When selling lightbulbs becomes an unprofitable business, how does Philips sell lightbulbs?

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

　　Walking into The Edge, the new headquarters of auditing giant Deloitte in Amsterdam's new district, light will be the first thing you notice.

　　In this 13-story glass office building completed in 2014, sunlight pours directly down from the rooftop glass atrium. And in areas where sunlight cannot directly reach, 6,000 sets of Philips' smart LED luminaires are distributed.

Deloitte Amsterdam The Edge – Interior view of Deloitte's new Amsterdam headquarters, The Edge

　　Unlike the ordinary light bulbs commonly found in office buildings, these LED bulbs do not rely on electrical wires for power. Behind each bulb is a network cable — the same ordinary Ethernet cable you use when installing broadband internet. These networked bulbs can receive information from sensors throughout the building. Here, you don't need to search for light switches or air conditioner remote controls. When you walk into an office area, the overhead lights turn on automatically and the air conditioner is adjusted to a temperature comfortable for the human body.

　　In addition, everyone can adjust the overhead lighting and air-conditioning temperature according to their own preferences. Workstations inside The Edge are not fixed; Christine, a project manager, walks each day to wherever she wants to sit and takes out her iPhone to adjust the lighting.

　　"Find a desk, sit down, open your phone, point the camera at the light like this, and hold the button on the screen to adjust the lighting and temperature," Christine explained to the reporter while demonstrating. Because the workstations are not fixed, the building's bulbs cannot simply pair via Wi-Fi or Bluetooth search like ordinary smart bulbs; instead, hidden markers are installed near each bulb to help the phone identify its current location.

Scanning the lights with the phone's front camera – Scanning nearby lights with the phone's front camera

　　"Everyone can adjust their work environment. Men generally tend to lower the air conditioning temperature by two degrees, while women prefer it relatively warmer. So you see, sometimes male employees mostly sit together and female employees tend to sit together — it's the temperature that separates them," said Tim Sluiters, Deloitte's property manager. One of his daily tasks is to check the usage of offices and meeting rooms throughout the building via a dedicated management system.

　　This lighting management system controls all the lights and air-conditioning temperatures across thirteen floors, but it doesn't require a bunch of screens and complex software like a casino monitoring system. Sitting at a round table in the common room, Sluiters gave a demonstration to reporters; accessing the control system simply required him to open 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 the day. Currently, more people are working on the east side of floors 4-8, but that will change in an hour or two," Sluiters told reporters.

　　By the end of this year, The Edge will have been in operation for one year. Derek Wright, Connected Lighting product manager at Philips, who is responsible for designing and installing the entire lighting system for Deloitte, estimates that the system will save Deloitte 70% in energy.

　　Beyond the light bulbs Philips traditionally sold, the building's Power over Ethernet system, smartphone app, and building management system were all developed by Philips. Just a few years ago, Philips would have provided nothing more than box after box of energy-saving light bulbs for a system like this.

　　All of this has become possible because LED lights can do so much more than energy-saving bulbs.

　　In a Carrefour supermarket in Lille, France, Philips launched another LED-related experiment: installing sensors in LED lights to track the location of every customer. The 2,500-meter-long LED light strips can transmit signals to smartphones, which can determine the user's location and walking direction by receiving light signals without needing an internet connection.

　　This way, retailers can add indoor navigation features to their mobile apps and push promotional messages based on the user's location, such as "2 meters ahead, buy one get one free on the wine on the shelf to your right."

　　In addition to the pilot project with Carrefour, Philips has also launched 262 urban experimental projects in locations including Los Angeles and New York in the United States, and Sant'Angelo in Italy. As early as a decade ago, Philips began attempting to sell comprehensive solutions to its customers. But it is only in recent years that cases like The Edge and Carrefour have begun to come into people's view.

　　The driving force behind this change is mainly the possibilities brought by LED technology itself.

　　A technological revolution triggered by LED

　　Although many designers still use retro Edison bulbs in home design, the present and near future of the lighting industry belong to LED.

　　LED (Light Emitting Diode lighting) is a lighting technology that has existed for decades. In the last 5 years, with the reduction of costs and the improvement of brightness, LED lights have become the most economical choice for homes and offices:

Cost comparison of different types of bulbsCost comparison of different types of bulbs, cost reference numbers are for the US region

　　IKEA, the home furnishing retail giant, has announced that starting September 1st of this year, all of its stores worldwide will sell only LED lighting fixtures, and will no longer sell incandescent or even energy-saving lamps.

　　Technological change is undoubtedly a good thing for consumers. But for the business companies caught up in it, it may not necessarily be so.

　　"I've seen too many very large companies collapse in a very short period of time," Qiu Ronghong, Chief Innovation Officer at Philips, told reporters. Alcatel-Lucent, where Qiu Ronghong worked for 16 years, is one such example of collapse. After Huawei's rise, most of the originally dominant European telecom equipment manufacturers experienced turbulent transformations. Earlier this year, Alcatel-Lucent was acquired by Nokia.

