CELEX: 32014M7297
Language: en
Date: 2014-10-27 00:00:00
Title: Commission Decision of 27/10/2014 declaring a concentration to be compatible with the common market (Case No COMP/M.7297 - DOLBY / DOREMI / HIGHLANDS) according to Council Regulation (EC) No 139/2004 (Only the English text is authentic)

|[pic]                             |EUROPEAN COMMISSION                                                                                      |

Brussels, 27.10.2014
C(2014) 8095 final

                                        [pic]

|To the notifying party                                                 |                                                                       |
|                                                                       |                                                                       |

Dear Sir/Madam,

Subject:    Case M.7297 – DOLBY/ DOREMI/ HIGHLANDS
Commission decision pursuant to Article 6(1)(b) of Council Regulation No 139/2004[1]

    1) On 25 September 2014, the European Commission received a notification of a  proposed  concentration  pursuant  to  Article  4  of  Council
       Regulation (EC) No 139/2004  by which the undertaking Dolby Laboratories, Inc. ("Dolby", the United States) acquires within the meaning of
       Article 3(1)(b) of the Merger Regulation control of the whole of the undertakings Doremi Technologies LLC and Doremi Labs, Inc  (together,
       "Doremi", the United States) and Highlands Technologies Solutions S.A.S. ("Highlands", France) by way of  purchase of shares  and  assets.
       Dolby is hereby referred to as the "Notifying Party" and Dolby, Doremi and Highlands are collectively referred to as "Parties".

       THE PARTIES

    2) Dolby designs and manufactures audio, video and voice technologies. It specialises in digital signal processing,  compression  technology,
       noise reduction systems and multichannel sound programming for home, work, cinema and mobile applications, including the  manufacture  and
       supply of digital cinema servers ("DCS") and theatre management systems ("TMS"). During fiscal year 2013, around 89% of  Dolby’s  revenues
       came from licensing its technology to third parties, 9% from products and 2% from services. Dolby can be described as a licensing  company
       with a strong foothold in audio technology.

    3) Doremi is specialised in the field of digital video, in particular in the design and manufacture of DCS and TMS.

    4) Highlands acts as a re-seller of Doremi products in the EMEA region. [Most][BUSINESS SECRET] of Highland's revenues are achieved  via  the
       sale of Doremi DCS and related accessories.

       THE OPERATION

    5) The proposed transaction involves the acquisition of sole control of Doremi and Highlands by Dolby.

    6) According to a Membership Interest Purchase Agreement of 23 February 2014 between Dolby and Doremi, Dolby will acquire [Doremi’s  USA  and
       French businesses] [BUSINESS SECRET] Through a separate agreement, governed by an Asset Purchase Agreement executed on 23  February  2014,
       Dolby France S.A.S. ("Dolby France", France), a subsidiary of Dolby, will acquire the assets of Highlands.

    7) Dolby France and Doremi will enter into a Successor Agreement [BUSINESS SECRET]. This Successor Agreement is a condition to the closing of
       acquisition of Doremi.

    8) The transactions contemplated in the Membership Interest Purchase Agreement, the Asset Purchase  Agreement  and  the  Successor  Agreement
       involve the same buyer, namely Dolby, and are conditional upon  each  other.[2]  Therefore  these  transactions  qualify  as  interrelated
       transactions pursuant to paragraphs 38 and 43 of  the  Commission  Consolidated  Jurisdictional  Notice.[3]  As  a  result,  the  proposed
       transaction can be considered a single concentration within the meaning of Article 3 of the Merger Regulation.

    9) The value of the transaction is USD 92.5 million plus a potential earn-out of USD 20 million over a four-year period.

   10) Therefore, the proposed transaction constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

       EU DIMENSION

   11) The proposed transaction does not have a Union dimension within the meaning of Article 1 of the Merger Regulation.

   12) On 9 July 2014, the competent Competition Authority of Spain requested the Commission to examine the case, pursuant to  Article  22(1)  of
       the Merger Regulation. The request was made within the legal deadline of 15 working days following the national notification. The referral
       request was joined by the competent Competition Authority of the UK on 1 August 2014. On 14 August 2014, the Commission decided to  accept
       the referral request and to examine the concentration.

       MARKET DEFINITION

   13) A digital cinema system comprises a number of components, including a projector, a DCS, a cinema audio processor  and  Theatre  Management
       System ("TMS") software. TMS is the software that enables a cinema manager to control several cinema screens from a  single  computer,  so
       that there is no need to have a projector operator for each auditorium.

   14) The Parties' activities overlap in the manufacture and supply of DCS as well as the supply  of  TMS  software.  The  market  for  TMS  is,
       however, not affected, as the Parties' combined market share is below 20% in the EEA.[4] Finally, only Dolby is active in the  manufacture
       and supply of digital cinema audio processors.

1 Digital Cinema Servers

   15) This is the first time that the Commission has been called upon to analyse the market for the manufacture and supply of DCS.

   16) DCS are used to load, store, decrypt, decode and re-encrypt digital film files for presentation on a projector. There are two parts to the
       DCS: (i) the storage server, which contains the movie file, and (ii) the media block, which decrypts  and  decodes,  then  watermarks  and
       passes the video stream to the digital projector.

1 Product market

   17) DCS could be differentiated according to the image projection technology and/or product generations.

   18) A first distinction can be made between the two established technologies for image projection: (i) the Digital Light Processing technology
       ("DLP"), developed and licensed by Texas Instruments; and (ii) the Silicon X-tal Reflective Display  ("SXRD")  technology,  developed  and
       sold by Sony. Sony SXRD projectors are only compatible – and are integrated and bundled –  with  the  Sony  DCS.  DLP  projectors,  mainly
       supplied by Barco, Christie and NEC, are generally compatible with DCS supplied by a number of different providers.

   19) Second, there are three product "generations". As for the first generation, both the media block and the storage server  are  external  to
       the digital projector, and are connected via a secure HD-SDI link. As for second generation DCS (the Integrated Media Block or "IMB"), the
       media block is placed inside the projector while the storage server is still located outside the projector. The  latest  third  generation
       (the Integrated Media Server or "IMS") builds the storage server into the media block and the block is then completely housed  within  the
       projector.

