Dark Matter

With LED Bulbs, Profits and Growth Diverge

When it’s time to move on, it’s time to move on: IBM left the PC business, Minolta left the camera business and Nokia left the handset business. Philips is now essentially leaving the light bulb business.

Last month, Philips announced that it would spin off its lighting business in order to concentrate on higher-margin segments such as healthcare and consumer electronics products. The main concern for Philips is leaving the light bulb business, an industry on which the company was founded almost 125 years ago.

This means the popular Philips Hue family of smart bulbs will become part of a separate — and apparently yet unnamed — company. It’s unlikely there will be any noticeable disruption for consumers, but the lighting industry’s falling average selling prices (ASPs) and profit margins are causing a shake-up and shake-out among players that had looked to the LED market for growth.

Samsung announced last week that it planned to exit the LED lighting business outside of Korea owing to profitability concerns. It was surprising news given Samsung’s previous plans to enter the market for smart bulbs as part of its home connectivity strategy. The company had been showing off a Bluetooth-enabled LED bulb, a product under review by the Federal Communications Commission. Should Samsung cancel this product, it’s another acknowledgement that even the market for high-end bulbs has changed dramatically in the past year.

CCS Insight recently wrote about GE’s new ZigBee-based $15 LED smart bulb (see Daily Insight: The Battle of the Bulb) — shockingly low-priced considering some basic LED models cost more. Moves like GE’s are driving the smart bulb mainstream, causing it to become commoditised in record time. Asian brands are accelerating this process, selling connected bulbs at prices that undercut of some established products by up to 50%.

Last week, Cree, an American-based maker of LED products, announced disappointing quarterly financial results as a result of declining LED margins. This follows recent news from German-based lighting maker Osram of significant cutbacks owing to falling lighting profitability.

Volume growth and profit growth don’t always correlate: sales of LED bulbs have more than tripled in the past three years, but prices and profits have been heading in the other direction. The market has matured, and the extremely long life spans of LED bulbs — up to 30 years in some cases — mean that recurring revenue could begin to dry up.

We expect bulb makers to turn to the smart bulb market to shore up ASPs. Smart bulbs can be used as dumb bulbs (so a smart home isn’t a must for selling a smart bulb), but will also act as an introduction to the Internet of things for many households. Plunging LED prices could, ultimately, spark an industry. Anyone who screws in a light bulb will be creating a smart home.