Why Apple Finally Embraced Dolby Vision

Thanks to Apple (NASDAQ: AAPL), it's been a great week for Dolby Laboratories (NYSE: DLB) investors. Dolby shares are up more than 15% over the past four days, including a nearly 10% pop on Wednesday alone after the folks in Cupertino confirmed that several of their newest products would feature Dolby Vision technology. More specifically, Dolby Vision will be incorporated into Apple's new iPhone 8 and 8 Plus, the higher-end iPhone X, and the new 4K Apple TV set-top box.

According to B. Riley analyst Eric Wold, who reiterated his buy rating on Dolby shares after the announcement, Apple's embrace "clearly boosts the importance of Dolby Vision technology so soon after its launch."

Why now?

Dolby Vision isn't exactly "new" -- the company first introduced its cutting-edge visual-enhancement technology in early 2014. And Dolby Vision has wowed its reviewers by enabling more vivid colors, brightness, and contrast to more closely mimic how our eyes see the world.

But why wouldn't original equipment manufacturers (OEMs) simply rush out and adopt Dolby Vision right away? From Apple's perspective, there was likely one big problem preventing the move until now: namely, a lack of content mastered and color-graded in Dolby Vision to merit Apple shelling out tens of millions of dollars for the right to include the technology in its massively popular product lines.

Gaining momentum

The first TV sets to incorporate Dolby Vision only started to trickle into stores a little over a year after its initial launch. But it wasn't until early 2015 that Dolby Vision truly started to gain momentum with content providers.

Starting in January 2015, Dolby announced a collaboration with Warner Bros. Home Entertainment to develop a "steady pipeline" of films mastered in Dolby Vision throughout the year. Shortly thereafter, Netflix announced it would begin streaming Dolby Vision content later that fall. Then, a few months later in April 2015, both AMC Entertainment and Disney followed suit -- the former through a commitment for Dolby Vision-enabled laser projectors at hundreds of new AMC movie theaters built through 2024, and the latter with a promise to bring the first Dolby Vision titles to theaters around the globe starting that summer.

Dolby Vision only continued to pile on new customer wins in the months that followed, including commitments from both MGM Studios and Universal Pictures in 2016 to bring their own slates of Dolby Vision content to home entertainment-distribution platforms. Then, Lionsgate, Universal, and Warner Bros. followed in early 2017 with renewed promises for Dolby Vision content in their respective Ultra HD Blu-ray catalogs.

All the while, this accelerating momentum gave leading hardware manufacturers from LG to Sony, Vizio, and Philips the motivation they needed to develop their own Dolby Vision-enabled electronics. LG, for its part, became the first company to incorporate Dolby Vision into a smartphone with the launch of its G6 device earlier this summer.

Enter Apple

Curiously, Apple archrival Samsung has opted not to use Dolby Vision in its own TVs or mobile devices, instead favoring the competing, royalty-free HDR10+ open standard.

That said, according to Piper Jaffray analyst Michael Olson, Apple's business alone could add as much as $35 million per year to Dolby's top line. But considering so many leading content providers and OEMs have already given their seals of approval to Dolby Vision, that's a small price to pay for Apple to differentiate its latest products with such a well-known name and widely adopted visual technology.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Lions Gate Entertainment Class A, Lions Gate Entertainment Class B, and Netflix. The Motley Fool has a disclosure policy.