   20) While all three generations of servers generally offer similar functionality, later generations have improved  features  and  performance.
       For instance, first generation DCS only support 2K playback, whereas IMB and IMS generally support 4K[5] or high-frame rate playback.[6]

   21) Regardless of the various distinctions, all DCS need to be compliant with the specifications developed by the six major Hollywood  studios
       within the Digital Cinema Initiative (“DCI”) as from 2002 if they want to play back the movie studios' encrypted  content.  DCI's  primary
       purpose is to establish and document voluntary specifications for an open architecture for digital cinema that ensures a uniform and  high
       level of technical performance, reliability and quality control, and protect content against piracy. While voluntary and  not  a  “formal”
       standard – technical standards for digital cinema are typically adopted within the  Society  of  Motion  Picture  &  Television  Engineers
       ("SMPTE") – DCS specifications are de facto functional requirements for  equipment  manufacturers,  as  Hollywood  studios  release  their
       content only for DCI-compatible equipment. Given  the  open  architecture,  DCI  specifications  also  have  had  the  effect  to  promote
       interoperability between different components of digital cinema equipment to the extent that these components (such as the  projector  and
       the DCS) are not physically integrated.[7]

   22) First generation (also called Series-1) projectors only support first generation DCS. Series-2 projectors generally  allow  exhibitors  to
       choose among any of the three DCS generations.

1 Views of the Notifying Party

   23) The Notifying Party submits that the relevant product market is  the  market  for  the  manufacture  and  sale  of  DCS,  without  further
       distinguishing by DCS generation or projection technology. All models have the same intended use, the  same  characteristics  and  similar
       prices.

2 Results of the market investigation and Commission's assessment

   24) The results of the market investigation generally support the Notifying Party's claim.

   25) On the demand side, all of the respondents to  the  market  investigation  considered  that  DCS  are  a  separate  product  from  digital
       projectors,[8] with the exception of Sony's DCS, which constitutes an integrated solution along with the  projector.  In  fact,  customers
       that took part in the market investigation indicated that projectors and DCS have different life cycles and different needs  in  terms  of
       upgrade. Finally, according to those customers, maintenance would be easier if the projector and DCS were separate components.

   26) As regards the difference between the second (IMB) and the third generation (IMS) DCS, a number of customers responded that,  performance-
       wise, the two product generations are similar.[9] Even if some differences could be drawn between the two product generations in terms  of
       cost (IMS are generally cheaper) and of functionalities (for example, High Frame  Rate  or  storage  capacity),  a  number  of  exhibitors
       confirmed that it would not make sense to upgrade IMB with IMS outside of the normal replacement cycle.

   27) Finally, the majority of customers and competitors that responded  to  the  market  investigation  indicated  that,  despite  some  slight
       differences in price and functionality, Sony's SXRD-compatible and DLP-compatible DCS are  similar  products  that  compete  against  each
       other.[10]

   28) On the supply side, the majority of DCS suppliers that responded to the market investigation considered  that  DCS  are  a  different  and
       separate product from projectors, TMS and audio processors (although some  suppliers  noted  that  with  the  advent  of  more  integrated
       solutions, the distinction between projectors and DCS is becoming more blurred).[11] As regards different generations of DCS, the majority
       of suppliers that responded to the market investigation explained that they equally produce both IMBs  and  IMSs[12].  Moreover,  IMS  are
       usually significantly cheaper than IMB, but that IMB usually come with a greater storage  capacity  (since  storage  is  external  to  the
       projector so that more space is available).[13]

   29) In light of the results of the market investigation, and on the basis of the evidence available to it, the Commission  concludes  for  the
       purposes of assessing the proposed transaction that there is a product market for the manufacture  and  supply  of  DCS,  comprising  both
       Sony's SXRD and DPL image projection technology and all DCS product generations.

2 Geographic market

1 Views of the Notifying Party

   30) The Notifying Party submits that the relevant geographic market for the production and supply of DCS  is  global  or  at  least  EEA-wide.
       First, the DCI-standard is applicable worldwide. Second, the main standalone  producers  of  DCS  and  the  four  main  digital  projector
       manufacturers (Barco, Christie, NEC and Sony, all of whom are important customers of standalone DCS manufacturers) are active globally and
       offer the same products across all regions of the world. Third, product specifications are identical in all regions of the world.  Fourth,
       prices are broadly similar across geographic regions.

2 Results of the market investigation and Commission's assessment

   31) On the demand side, the majority of customers that took part in the market investigation responded that they purchase DCS at  a  worldwide
       level.[14] A majority of customers also confirmed that a local presence is not required for direct sales or after sales support.  However,
       results were mixed as to whether manufacturers need a local presence for maintenance services to compete effectively.[15]  Some  customers
       noted that maintenance should be located at least in the same time zone  to  ensure  a  proper  service  to  exhibitors.  Other  customers
       explained that, as long as a third-party maintenance company is located in the same territory / time zone, there is no need  for  the  DCS
       manufacturer to have a local presence.

   32) On the supply side, all the DCS manufacturers who took part in the market investigation supported the Notifying  Party's  submission  that
       there are no differences between DCS models across the world.[16] First, all DCS models need to be DCI-compliant in order to  be  able  to
       play content released by the major Hollywood studios and thus to compete effectively at a global level. This results  in  similar  if  not
       identical technical specifications worldwide. Second, the majority of DCS producers responding to the market  investigation  supply  their
       products at a worldwide level. However, the market investigation gave mixed results as regards price differences  at  worldwide  level  or
       across different regions.[17] Third, DCS producers that took part in the  market  investigation  indicated  that  DCS  transport  cost  is
       negligible compared to the cost of the product and that it does not substantially vary according to the product  destination.[18]  Fourth,
       respondents to the market investigation gave indications that a certain local presence is necessary, especially for  after  sales  support
       and maintenance services. Replies were mixed as regards a local presence for direct sales.[19] On the one hand,  DCS  suppliers  confirmed
       that maintenance support has to be present at least in the same  time  zone.  On  the  other  hand,  different  suppliers  explained  that
       maintenance can be administrated remotely and that third-party companies can be used to make up for the absence  of  a  local  branch.  In
       conclusion, the Commission notes that the results of the market investigation were mixed as regards the geographic scope of the market for
       the manufacture and supply of DCS.

   33) In any event, it is not necessary to conclude on the exact geographic scope, namely worldwide or EEA-wide, as the  proposed  concentration
       does not give rise to serious doubts as to its compatibility with the internal market under any alternative geographic market definition.

2 Digital cinema audio

   34) This is the first time that the Commission has been called upon to analyse the market for the manufacture and  supply  of  digital  cinema
       audio.

   35) Cinema audio processors receive audio from multiple digital audio sources, including from the DCS, and then route each sound layer to  the
       corresponding speaker in sync with the playback of the images.

   36) Along with the more traditional 5.1 and 7.1 audio formats[20] (which are based on  an  open,  non-proprietary  format),  in  recent  years
       companies like Dolby and Barco/Auro have started developing a new, more  immersive,  audio  format  known  as  “immersive  sound”  or  “3D
       audio”[21] that supports many more audio channels and/or so-called "object-based" audio. 3D audio adds an additional overhead dimension to
       the classic 5.1 or 7.1 audio formats, thus rendering the spectator's experience more realistic.

