Selling Light Bulbs No Longer Pays. So How Will Philips Sell Light Bulbs?

LED has changed many things, and Philips is surely one of them.

Walk into The Edge, the new headquarters of the auditing giant Deloitte in Amsterdam's new district, and the first thing you notice is the light.

In this 13-story glass office building, completed in 2014, sunlight pours straight down through a glass atrium in the roof. Where the sun cannot reach, 6,000 Philips smart LED fixtures take over.

Inside The Edge, Deloitte's new Amsterdam headquarters

Unlike the bulbs in most office buildings, these LEDs do not draw power from electrical wiring. Behind every bulb runs a network cable, the same ordinary Ethernet cable you use to hook up home broadband. Because they are networked, the bulbs can take in data from sensors throughout the building. Nobody here has to hunt for a light switch or an air-conditioning remote. Walk into an office area and the lights overhead switch on by themselves, and the air conditioning settles at a comfortable temperature.

Everyone can also adjust the light and the temperature above their own desk to suit themselves. Desks at The Edge are not assigned. Each day Christine, a project manager, walks to wherever she wants to sit, takes out her iPhone and adjusts the lights.

"You find a desk, sit down, open your phone, scan the light with the camera like this, and hold down the button on the screen to change the light and the temperature," Christine told QDaily as she demonstrated. Because nobody has a fixed seat, the bulbs cannot pair with a phone over Wi-Fi or Bluetooth the way ordinary smart bulbs do. Instead, small, unobtrusive markers near each bulb tell the phone where it is.

Using a phone's front camera to scan a nearby light

"Everyone can adjust their own working environment. Men usually like the air conditioning two degrees cooler, while women prefer it a bit warmer. So you see, sometimes most of the men end up sitting together and the women tend to sit together. It's the temperature that separates them," said Tim Sluiters, Deloitte's property manager. Part of his daily routine is checking, in a dedicated management system, how the building's offices and meeting rooms are being used.

The system controls every light and the air conditioning on all 13 floors, yet it needs nothing like the wall of screens and complex software of a casino surveillance room. Sitting at a round table in a common room, Sluiters showed QDaily how it works: to reach the controls, he simply opened a web page on his laptop.

The Edge's management system

"In this system I can see how many employees are using the offices at different times of day," Sluiters told QDaily. "Right now a lot of people are working on the east side of floors 4 to 8. In an hour or two that will change."

By the end of this year, The Edge will have been in use for a full year. Derek Wright, the Philips connected lighting product manager who designed and installed Deloitte's entire lighting system, expects it to cut Deloitte's energy use by 70%.

Besides the bulbs Philips has always sold, Philips also developed the power-over-network-cable system, the smartphone app and the building management system used throughout the building. A few years ago, Philips's contribution to a project like this would usually have been box after box of energy-saving bulbs.

All this is possible because LEDs can do far more than energy-saving lamps.

At a Carrefour supermarket in Lille, France, Philips has started another LED experiment: putting sensors in the lights to track where each shopper is. A total of 2,500 meters of LED strip lighting sends signals to smartphones. By picking up the signal in the light, a phone can work out where its user is standing and which way they are walking, with no internet connection.

That lets retailers add in-store navigation to their apps and push promotions based on where a shopper is standing: "Two meters ahead, the wine on the shelf to your right is buy one, get one free."

Beyond the Carrefour pilot, Philips has launched 262 urban pilot projects in places such as Los Angeles and New York in the United States and Sant'Angelo in Italy. Philips began trying to sell customers complete solutions more than a decade ago. But only in the past few years have projects like The Edge and Carrefour started to draw public attention.

What is driving the change is, above all, what LED technology itself makes possible.

A Technological Revolution Set Off by LED

Plenty of designers still use retro Edison bulbs in home interiors, but the lighting industry's present and near future both belong to LED.

LED (light-emitting diode) lighting has been around for decades. Over the past five years, as costs have fallen and brightness has risen, LED lamps have become the cheapest choice for homes and offices:

Comparison of the cost of using different types of bulbs; cost figures are for the United States

IKEA, the home furnishings giant, has announced that from September 1 this year, its stores worldwide will sell only LED lighting, dropping incandescent bulbs and even energy-saving lamps.

Technological change is clearly good for consumers. For the companies caught up in it, not necessarily.

"I have seen too many very large companies collapse in a very short time," Philips Chief Innovation Officer Qiu Ronghong told QDaily. Alcatel-Lucent, where Qiu worked for 16 years, is one such case. After Huawei rose, most of the European telecom equipment makers that once dominated the market went through rocky transformations. Earlier this year, Alcatel-Lucent was acquired by Nokia.