　　The entire lighting industry is undergoing a technology-disrupting revolution. Philips, Osram, and GE Lighting have for many years occupied the vast majority of the market share in light source production, but the popularization of LED has opened up more opportunities for entirely new competitors.

　　The most important component of an LED bulb is the semiconductor chip, which does not place high demands on the original optical craftsmanship. "The entire industry will have to transform from a traditional industry into an industry of the semiconductor sector," said Qiu Ronghong. "The product life cycle has become much faster, and there are more competitors because the entry barriers have been lowered."

　　Although Philips began its transition to LED a long time ago, traditional technical advantages do not necessarily add value in the face of new technology. When it comes to producing light bulbs, the manufacturing expertise gained from incandescent and energy-saving lamp products does not carry over to LED products. On the contrary, the costs consumed by the traditional business and the existing team may instead become obstacles to the shift toward new products.

　　The new entrants do not carry these burdens; they may focus on just one small component and quickly enter the market. For Philips to compete against all these small yet strong rivals is indeed no small challenge.

　　The most striking challenger is the American company Cree, founded in 1987, which originally provided LED epitaxy, chips, and packaging for lighting manufacturers worldwide. A few years ago, they decided to launch their own LED bulbs. Within two years, they sold at least 20 million LED bulbs, leaping to first place in the U.S. LED lighting market.

　　As for lower-cost Chinese competitors, more than a thousand Chinese manufacturers have already begun producing LED bulbs.

Over the past decade, Philips' lighting business profits have declined significantly. Source: Bloomberg Data

　　The impact of LEDs doesn't stop there. The 10-year lifespan of LED bulbs is destroying the business of selling light bulbs.

　　From the time an LED light starts being used to when it is retired, it can replace at least 5 CFL bulbs or 42 incandescent bulbs. For a light bulb manufacturer like Philips, this means each customer will buy at least 80% fewer bulbs.

　　McKinsey predicts that by 2020, the global lighting industry's average annual growth rate will drop from this year's 5% to 3%. Making money just by selling light bulbs no longer works.

　　In March 2014, Philips announced it would sell 80.1% of its LED components and automotive lighting business Lumileds for approximately $3.3 billion. This means Philips Lighting has been separated from the healthcare business to focus on competing for the new markets opened up by LEDs—but at the same time it bears the risks alone.

　　Another giant, Osram, made a similar adjustment, having been spun off from its parent company Siemens before 2013.

　　More Than Just Selling a Light Bulb

　　If you follow tech news, the first LED product that left an impression on you was probably the Philips Hue, launched in 2012.

　　The name Hue comes from the word "color." It is a series of smart bulbs that can be controlled directly via smartphone for on/off, brightness, and color. People often see it displayed alongside expensive digital accessories in Apple retail stores.

　　Three years after its launch, the Philips Hue series remains one of the most expensive smart bulbs on the market. The entry-level set of three bulbs plus a bridge sells for 1999 RMB on Tmall, while an ordinary Philips LED bulb costs only around 20 RMB.

　　This distinctive high price is because, from the very beginning, this team never intended to just sell light bulbs.

In a 17th-century house in Amsterdam, Hue founder George Yianni decorated a living room with the full Hue product range. A floor lamp was fitted with the basic smart bulb, a flexible Hue Lightstrips strip was installed beneath the TV cabinet, two wireless Hue Phoenix table lamps were placed on a side table, and the portable Hue Bloom lamp — which you can pick up and carry anywhere — sat on the coffee table.

George picked up the portable lamp, turned the dial at the base to change the light's color, and handed it to a member of the audience, saying, "This way, when you walk into another room, you can take Hue with you."

As the lamp was passed around among the audience, George turned on the TV and played a clip from a television program.

Hue founder George Yianni demonstrates the complete Hue system

All the lights in the living room changed color — and even flickered — along with the scenes on TV, just like in a theater, where lighting is used to create the transitions between spring, summer, autumn, and winter, or shifts between emotions such as joy, anger, sorrow, and happiness. For example, at the moment the villain was shot, all the lights shifted to a blue-green tone.

"We are very cautious in our market strategy; we are not selling light bulbs, but selling experiences related to lighting," Yianni told *Curious Daily*.

To be honest, lighting that changes with the plot is not necessarily a good idea, but its existence reflects Philips' transformation. This app, co-developed by entertainment company Syfy and Hue, is one of more than 300 third-party apps supported by Hue.

Today, Hue is already an open platform. Changes in brightness and color are exposed as software parameters, allowing software developers to control the bulbs through their own apps and the internet—this is standard software platform design.

"When analyzing user cases, we found it difficult to find a killer app that suits everyone. Everyone wants to use smart bulbs in their own way. Our solution is to open up this platform, so that no matter how crazy their ideas may be, they can develop and use the apps they need," Yianni introduced.