   37) The installation of a new 3D audio system by an exhibitor requires significant investment in both equipment (including a dedicated digital
       cinema audio processor and additional loudspeakers) and room retrofitting (the number of loudspeakers utilised  are  significantly  higher
       than traditional 5.1/7.1 sound systems).

1 Product market

1 Views of the Notifying Party

   38) The Notifying Party submits that given the differences in audio playback features and price, there is a market for  digital  cinema  audio
       processors supporting only the traditional 5.1/7.1 audio formats (but not immersive sound) that is separate  from  the  market  for  audio
       processors capable of supporting immersive or 3D audio on top of the 5.1/7.1 audio formats. As regards price, the Notifying Party  submits
       that the cost for audio processors supporting 5.1/7.1 audio formats is modest (about USD  3000).  On  the  contrary,  Dolby's  new  Atmos-
       compatible CP850 audio processor is currently sold for a price approximately 10 times higher (USD 33 000).

2 Results of the market investigation and Commission's assessment

   39) On the demand side, a vast majority of the respondents to the market investigation considered that audio processors are a separate product
       from the DCS or the projector.[22] Furthermore, the majority of the respondents  supported  the  Notifying  Party's  argument  that  audio
       processors that only support the 5.1/7.1 audio formats are different  products  from  processors  supporting  immersive  sound.  Important
       differences arise when considering price (3D audio-processors are much more expensive, and require significant  additional  investment  in
       retrofitting the theatre with additional loudspeakers and other equipment) and features (3D audio processors require  advanced  processing
       power).[23]

   40) On the supply side, the majority of the suppliers responding to the  market  investigation  stated  that  audio  processors  are  separate
       products from the projector or the DCS.[24] When asked about the differences between audio processors supporting the 5.1/7.1  formats  and
       those compatible with the 3D audio format, the majority of the respondents were of the opinion  that  these  two  products  would  not  be
       comparable.[25]

   41) Finally, movie studios responding to the market investigation generally agreed that audio processors are a separate product from  the  DCS
       and projectors.[26] Secondly, they claimed that audio processors supporting 5.1/7.1 format and those supporting 3D audio  format  are  not
       comparable in terms of functionality.[27]In light of the results of the market investigation, and on the basis of the  evidence  available
       to it, the Commission concludes, for the purpose of assessing the proposed transaction, that there is a product market for the manufacture
       and supply of digital cinema audio processors supporting 3D audio or immersive sound that is separate from the market for the  manufacture
       and supply of digital cinema audio processors supporting only 5.1 and 7.1 audio formats.

2 Geographic market

1 Views of the Notifying Party

   42) The Notifying Party submits that the market for audio processors is worldwide in scope as the  existing  5.1/7.1  audio  formats  and  the
       possibly forthcoming standard for immersive audio apply globally. Moreover, audio processor manufacturers are active at a worldwide level,
       where they offer the same products across different regions.

2 Results of the market investigation and Commission's assessment

   43) On the demand side, most respondents to the market investigation indicated that they procure audio processors at the national  level  and,
       to a limited extent, at a worldwide or EEA-wide level.[28] The majority of customers indicated that a local presence of  the  manufacturer
       is not necessary for direct sales. The market investigation provided mixed results as to whether a local presence for after-sales  support
       is needed. Finally, respondents indicated that a local presence is necessary for product maintenance services.[29]  Respondents  explained
       that local maintenance support should be at least in the same time zone or available within 24 hours. Other  respondents  noted,  however,
       that manufacturers could use third-party maintenance companies.

   44) On the supply side, the majority of the respondents to the market investigation indicated that they do not supply  different  versions  of
       their audio processors to target different geographic regions.[30] Responses to  the  market  investigation  were  mixed  as  regards  the
       possible price differences of audio processors across the world.[31] In conclusion, the Commission notes that the results  of  the  market
       investigation were mixed as regards the geographic scope of the market for the manufacture and supply of digital cinema audio  processors.
       While on the supply side, respondents support a worldwide  market,  on  the  demand  side,  customers  highlight  the  importance  of  the
       manufacturer having a local presence.

   45) In any event, it is not necessary to conclude on the exact geographic scope, namely worldwide or EEA-wide, as the  proposed  concentration
       does not raise any competition concerns under any alternative geographic market definition.

       COMPETITIVE ASSESSMENT

1 Horizontal effects as regards Digital Cinema Servers ("DCS")

   46) The activities of the Parties overlap with respect to the manufacture and  supply  of  DCS.  Dolby  produces  only  first[32]  and  second
       (IMB)[33] generation DCS, whereas Doremi currently offers first, second (IMB) and third (IMS) generation DCS.[34]

   47) As regards the sale of DCS in 2013, the combined market share of the Parties amounted to [40-50]% worldwide (Dolby: [10-20]%; Doremi: [30-
       40]%) and [70-80]% at the EEA- level (Dolby: [10-20]%; Doremi: [50-60]%). The tables below give an overview of the Parties' and their main
       competitors' market shares between 2009 and the first trimester of 2014.

       Table 1: DCS Sales worldwide 2009-H1 2014, market shares (in units)

|                         |Market share 2009                                |
|                         |Worldwide               |EEA*                    |
|Dolby                    |[10-20]%                |[10-20]%                |
|Doremi                   |[40-50]%                |[60-70]%                |
|Combined                 |[50-60]%                |[80-90]%                |
|Sony                     |[10-20]%                |[5-10]%                 |
|Christie                 |[0-5]%                  |[0-5]%                  |
|GDC                      |[20-30]%                |[0-5]%                  |
|Qube                     |[0-5]%                  |[0-5]%                  |
|Others                   |[0-5]%                  |[0-5]%                  |

            Source: The Notifying Party, based on IHS data
            * Except for Liechtenstein and Malta which are not tracked by IHS

   48) Currently, several manufacturers' DCS – including Doremi's DCS – support Barco/ Auro 11.1. Moreover, Dolby has granted Atmos  licenses  to
       other DCS manufacturers including Barco.

   49) The Commission has therefore examined, first, whether the merger could lead to a foreclosure of 3D audio providers  competing  with  Dolby
       through a leverage of the merged entity's strong installed base in DCS into the nascent  market  for  3D  audio  processors.  Second,  the
       Commission has investigated the reverse scenario whereby the merged entity could use its position in the  emerging  market  for  3D  audio
       processors to strengthen further its current position in DCS.

1 Leveraging the merged entity's position in DCS into 3D audio

1 Views of the Notifying Party

   50) According to Dolby, the rationale for the proposed concentration is to integrate Doremi's superior DCS with Dolby's  Atmos  technology  to
       drive down cost and to create a product that is differentiated from the products integrating projectors and DCS (provided by Christie  and
       Sony) or integrating projector, DCS and 3D audio (Barco).

