges for the assistance it provides in their development; the company earns royalties only on the consumer products that incorporate the ICs.