Philips Lighting Utilizes the IoT Revolution to Brighten Its Future

Can Philips reverse the trend of slowing growth and falling margins with digital innovation? Perhaps they already have.

Never the Status Quo

Since the very beginning of its history, Philips has been a market leader and innovator in the consumer products space. As an early adopter of the “electricity industry” in 1891, Philips’ core product category has always been lighting. After quickly ramping up to being one of the largest producers of light bulbs in Europe in the late 1890s, Philips still dominates the lighting industry to this day with the majority of its revenues (30%) coming from its lighting business. [1][2]

In despite of Philips’ clear dedication, the lighting industry is not typically regarded as exciting. Since 1879, when Thomas Edison first patented the incandescent bulb, there really has only ever been two major technological revolutions in lighting: the introduction of the fluorescent bulb in 1939, driven by an energy shortage, and the invention of the light emitting diode (LED) in 1962, also driven by global energy consumption concerns.[3]

However sluggish the industry, Philips is not in any way short of innovation potential. Throughout the twentieth century, they diversified away from the sleepy lighting industry into consumer products (TV, Radio, CD and Cassette players), medical devices (X-Rays), and even the digital revolution itself (Integrated Circuits and Transistors). The innovation has indeed been slower in lighting, but the company has always been an early adopter of new technologies, driving adoption of the fluorescent bulb and LED soon after their introduction into the market.[4]

The story of Philips isn’t without challenges. As recently as last year, Philips has been facing increasing competitive pressure due to the lower cost and longer lifespan of LEDs, as well as the company’s failure to vertically integrate with a semiconductor business. As a result, Philips Lighting is troubled by falling margins and stagnant growth.[5] Notwithstanding these concerns, Philips has once again remained true to its core principles and relied on innovation to impact the bottom line. In 2012, thanks to the digital revolution, Philips may have had its “iPod moment” without anyone noticing. [6]

Philips Hue and the Home Automation Market

That iPod moment is Phillips Hue, a lighting control system designed to provide consumers with full control over their home, all driven by their in-home Wi-Fi network, smartphone, and an easy to use app. Hue represents a major milestone in the world of lighting products, previously restricted to a boring life of low prices and bland marketing. Now part of the Internet of Things (IoT) and home automation revolution, Hue promises to “forever change the way you control and experience light.”[7] The system is packaged as three smart bulbs and the “bridge”- an in-home communication hub that supports connection of up to 50 bulbs.  The Hue is not cheap, however. Priced at a steep $199, the system has entered premium price territory, which further represents the commitment by the company to launch into a completely new market segment for its products.[8]

While a radically new direction for Philips, the research supports that they are once again an early adopter of a budding trend. McKinsey & Company’s report on the global lighting market shows that “the market for lighting system control components is expected to grow very rapidly.”[9]

screen-shot-2016-11-17-at-3-03-09-pm

Figure 1[10]

In addition, the report states that, “Residential may be the fastest-growing application, although the market size is currently still small…However, awareness of lighting control in the residential domain is gradually increasing, together with greater consciousness of home energy management systems.”[11] Not only is the residential space growing rapidly, but as seen in Figure 1, the office and outdoor spaces are also growing at a CAGR of 17% and 24% respectively. Fortunately, the draw for systems like Philips Hue is not only the “cool” factor for hip techies, but also the energy saving potential that smart lighting products provide.

The Future for Philips Lighting

In despite of the proliferation of LEDs putting a major strain on the industry as a whole, Philips once again has used its innovation in the digital space to stay a market leader.

To stay ahead of the curve, however, Philips will need to continue to push the ball forward. I think that the best way to do this is twofold. First, continue intense R&D in the residential space, focusing on energy conscious early adopters of IoT technology. Second, invest heavily on the second highest growth sector for home lighting systems, outdoor. As long as Philips never abandons its innovation culture, the 21st century should surely look as bright for the company as the 20th.

(744 words)

 

[1] Philips. 2016. Our heritage – Company – About | Philips. [ONLINE] Available at: http://www.philips.com/a-w/about/company/our-heritage.html. [Accessed 17 November 2016].

[2] Philips. 2016. Philips 2016 Q3 Quarterly Results. [ONLINE] Available at: http://www.philips.com/corporate/resources/quarterlyresults/2016/Q3_2016/philips-third-quarter-results-2016-presentation.pdf. [Accessed 17 November 2016].

[3] Energy.gov. 2016. The History of the Light Bulb | Department of Energy. [ONLINE] Available at: http://www.energy.gov/articles/history-light-bulb. [Accessed 15 November 2016].