   51) The Notifying Party submits that the merged entity will not have the ability  to  foreclose  competing  3D  audio  systems  from  its  DCS
       installed base or newly sold DCS because, first, an open industry standard for immersive sound is expected to be published before the  end
       of 2015. The Notifying Party points to the statement by the Chair of the SMPTE Working Group on Immersive Sound, Mr  Peter  Ludé,  in  the
       newsletter "SMPTE Newswatch" of 7 August 2014, according to which "he is hopeful a standard will be ready or close to ready for publishing
       before late 2015." Furthermore, it submits that Dolby does not control, or cannot block, the adoption of an open industry standard for  an
       Object-based Audio Essence format, as immersive sound is technically called by SMPTE. Dolby submits that it has  publicly  and  repeatedly
       declared its intent to support the open standard and that it is actively working with SMPTE to develop a standard.

   52) Second, the Notifying Party submits that a forthcoming – voluntary – SMPTE standard on immersive sound would need to be respected  by  DCS
       manufacturers in order to be compliant with Hollywood movie studios' DCI specifications. It points to a public DCI  statement  of  9  July
       2014 that "DCI expects industry adherence to the upcoming SMPTE common Object-based Audio Essence  format  standard  when  published".  In
       September 2013, DCI had published an addendum to the Digital Cinema System Specification ("DCSS") regarding  digital  cinema  object-based
       audio.[56] The addendum establishes five requirements for object-based audio that must be satisfied “to assure interoperability  with  and
       continued compliance to the DCSS”. The requirements include that the object-based audio essence shall “be represented in a  common  format
       standardised by SMPTE that is interoperable with the DCSS architecture."[57] Therefore, the Notifying Party submits that if a  DCS  blocks
       or otherwise hinders the playback of any part of a DCI-compliant movie (including the immersive sound track), then that DCS would cease to
       be DCI-compliant and thereby lose access to the DCS market.

   53) Even if an open SMPTE standard for immersive sound that is endorsed by DCI did not come forward, the  Notifying  Party  submits  that  the
       merged entity would not have the ability or incentive to render Dolby/ Doremi servers incompatible with 3D audio  solutions  that  compete
       with Atmos.

   54) First, it submits that the merged entity does not have market power in the market for DCS for the reasons set out in section 5.1.1 above.

   55) Second, a potential foreclosure strategy would result in increasing exhibitors' cost for a 3D audio system by the cost  of  a  DCS,  which
       represents approximately an 8% increase compared to the total estimated investment necessary for upgrading  a  theatre  auditorium  to  3D
       audio equipment. This is because a DCS trades for about USD 8 000, while the theatre refit  for  an  Atmos  installation  currently  costs
       approximately a total of USD 100 000 (USD 70 000 for additional loudspeakers and amplifiers that are not sold by the  merged  entity;  and
       approximately USD 30 000 for the Dolby Atmos audio processor). If the merged entity were to foreclose third party  DCS  and  an  exhibitor
       (currently using a Doremi DCS) wanted to install a 3D audio solution competing with Atmos, the exhibitor's cost would increase by the cost
       of a new DCS (approximately USD 8 000 or 8% of the total installation cost, assuming that the total installation cost of the competing  3D
       audio solution is the same as for Atmos). Given this cost structure where the cost of switching DCS is marginal compared to  the  cost  of
       retrofitting an auditorium with a 3D audio installation, the Notifying Party submits that the hypothetical foreclosure strategy would  not
       guarantee that customers choose Atmos over competing 3D audio solutions. For  instance,  Barco/Auro  could  absorb  some  or  all  of  the
       additional cost of buying a new DCS. Furthermore, the merged entity would lose share in the DCS market to competitors, making the strategy
       unprofitable, and cause Dolby reputational harm with exhibitors.

   56) Third, the Notifying Party submits that Barco could retaliate by, for instance, shutting out Atmos of its  new  integrated  projector  and
       server line, or making it difficult for the merged entity's servers to function with Barco projectors, which represent more  than  40%  of
       new installations in the EEA in 2013.

   57) Fourth, the Notifying Party submits that the existence of the non-proprietary 5.1 and 7.1 open standards for digital surround  sound  will
       serve a de facto competitive constraint on the merged business, given that 3D audio is not, and will not become in the foreseeable future,
       a "must have" for exhibitors.

2 Results of the market investigation

   58) In general, the vast majority of respondents to the market investigation do not expect the proposed transaction to have any adverse impact
       of a conglomerate nature.[58] However, a minority of respondents submit that  the  merged  entity  could  leverage  its  strengthened  DCS
       installed base into the nascent 3D audio market in order to foreclose actual or potential 3D audio competitors and establish Atmos as  the
       de facto standard for 3D audio.

   59) First, with respect to the merged entity's ability to render Dolby/ Doremi's significant installed base of DCS incompatible with non-Dolby
       3D audio solutions, the results of the market investigation support the Notifying Party's submission that a voluntary, open  standard  for
       3D audio – endorsed by the movie studios – is likely to be published in the course  of  2015.  Most  competitors  with  knowledge  of  the
       standard discussions within SMPTE as well as all movie studios responding to the market investigation find it  a  realistic  timeline  for
       SMPTE to publish, or be close to publishing, a voluntary 3D audio  standard  before  late  2015.[59]  The  vast  majority  of  competitors
       expressing an opinion also believe that the agreement on such a standard by late 2015 will be sufficiently ahead of when  most  exhibitors
       expect to decide whether to invest in immersive sound systems.[60] All respondents expressing  an  opinion  expect  the  3D  audio  format
       standard to be open and to support various implementations.[61]

   60) Second, most competitors expressing an opinion consider that the movie studios will be equally effective as in the past in  ensuring  that
       DCS manufacturers respect a possible forthcoming open SMPTE standard for immersive sound, in order to be DCI-compliant and be able to play
       back their movies.[62] Moreover, a number of movie studios indicate that they support an open  3D  audio  standard  and  that  they  would
       consider measures to help adherence to such a standard by DCS manufacturers, for instance  by  making  their  content  only  available  to
       theatres with compliant equipment, or mixing it exclusively in the open 3D audio format.[63]

   61) While agreeing that DCI may be effective in ensuring compliance with DCS, one respondent submits that another  possible  outcome  is  that
       Dolby would not support the forthcoming SMPTE open standard on the merged entity's installed base of DCS. In this case, the movie  studios
       would need to decide whether their movies would be available for playback on the merged entity's DCS, which would  involve  a  significant
       financial risk for the studios given the merged entity's large installed base. Therefore, the respondent believes that  Dolby  has,  post-
       transaction, countervailing power to negotiate DCI rules recognising Dolby Atmos as a de facto standard.