In the very beginning, Hue was actually a venture capital project within Philips. One day, a few colleagues came to Yianni, saying they could connect lights to the internet, which became the origin of Hue's birth. With the support of the venture capital model, it took only one year from the birth of the idea to the product launch in 2012.

Shortening the time "from idea to market" is an important adjustment Philips has made in response to the LED disruption. In the past, it often took two years for a product to go from concept to market launch. Now, the interval for launching new products has been shortened to half a year.

"Decision-making used to drag on for half a year; now it's shortened to within three weeks. If it works, we make a roadmap and lay out a specific launch plan. If not, we don't waste time and move on to the next one." The sense of crisis from a background in the communications industry makes Qiu Ronghong feel they are still not fast enough. "Everyone is aware of LED, but we still need to speed up."

In the organizational structure announced this January, all decision-making levels have been streamlined from three or more layers to two layers. As for ideas that may produce disruptive innovation, they choose to use internal venture capital to avoid the complex processes in a huge machine.

Those immature ideas that may have great potential, after receiving venture capital project approval, will be assigned a venture capital manager by the innovation department to push forward, build teams and try methods. Unlike traditional approaches aimed at safely completing targets, venture capital needs to bear risks. Qiu Ronghong told reporters: "I'd be very satisfied with a 50% success rate."

Before Hue was born, Philips had already started selling businesses beyond light bulbs. In other words, their goal shifted from "selling more light bulbs to more customers" to "selling entire systems related to lighting."

This April, Los Angeles became the first city to use the Philips CityTouch system to manage all of its streetlights. Each streetlight is connected to a terminal control system via wireless network, allowing city managers to monitor, adjust, and maintain all streetlights from a single control panel.

Since 2010, the CityTouch project has been deployed in 31 countries worldwide. Los Angeles's streetlight management system is just one of the 262 total projects. In the Los Angeles project, Philips connected luminaires from other companies for the first time.

CityTouch system interface

As Qiu Ronghong said, "We can't just sell products — you want however many light bulbs and we sell you that many light bulbs (that won't work). We're increasingly doing systems."

　　Inside Philips, they provided extensive transformation training and guidance for employees who originally worked in traditional lighting. According to Philips' projections, LED products will account for 70% of total sales by 2019. In China, where competition is particularly intense, Philips established a dedicated "terminal sales" team last year to directly communicate and sell to commercial real estate and city managers who need systematic services.

　　The transformation is even more evident in the company's management. At least half of the senior executives in Philips Lighting's management team are recent additions from the past two years. They either come from industries that have undergone digital transformation, like Qiu Ronghong, or from internet companies, like global strategy head Bill Bien.

Changes in Philips Lighting Business Share (2005-2015)

Changes in the lighting industry's development direction envisioned by Philips itself, with blue representing traditional lighting, green representing LED, and purple representing systems and services

　　City Touch and Hue are both part of Philips' overall internet strategy. Beyond this, Philips still needs to find more new businesses to strengthen its increasingly less obvious advantages. In Philips' plan, the lighting business will have a pyramid structure in the future.

　　

Philips' envisioned transformation pyramid structure

Philips is not preparing to completely transform into an internet company. Lighting products remain the foundation of all business, and bulbs, luminaires, and light sources will continue to be made. "If LED is not done well, connectivity cannot be achieved," said Qiu Ronghong.

The internet lighting part, in addition to Hue and CityTouch, also includes data analysis services based on lighting, just like the example of the Deloitte office building. Each lamp has a chip connected to the building's network, and how many people have entered this office and how long they stayed are reflected in real time in the lighting management system. The energy consumption analysis report generated based on this is also a data service provided based on lighting.

In Philips' view, ubiquitous lights have unique advantages. Qiu Ronghong said: "Although we need to compete with companies doing Wi-Fi and GPS in these new areas, our persuasion cost is lower: you have to install lights anyway, so you only need to add a little more to enjoy these services."

The top of this pyramid is the Internet of Things, in which investment has only recently begun, and there is no particularly significant progress yet.

Internet lighting seems interesting, but it has not brought much revenue so far, and the Internet of Things is an even more distant plan. In contrast, Philips has already invested 90% of its R&D funds in these areas.

At the same time, the growth rate of new businesses cannot keep up with the decline rate of old businesses. From January to March 2015, 39% of Philips' lighting sales came from LEDs. The "traditional lighting" business such as energy-saving lamps and fluorescent lamps has declined by 60%, while the LED business has only grown by 25%. Philips still needs to move faster.

Whenever a major technological change occurs, industry leaders face enormous challenges. When computers transformed from professional equipment to personal computers in every household, DEC, a giant from the minicomputer era, was acquired by HP; when mobile phones became smart, Nokia sold its mobile phone business. Of course, there are also examples of successfully creating new industries, such as Apple. But how many Apples are there in total?

Now, when LEDs completely replace incandescent and energy-saving lamps and begin to kill the traditional light bulb manufacturing business model, the spotlight has fallen on Philips.