The whole lighting industry is going through a revolution driven by disruptive technology. For many years Philips, Osram and GE Lighting held the vast majority of the market for light sources, but the spread of LED has opened the door to entirely new competitors.

The heart of an LED bulb is a semiconductor chip, and it makes few demands on traditional optical craftsmanship. "The whole industry has to turn from a traditional industry into a semiconductor industry," Qiu said. "Product life cycles have become very short, and there are more competitors, because the barrier to entry is lower."

Philips started moving to LED early, but old technical strengths do not necessarily help against a new technology. Both are light bulbs, yet the manufacturing advantages Philips built in incandescent and energy-saving lamps do not carry over to LED. If anything, the costs of the traditional business and the existing teams may hold back the shift to new products.

Newcomers carry no such baggage. Some focus on a single small component and can enter the market quickly. Taking on all these small but strong rivals at once is a real challenge for Philips.

The most prominent challenger is Cree, an American company founded in 1987 that originally supplied LED epitaxial wafers, chips and packaging to lighting makers around the world. A few years ago it decided to launch its own LED bulbs. Within two years it had sold at least 20 million of them and leapt to first place in the US LED lighting market.

Then there are the lower-cost Chinese competitors: more than a thousand Chinese manufacturers now make LED bulbs.

Profits of Philips's lighting business have fallen sharply over the past ten years, Source: Bloomberg Data

And LED's impact does not end there. An LED bulb lasts ten years, and that lifespan is destroying the business of selling light bulbs.

A single LED lamp, from first use to retirement, outlasts at least 5 energy-saving lamps or 42 incandescent bulbs. For a bulb maker like Philips, that means each customer will buy at least 80% fewer bulbs.

McKinsey predicts that by 2020, the global lighting industry's average annual growth will fall from 5% this year to 3%. Selling bulbs alone no longer makes money.

In March 2014, Philips announced it would sell an 80.1% stake in Lumileds, its LED components and automotive lighting business, for about US$3.3 billion. The move separated Philips Lighting from the healthcare business so it could concentrate on fighting for the new markets LED has opened up, but it also left the lighting business to carry the risk on its own.

Osram, another giant, made a similar move: it was spun off from its parent company, Siemens, before 2013.

More Than Selling a Light Bulb

If you follow tech news, the first LED product that caught your eye may well have been Philips Hue, launched in 2012.

The name Hue comes from the word for "color." It is a range of smart bulbs whose power, brightness and color you control directly from your phone, and you would often see them in Apple stores, displayed next to expensive gadget accessories.

Three years after launch, Philips Hue is still among the most expensive smart bulbs on the market. The entry-level starter kit, three bulbs plus a bridge, sells for 1,698 yuan on Tmall. An ordinary Philips LED bulb costs about 20 yuan.

The price is unusually high because, from the start, the team never meant to sell just bulbs.

In a 17th-century house in Amsterdam, Hue founder George Yianni had furnished a living room with the full Hue range. The floor lamp held a basic smart bulb; a flexible light strip, Hue Lightstrips, ran beneath the TV cabinet; two smart table lamps, Hue Phoenix, stood on a low table; and on the coffee table sat Hue Go, a portable lamp you can carry from room to room in your hands.

George picked up a Hue Go, turned the knob on its base to change the color of the light, and handed it to his audience. "This way, when you walk into another room, you can take Hue with you."

As the lamp went around the room, George switched on the TV and played a clip from a TV show.

Hue founder George Yianni demonstrates the full Hue system

Every light in the living room changed color, and even flickered, in step with the plot, much as stage lighting in a theater conjures the turn of the seasons or a shift from joy to anger. At the moment the villain was shot, for instance, every light turned blue-green.

"We are very careful with our market strategy. We are not selling light bulbs; we are selling experiences related to light," Yianni told QDaily.

Frankly, lights that change with the plot may not be a great idea, but the fact that they exist at all shows how Philips is changing. The app was developed jointly by the entertainment company Syfy and Hue, and it is one of more than 300 third-party apps that Hue supports.

Hue is now an open platform. Brightness and color are exposed as software parameters, and developers can control the bulbs over the internet through their own apps. This is standard software platform design.

"When we analyzed user cases, we found it hard to find a killer app that suits everyone," Yianni explained. "Everyone wants to use smart bulbs in their own way. Our solution is to open up the platform, so that however crazy their ideas are, people can build and use the apps they need."