   62) Third, a majority of customers expressing a view indicated that if Dolby were to withdraw support for  non-Dolby  3D  audio  solutions  on
       Doremi's DCS, they would either replace the DCS or abandon the plan to invest into 3D audio.[64]

   63) Fourth, respondents to the market investigation indicated that 3D audio is not, and is unlikely to become, a "must have"  for  cinemas  in
       the next three years. The vast majority of customers indicate that the likely uptake will be limited to less than 10% of  screens  in  the
       EEA in the next 3 years due to the very high retrofitting cost.[65] While 3D audio can be  one  of  several  differentiating  features  of
       cinemas and in particular of premium auditoriums in a multiplex cinema,[66] a large majority of customers and a  majority  of  competitors
       that responded to the market investigation consider it unlikely that 3D audio will become a must-have.[67]

3 Commission's assessment

   64) First, the results of the market investigation support the Notifying Party's argument that an open, non-proprietary standard for immersive
       sound is likely to be published before the end of 2015.

   65) Second, in light of the responses to the market investigation, the Commission considers that Dolby would likely need to  respect  such  an
       open standard in order to be compliant with DCI's specifications. Movie studios have indicated that since they control the  content,  they
       would have ways to encourage compliance with DCSS specifications. As to the scenario submitted by one respondent whereby the merged entity
       could de facto veto DCI specifications due its large combined installed base of DCS, the Commission  considers  this  to  be  implausible.
       Rather than not making available its movies on every installed DCS of the merged entity – which would  indeed  be  financially  risky  for
       movie studios– the studios could pursue options that have none or very limited financial risks for them but would be a major risk for  the
       merged entity. For instance, the studios could refuse to make their content available in auditoriums that run Dolby's  new,  non-compliant
       DCS model and/or that install DCS updates with Dolby software rendering the existing DCS incompatible  with  the  open  standard,  on  the
       grounds that this model or software update, respectively, does not implement the open standard. Given that exhibitors would run  the  risk
       of losing access to premium content by the major Hollywood studios, these measures would presumably suffice to incentivise exhibitors  not
       to purchase non-DCI compliant DCS devices or not to run non-DCI compliant software updates on the DCS that they own.[68] This would affect
       Dolby's capacity both to sell new DCS devices and to successfully update  its  installed  base,  and  harm  Dolby's  reputation  with  its
       customers.

   66) Even if a standard did not come forward, the Commission considers that, in the light of  the  market  investigation  results,  the  merged
       entity would likely lack the ability and incentive to pursue a foreclosure strategy.

   67) The Commission considers, for the reasons set out in section 5.1.3 above (including that customers have  a  sufficient  choice  of  viable
       options for purchasing a new DCS, and can swap out a DCS in their digital cinema system with sufficient ease), that the merged entity does
       not have market power with respect to new DCS sales, given in particular, the range of competitors and new entrants and relative  ease  of
       replacing a DCS in the digital cinema system. For the conglomerate concern investigated here, it is also  relevant,  however,  to  enquire
       whether the merged entity can exercise market power with respect to the Parties' existing installed base, that is, before  the  end  of  a
       DCS' life cycle. Thus, some respondents to the market investigation submit that the merged  entity  could  foreclose  competing  3D  audio
       solutions from the existing installed Doremi DCS. For instance, Dolby could seek to persuade exhibitors using the merged entity's  DCS  to
       allow the installation of software / firmware updates on their DCS that would result (amongst others) in hampering  interoperability  with
       non-Dolby 3D audio solutions such as Auro 11.1 (which is currently supported by Doremi's DCS).

   68) First, in light of the results of the market investigation, the Commission considers that such a foreclosure strategy would likely not  be
       successful in driving customers to Dolby's 3D audio product. Customers indicated they would pursue other options, notably to  replace  the
       merged entity's DCS with a non-Dolby product, or abandon altogether the plan to invest in 3D audio. Also some competitors, who submit that
       foreclosure would be likely, still concur with the customers' view.[69] One states "[t]o replace the  Doremi  server  would  be  the  most
       reasonable for cost and effort but would require faith that a competing immersive  audio  system  will  be  successful."  Moreover,  those
       competitors who consider that exhibitors would likely convert to Dolby Atmos give reasons  that  are  not  merger-specific,  such  as  the
       possibility that Dolby may subsidise part of the cost of installations or  that  the  alternative  3D  audio  solution  has  less  content
       available in its format (partly because Dolby invests more into sponsoring movie studios to create 3D  audio  sound  tracks[70]).  In  any
       event, the merged entity's competitors could also deploy these tactics as a counter-strategy.

   69) Second, the Commission notes that the total cost of both purchasing a new, non-Dolby DCS and installing Auro 11.1 – Dolby's  only  current
       competitor in 3D audio – would seem to be less than the total cost of installing Dolby's 3D audio solution. Auro itself  states  that  the
       total cost of upgrading an auditorium from an existing 7.1 system to Auro 11.1 is about double the price of the 7.1  system,  while  Dolby
       Atmos currently costs almost the triple.[71] This is because Atmos – depending on the auditorium size and  setup  –  typically  uses  more
       speakers[72] than Auro 11.1 and requires separate amplifiers for each speaker  while  Auro  11.1  uses  speaker  arrays  that  need  fewer
       amplifiers. Estimates by customers and competitors of the total cost of installing Atmos in an auditorium from a 7.1 system  range  widely
       between EUR 60 000 and EUR 150 000 or even more, depending on the size of the auditorium and the suitability  of  the  building  structure
       (due to the need to suspend speakers from the ceilings).[73] Assuming the Notifying Party's submission that the total cost of installation
       of Atmos is USD 100 000 and Auro's submission that an upgrade to Auro costs approximately two thirds of an upgrade  to  Atmos,  the  total
       cost of installing Auro 11.1 and replacing the DCS would likely be considerably less expensive than installing Dolby Atmos.[74] Therefore,
       a foreclosure strategy would likely not be successful in driving customers to  Dolby's  3D  audio  product  as  it  would  be  still  more
       economical for an exhibitor with a preference for Auro 11.1 to purchase that solution and a new DCS.

   70) Third, in light of the results of the market investigation, the Commission considers that 3D audio is not, and is unlikely  to  become  in
       the foreseeable future, a "must have" feature for exhibitors to be able to compete for cinema-goers.

   71) In light of the above, and on the basis of the evidence available to it, the Commission concludes that the proposed transaction would  not
       result in conglomerate effects whereby the merged entity could use its installed base in the market for  DCS  to  foreclose  competing  3D
       audio system and therefore does not give rise to serious doubts as to its compatibility with the internal market as  regards  the  nascent
       market for 3D audio processors.

2 Leveraging the merged entity's position in 3D audio into DCS

   72) Dolby has granted licenses to competing DCS manufacturers allowing them to access information about security, packaging and the  streaming
       protocol for Atmos. Today, the DCS of GDC, Christie, Doremi and Qube are already compatible with the Dolby Atmos format, and Sony and  USL
       are on the path to being Atmos-compatible. The Commission has investigated a scenario whereby the merged entity could use its position  in
       the emerging market for 3D audio processors to further strengthen its position in DCS, for instance by withdrawing licenses  to  competing
       DCS manufacturers.