[4] Philips. 2016. Our heritage – Company – About | Philips. [ONLINE] Available at: http://www.philips.com/a-w/about/company/our-heritage.html. [Accessed 15 November 2016]

[5] Bloomberg.com. 2016. Light Gives Us Life But Actually Is a Terrible Business – Bloomberg. [ONLINE] Available at: https://www.bloomberg.com/news/articles/2015-05-07/light-gives-us-life-but-is-actually-a-terrible-business. [Accessed 17 November 2016].

[6] SPIE Europe Ltd. 2016. Philips Hue: solid-state lighting’s iPod moment?. [ONLINE] Available at: http://optics.org/news/3/10/39. [Accessed 17 November 2016].

[7] Philips Hue. 2016. Philips Hue. [ONLINE] Available at: http://www2.meethue.com/en-us/about-hue/#aboutthesystem. [Accessed 17 November 2016].

[8] Ibid

[9] McKinsey & Company. 2012. Lighting the Way: Perspective On the Global Lighting Market. [ONLINE] Available at: https://www.mckinsey.de/files/Lighting_the_way_Perspectives_on_global_lighting_market_2012.pdf. [Accessed 17 November 2016].

[10] Ibid. p.37

[11] Ibid. p.38

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4 thoughts on “Philips Lighting Utilizes the IoT Revolution to Brighten Its Future

  1. The idea of cheap and accessible home automation systems is incredibly appealing to me, as a homeowner and an energy conscious individual. However, I don’t feel that this is an incredibly revolutionary system in that others can very easily, and some already have, replicate. The home automation space is very crowded, with fully automated systems coming in at upwards of $5000 to small systems with limited components priced in the double digits. However, their is space in which I feel there is room for Phillips or any other electronics or tech company to breakthrough in a big way. Providing an all-encompassing system that enables a homeowner to piece together the most desirable products over time or within budget would strike a chord with consumers. Current companies in the space provide a few products and navigating the compatibility matrices across platforms is incredibly painful. I look forward to Apple’s full release of the Home system (as opposed to just the Home app that snuck its way onto your phone in the latest update that syncs with a small number of products) as I feel this may be on track towards the system most homeowners truly desire.

  2. You seem very optimistic about the Phillips Hue, but smart devices haven’t been living up to the hype so far. According to The Economist, only 6% of US households have smart devices today. Price is a big concern – who wants to pay 200 bucks for three lightbulbs when I can buy 12 LEDs at target for less than that? Are people willing to pay such a big premium on light bulbs just so they can control them with an app? The Phillips Hue is a good start, but it only provides an incremental improvement over the current user experience at a much higher price. To drive adoption, you need step-change improvements over the status-quo. For me, the bigger value to consumers is interconnected smart devices working together to enhance the user experience. For that Phillips, will need to 1) bring its price down and 2) innovate beyond Hue into other smart devices and work with Nest or Apple to create a truly remarkable smart home experience.

  3. Indeed Philips needs to continue innovating to stay ahead of the curve. Already other startups are looking to disrupt the lighting industry, with innovations such as The Finally Bulb, a bulb that is 75% more efficient and has a useful life 15 times longer than the LED bulb http://www.topbulb.com/blog/next-big-thing-lighting-led/.

    In 2015, Philips signed a $25 million deal to team up with MIT and move its R&D headquarters to Cambridge http://fortune.com/2015/05/19/philips-rd-mit/. This suggests they have recognized the need to focus on R&D in-house, rather than just buy up competitor start-ups. Or perhaps this may just be a marketing stint to create a “growth story” for the company given it recently sold 25% of its lighting business http://www.cnbc.com/2016/05/03/philips-to-seek-ipo-for-philips-lighting.html.

    Irrespective of intentions, innovating in-house clearly seems to be a key strategic focus of Philips Lighting.

  4. Enlightening post, Nick!

    My friend is what we would call an “early adopter,” and he bought one of the Phillips Hue products. Honestly, I thought it was very gimmicky and unnecessary, at least in its early stage of development. However, I agree there are possible benefits and applications for innovations in this area. I think being able to control lights throughout the house using your smart phone could not only be a great party trick, but also help save on energy costs. The lights could also be interactive or have security applications in the future. In a recent Forbes article (http://www.forbes.com/sites/peterdetwiler/2015/05/13/philips-and-the-future-of-led-lighintg/2/#7cdd2a3221e0) I read about how lights could be synced and interact with music, or they could change color and light up tactically during an emergency like a fire in order to lead occupants to safety. I think we are moving towards a even more connected world and home and lights will definitely play a part in that interaction; looks like Phillips is on the right path.

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