Hue actually began as an internal venture project at Philips. One day a few colleagues came to Yianni and said they could connect lights to the internet. That was the origin of Hue. Backed by the venture model, Hue went from idea to product launch in 2012 in just one year.

Shortening the time "from idea to market" was one of the main ways Philips responded to the LED shock. A product used to take two years to go from concept to store shelves. Now Philips launches a new product every six months.

"Decisions used to drag on for six months. Now we make them within three weeks. If it's a yes, we draw up a roadmap and a concrete launch plan. If it's a no, we don't waste time; we move on to the next idea." Coming from telecoms, Qiu brings a sense of urgency that makes the company still seem too slow. "Everyone has realized how important LED is, but we still need to speed up."

Under the organizational structure announced in January this year, every decision now passes through two levels instead of three or more. And for ideas that might lead to disruptive innovation, Philips chose internal venture investment as a way around the complicated processes of a huge machine.

Ideas that are immature but may have great potential, once approved as venture projects, get a venture manager from the innovation department, who drives the project forward, builds a team and tries out approaches. Traditional practice aims above all at hitting targets safely; venture projects are meant to take risks. "A 50% success rate would make me very happy," Qiu told QDaily.

From Selling Bulbs to Selling Services

Even before Hue was born, Philips had begun selling things other than light bulbs. Put another way, its goal had shifted from "selling more bulbs to more customers" to "selling complete lighting systems."

In April this year, Los Angeles became the first city to manage all of its streetlights with the Philips CityTouch system. Every streetlight connects over a wireless network to a central control system, and city managers can monitor, adjust and maintain all of them from a single control panel.

Since 2010, CityTouch has been deployed in 31 countries. The Los Angeles streetlight system is just one of the 262 projects. In Los Angeles, Philips for the first time began connecting fixtures made by other companies.

The interface of the CityTouch system

As Qiu put it: "We can't just sell products, selling you as many bulbs as you want (that won't work). More and more, we are doing systems."

Inside the company, Philips has given employees from traditional lighting extensive retraining and guidance. Philips expects LED products to make up 70% of its total sales in 2019. In China, where competition is especially fierce, Philips set up a dedicated "end-sales" team last year to deal and sell directly with commercial property owners, and even city governments, that need system-level services.

The change is even more visible in management. At least half of Philips Lighting's executives joined in the past two years. They come either, like Qiu, from industries that have been through a digital transformation, or, like global head of strategy Bill Bien, from internet companies.

Philips's own vision of how the lighting industry will change; blue is traditional lighting, green is LED, purple is systems and services

CityTouch and Hue are both part of Philips's wider internet strategy. Beyond them, Philips still needs to find more new businesses to shore up an advantage that is fading. In Philips's plan, the lighting business will take the shape of a pyramid.

The transformation pyramid Philips envisions

Philips has no plan to turn itself into an internet company. Lighting products remain the base of everything it does, and it will keep making bulbs, fixtures and light sources. "If we don't get LED right, we can't achieve connectivity either," Qiu said.

The connected lighting layer includes, besides Hue and CityTouch, data analysis services built on lighting, as in the Deloitte building. Every light has a chip connected to the building's network, so the lighting management system shows in real time how many people have entered an office and how long they stayed. The energy-use reports generated from this data are another service that rests on light.

Philips sees its lights, which are everywhere, as a unique advantage. "In these new fields we have to compete with Wi-Fi and GPS companies, but it costs us less to persuade customers," Qiu said. "You have to install lights anyway, and for just a little more you get these services."

At the top of the pyramid is the Internet of Things, which Philips only recently began investing in and where it has yet to make much visible progress.

Connected lighting all looks interesting, but so far it has not brought in much revenue, and the Internet of Things is an even more distant plan. Yet Philips already puts 90% of its R&D budget into these areas.

Meanwhile, the new businesses are not growing as fast as the old one is shrinking. From January to March 2015, LED accounted for 39% of Philips's lighting sales. "Traditional lighting" such as energy-saving and fluorescent lamps fell 60%, while the LED business grew only 25%. Philips needs to move faster.

Every major technological shift puts industry leaders under enormous pressure. When computers went from specialist equipment to a PC in every home, DEC, the giant of the minicomputer era, was bought by HP. When phones became smart, Nokia sold off its handset business. There are, of course, companies that succeeded in creating new industries, Apple among them. But how many Apples are there?

Now LED is completely replacing incandescent and energy-saving lamps and beginning to choke the traditional bulb makers' business model, and the spotlight has fallen on Philips.