1 Views of the Notifying Party

   73) The Notifying Party submits that it has no ability to leverage its position into the DCS market because Dolby Atmos has not, and will  not
       have, any significant degree of market power in relation to 3D audio processors. First, every movie will still be  available  in  the  5.1
       open-format, which has been the industry standard for approximately twenty years and will continue to be the norm. 3D audio is a  nice-to-
       have technology but merely optional.

   74) Second, conversion cost of a theatre auditorium is expensive and difficult to recover via cinema ticket  prices,  which  also  acts  as  a
       constraint on exercising any market power.

   75) Moreover, the Notifying Party submits that it does not have the incentive to foreclose. First, it is in  Dolby's  commercial  interest  to
       render Atmos compatible with as many servers as possible, so that when the filmmakers and the studios produce and distribute a movie  with
       Atmos format, they can be confident that the movie will be played back in the highest number of Atmos-compatible  cinemas.  Dolby  already
       had the possibility, pre-merger, to deny licenses to third-party DCS manufacturers. However, instead it has  chosen  to  license  six  DCS
       suppliers (including Doremi) to render their servers compatible with Atmos. Refusing to support third party immersive audio products would
       alienate the Hollywood movie studios and may lead them not to mix their movies in the Atmos format, fearing that their movies  would  only
       be played in the limited number of cinemas equipped with Atmos.

   76) Second, a foreclosure strategy would not be economically rational since the Atmos processor is considerably more expensive than a  typical
       DCS.[75] Foregoing sales of Atmos processors by preventing third-party DCS from being compatible with the Atmos technology would drive the
       broader adoption of the competing Auro technology at the expense of Atmos. Profits realised on the sale of an Atmos system are  likely  to
       be higher than on the sale of a DCS.

   77) Third, the forthcoming standard for immersive audio will allow theatres that select one rendering solution to be able to play  all  movies
       that include immersive sound without needing multiple rendering solutions.

   78) Finally, the Notifying Party submits that a large part of the DCS market would remain unaffected by a foreclosure strategy, since 3D audio
       will not be taken up by many theatres.[76] Given that less than 1% of all screens globally have adopted 3D audio technology at this  point
       in time, and allowing for some growth in the share of cinema adopting Atmos in the coming years, a foreclosure strategy could only  affect
       a small share of the DCS market and would therefore not prevent other DCS providers from effectively competing in the DCS market.

2 Results of the market investigation

   79) In general, the vast majority of respondents to the market investigation do not expect the proposed transaction to have any adverse impact
       of a conglomerate nature whereby the merged entity could use its position in 3D audio to foreclose DCS competitors.[77]

   80) First, respondents to the market investigation unanimously indicated that movies will continue to be supplied, for the foreseeable future,
       in the traditional, non-proprietary 5.1 and 7.1 digital audio formats.[78]

   81) Second, while respondents to the market investigation consider that entry is difficult due to significant investments in R&D and relations
       with content creators to work in and support the format, they nevertheless indicated that new companies – some  with  a  track  record  in
       audio solutions – may enter that market in the foreseeable future.[79]

   82) Third, the results of the market investigation support the Parties' submission that the  cost  of  retrofitting  theatres  with  3D  audio
       systems is high. Estimates by customers and competitors of the total cost of installing Atmos in an auditorium from  a  7.1  system  range
       widely between EUR 60 000 and EUR 150 000 or even more, depending on the size of the auditorium, the building structure (due to  the  need
       to suspend speakers from the ceilings).[80] Moreover, respondents converge in their assessment that  it  is  more  difficult  to  persuade
       cinema-goers to pay a higher ticket fee for a movie shown in 3D audio than for a movie shown in 3D video.[81]

   83) Fourth, the vast majority of customers, competitors and movie studios expressing a view consider that a strategy to limit Dolby's 3D audio
       solution to the merged entity's DCS would not make business sense. Dolby would lose potential customers of its 3D audio solution that have
       installed or prefer buying a third party DCS, thereby likely slowing down the take-up of its 3D audio solution in the marketplace.[82]

3 Commission's assessment

   84) The Commission considers that the merged entity does not have the ability to foreclose competing manufacturers  from  the  DCS  market  by
       using its current leading position in the nascent market for 3D audio processors. First, the Commission considers that given that 5.1  and
       7.1 formats for digital surround sound are based on open, non-proprietary standards and that  content  providers  will  continue  to  make
       available movies in these audio formats in the foreseeable future, these traditional formats that do not require any new investments  will
       be a de facto competitive constraint on the market for 3D audio processors.

   85) Second, one other competitor, Barco / Auro, is already active in the 3D audio processor market with considerable initial success and  will
       hold approximately [30-40%]% of the worldwide market (measured by number of converted screens) by the end of 2014. Moreover, the  response
       to the market investigation gave concrete indications that other companies may enter the 3D cinema audio processor market.

   86) Third, if an open standard for immersive audio is adopted and successfully implemented, theatres would be able to  play  all  movies  that
       include immersive sound with any rendering solution (3D audio processor and related audio equipment). In other words, if third  party  DCS
       do not support Atmos because Dolby no longer licences the technology to them, this could create a  market  opportunity  for  competing  3D
       audio solutions that could be supported by third party DCS.

   87) As regards incentives to foreclose, the Commission considers that, in light of the results of the market  investigation,  it  is  unlikely
       that a foreclosure strategy would be economically rational. First, prices for 3D audio processors are considerably higher  than  for  DCS.
       Second, absent an open standard, the Atmos format's success partly depends on movie studios being willing to provide their content in that
       format. A broad base of Atmos-equipped auditoriums is therefore important, but the foreclosure strategy would necessarily  lead  to  fewer
       Atmos-auditoriums.

   88) As to the likely impact, the Commission considers that, in light of the results of the market investigation, such a  foreclosure  strategy
       would likely affect only a small part of the DCS market. While internal documents  by  Dolby  identify  a  commercial  goal  of  equipping
       [BUSINESS SECRET] of theatre screens within 10 years, the vast majority of customers indicated that they expect an uptake limited to  less
       than 10% of screens in the EEA in the next 3 years (see also paragraph (94) above). Therefore, if Dolby had the ability and  incentive  to
       foreclose rival DCS manufacturers from Atmos, the strategy would not prevent DCS providers from competing in a substantial part of the DCS
       market.

   89) In light of the above, the Commission concludes that the proposed transaction would not result in conglomerate effects whereby the  merged
       entity could use its leading position in the (emerging) market for 3D audio  processors  to  foreclose  competing  DCS  manufacturers  and
       therefore does not give rise to serious doubts as to its compatibility with the internal market as regards the market for DCS.

       CONCLUSION

   90) For the above reasons, the European Commission has decided not to oppose the notified operation and to  declare  it  compatible  with  the
       internal market and with the EEA Agreement. This decision is adopted in application of  Article  6(1)(b)  of  the  Merger  Regulation  and
       Article 57 of the EEA Agreement.

For the Commission                            (signed)                                                       Joaquín ALMUNIA
Vice-President

-----------------------
[1]   OJ L 24, 29.1.2004, p. 1 ('the Merger Regulation'). With effect from 1 December 2009, the Treaty on the Functioning of the  European  Union
('TFEU') has introduced certain changes, such as the replacement of 'Community'  by  'Union'  and  'common  market'  by  'internal  market'.  The
terminology of the TFEU will be used throughout this decision.

[2]   See clause 7.2 (k) of Membership Interest Purchase Agreement entered into between Dolby and Doremi on 23 February 2014  and  clause  9.2.11
of the Asset Purchase Agreement entered into between Dolby France and Highlands on 23 February 2014.

[3]   Commission Consolidated Jurisdictional Notice under  Council  Regulation  (EC)  No  139/2004  on  the  control  of  concentrations  between
undertakings (OJ C 95, 16.04.2008, p.1.)

[4]   Based on information provided by the Notifying Party, the Parties' market shares are likely to be lower worldwide  than  they  are  in  the
EEA. Respondents to the market investigation generally considered that the geographic scope of this market is global or at least EEA-wide,  given
the need for regional or local maintenance support (See replies to Commission questionnaire Q2 to Customers of 25 September  2014,  questions  14
and 15). In any case, as the proposed transaction does not give rise to any serious doubts as to  its  compatibility  with  the  internal  market
under any plausible geographic market definition, the Commission considers that the exact geographic definition of this market can be left  open.
Moreover, the respondents to the market investigation did not raise any concerns with respect to the  Parties'  horizontal  overlap  in  the  TMS
market. Therefore, in light of the above and the Parties' activities limited overlap, the market for TMS will not be discussed further.

[5]   2K and 4K refer to different resolutions of the projected image.

[6]   Frame rate, also known as frame frequency or "frames per second" (FPS), is the  frequency  at  which  an  imaging  device  produces  unique
consecutive images called frames. High Frame Rate refers to higher frame rates than typical prior practice.

[7]   For instance, Sony has always physically integrated its projector with the  DCS  in  an  all-in-one  solution  so  that  exhibitors  having
purchased Sony's projectors are not able to physically substitute Sony's DCS with a third-party product without  incurring  the  cost  of  a  new
projector.

[8]   See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 3.

[9]   See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 4.

[10]  See replies to Commission questionnaires Q2 to Customers of 25 September 2014, question 5 and Q1  to  Competitors  of  25  September  2014,
question 6.

[11]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 4.

[12]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 3.

[13]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 5.

[14]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 11.

[15]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 10.

[16]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 11.

[17]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 12.

[18]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 13.

[19]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 14.

[20]  In Surround Sound 5.1, the soundtrack to the movie is broadcast or emitted from six sources in the theatre:  from  three  speakers  located
just behind the screen (one middle, one left and one right), one speaker each to the left and the right of the auditorium and a  subwoofer.   The
only difference between Surround Sound 5.1 and 7.1 is that in the latter the existing left surround and right surround channels  are  split  into
four zones, resulting in 8 separate audio channels.

[21]  Both terms are used interchangeably in this decision, along with the technical term "Object-based Audio Essence format" used by  SMPTE  and
DCI.

[22]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 6.

[23]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 7.

[24]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 7.

[25]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 8.

[26]  See replies to Commission questionnaire Q3 to Movie Studios of 25 September 2014, question 2.

[27]  See replies to Commission questionnaire Q3 to Movie Studios of 25 September 2014, question 3.

[28]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 12.

[29]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 13.

[30]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 15.

[31]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 16.

[32]  In terms of first generation server, Dolby supplies the Dolby Screen Server DSS200, which supports 2K resolution for both 2D and 3D.

[33]  In terms of IMB, Dolby supplies the Dolby Integrated Media Block and Screen Server DSS220, where the  IMB  is  installed  directly  in  the
cinema projectors. The DSS220 is a DCI-compliant system with built-in support for HFR, 2K, 4K, 2D and HFR 3D playback as an option.

[34]  Doremi's second generation product is marketed under the name "IMB Showvault" and third generation product under the name "IMS 1000".

[35]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 27.

[36]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 25.

[37]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 29 and replies to Commission questionnaire  Q2  to
Customers of 25 September 2014, question 23. Respondents also indicated that Series 1 projectors in use in  the  EEA,  which  are  likely  to  be
replaced earlier than Series 2 projectors, would certainly represent less than 20% of the total number of projectors  in  use.  (See  replies  to
Commission questionnaire Q1 to Competitors of 25 September 2014, question 23 and replies to  Commission  questionnaire  Q2  to  Customers  of  25
September 2014, question 17).

[38]  See replies to Commission questionnaire Q1 to Competitors of 25 September  2014,  questions  24,  26  and  27  and  replies  to  Commission
questionnaire Q2 to Customers of 25 September 2014, questions 18, 20 and 21.

[39]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 30 and replies to Commission questionnaire  Q2  to
Customers of 25 September 2014, question 24.

[40]  See replies to Commission questionnaire Q1  to  Competitors  of  25  September  2014,  questions  35  and  37  and  replies  to  Commission
questionnaire Q2 to Customers of 25 September 2014, questions 29 and 31.

[41]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, questions 40, 42 and replies  to  Commission  questionnaire
Q2 to Customers of 25 September 2014, questions 34, 35, 36 and 37.

[42]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 37 and replies to Commission questionnaire  Q2  to
Customers of 25 September 2014, question 31.

[43]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, questions 44, 45 and replies  to  Commission  questionnaire
Q2 to Customers of 25 September 2014, questions 38, 39.

[44]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 46.

[45]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 40.

[46]  See replies to Commission questionnaire Q1 to Competitors of 25 September  2014,  questions  47,  48  and  49  and  replies  to  Commission
questionnaire Q2 to Customers of 25 September 2014, question 41.

*     Should read "entered".

[47]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 30.2.

[48]  See replies to Commission questionnaire Q2 to Customers of  25  September  2014,  question  32,  and  to  Commission  questionnaire  Q1  to
Competitors of 25 September 2014, question 38.

[49]  The Notifying Party's internal documents indicate [BUSINESS SECRET] Annex no. 05.019 to the Form CO.

*     Should read "competition".

[50]  This is the voluntary ISO standard 26428-11  (see  https://www.iso.org/obp/ui/#iso:std:iso:26428:-11:ed-1:v1:en).  It  had  been  published
originally by SMPTE in 2009 (ST428-11-2009). SMPTE revised its voluntary standard in 2013 (ST428-11-2013) to include high frame rates that  allow
3D projection (48, 50 and 60 fps/eye, requiring the equipment to run at 96, 100 or 120 fps).

[51]  Notably, local frequency of alternating current that impacts filming equipment. Note, however, that  –  according  to  the  third  party  –
additional equipment can be used to shoot films at 24 or 48 fps even where the local current frequency is unfavourable to these speeds.

[52]  The third party submits that Dolby's IMB does not support 50 fps/ eye HFR 3D and 100 fps 2D. However, Dolby product catalogue  states  that
50 fps/eye 3D is supported and that 100 fps 2D is subject to availability (See "Dolby Cinema Products Catalog", Annex A.013 to the Form  CO).  In
any case, it seems few films currently use 50 fps/eye 3D as the third party notes itself that this frame rate was used by one film only.

[53]  This is in case the merged entity were to release updates that withdraw support for AFR and that exhibitors choose to  install.  The  third
party itself notes the prospect that in France, cinemas may soon legally be required to play films in 25 fps due  to  a  recently  adopted  AFNOR
standard. Such standards are typically rendered mandatory by law.

[54]  The Notifying Party submits that technically, exhibitors do not absolutely need a sound  processor  to  be  able  to  play  back  a  movie.
However, in order to manage the levelling of the audio, EQ and audio conditioning, in practice every cinema theatre is equipped with both  a  DCS
and an audio processor.

[55]  104 Atmos systems have been installed in the EEA and a further [BUSINESS SECRET] are scheduled to be installed until the end of 2014.

[56]  Object-based audio addendum dated 9 September 2013, available at:  http://dcimovies.com/specification/DCI_Object-Based_Audio_Addendum_2013-
0909.pdf).

[57]  See paragraph 3.1.

[58]  See in particular replies to Commission questionnaire Q1 to Competitors of 25 September 2014,  questions  68  and  78,  and  to  Commission
questionnaire Q3 to Movie Studios of 25 September 2014, question 28.

[59]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 64, and to Commission questionnaire  Q3  to  Movie
Studios of 25 September 2014, question 25. One respondent contends, however, that Dolby is trying to slow down the process as much  as  possible,
presumably in order to gain time and establish Atmos as a de facto standard. Another respondent submits that the standard setting  process  moves
forward at a relatively slow pace.

[60]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 65.

[61]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 66, and to Commission questionnaire  Q3  to  Movie
Studios of 25 September 2014, question 26.

[62]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 67.

[63]  See replies to Commission questionnaire Q3 to Movie Studios of 25 September 2014, question 27.

[64]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, questions 54-55.

[65]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question  43.  Competitors  are  more  optimistic,  with  the
majority of competition indicating an uptake up to 20% of auditoriums,  and  a  minority  believing  uptake  would  be  higher.  See  replies  to
Commission questionnaire Q1 to Competitors of 25 September 2014, question 50.

[66]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, questions 44-45.

[67]  See replies to Commission questionnaire Q2 to Customers of  25  September  2014,  question  46,  and  to  Commission  questionnaire  Q1  to
Competitors of 25 September 2014, question 53.

[68]  Respondents to the market investigation generally indicated that  either  exhibitors,  or  the  third-party  integrators  with  which  they
contract, perform updates of their DCS, not the manufacturer of the DCS. Therefore, Dolby does not have direct control  over  its  DCS  installed
base. See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 25.

[69]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, question 69 and 70.

[70]  Today, Dolby pays for the Atmos-related post-production costs (mixing, sub-titling, dubbing) and distribution costs  of  most  movies  that
are made available in Atmos.

[71]  See reply by Auro to Commission questionnaire Q1 to Competitors of 25 September 2014, question 56.

[72]  Dolby Atmos supports up to 64 unique speaker feeds.

[73]  See replies to Commission questionnaire Q2 to Customers of  25  September  2014,  question  48,  and  to  Commission  questionnaire  Q1  to
Competitors of 25 September 2014, question 56.

[74]  If Auro 11.1 costs two thirds of the total installation cost of Atmos (2/3 * USD 100 000 = USD 66 666), USD 66 666+ USD 8000 for a new  DCS
is USD 74 666, which is well below the assumed Atmos cost of USD 100 000. This would continue to be true as long as  the  total  cost  for  Atmos
would not decrease by more than 25% provided the total cost for Auro 11.1 would remain the same.

[75]  According to the Notifying Party, the current list price of a Dolby 3D audio processor (CP850) is about USD 33 000, as  compared  with  the
typical list price of a DCS of around USD 8 500.  The list price of the CP850 includes room commissioning, design and review, and the  set-up  of
the room by a Dolby engineer. The actual price paid today for a Dolby CP850 will be closer to [BUSINESS SECRET] The negotiated street  price  for
a digital server varies, depending, for instance, on the number of DCS that are ordered by the exhibitor. Where the server is being sold  on  its
own, Dolby would estimate the average street price to be somewhere between [BUSINESS SECRET]

[76]  Dolby estimates that Atmos will contribute no more than [BUSINESS SECRET] per year of share growth for Dolby DCS for the period 2016-2023.

[77]  See in particular replies to Commission questionnaire Q1 to Competitors of 25 September 2014, questions 72 and 78,  replies  to  Commission
questionnaire Q2 to Customers of 25 September 2014, questions 56 and 62, and to Commission questionnaire Q3 to  Movie  Studios  of  25  September
2014, questions 29 and 31.

[78]  See replies to Commission questionnaire Q2 to Customers of  25  September  2014,  question  47,  and  to  Commission  questionnaire  Q1  to
Competitors of 25 September 2014, question 54.

[79]  See replies to Commission questionnaire Q1 to Competitors of 25 September 2014, questions 59 to 62, and to Commission questionnaire  Q3  to
Movie Studios of 25 September 2014, question 20-23.

[80]  See replies to Commission questionnaire Q2 to Customers of  25  September  2014,  question  48,  and  to  Commission  questionnaire  Q1  to
Competitors of 25 September 2014, question 56.

[81]  See replies to Commission questionnaire Q2 to Customers of  25  September  2014,  question  49,  and  to  Commission  questionnaire  Q1  to
Competitors of 25 September 2014, question 57.

[82]  See replies to Commission questionnaire Q2 to Customers of 25 September 2014, question 56, to Commission questionnaire  Q1  to  Competitors
of 25 September 2014, question 72, and to Commission questionnaire Q3 to Movie Studios of 25 September 2014, question 29.

-----------------------
 In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EC)  No  139/2004
 concerning non-disclosure of business secrets and other confidential information.  The  omissions  are  shown  thus  […].  Where  possible  the
 information omitted has been replaced by ranges of figures or a general description.

                                                                  PUBLIC VERSION

                                                                 MERGER PROCEDURE