I've been covering the solar industry for The Motley Fool since 2010, and over just three years the industry has gone through an incredible transformation. Solar once required massive subsidies to be competitive, but today there are utility-scale projects being built without subsidies and leases are being offered to homeowners with $0 down and lower energy bills to boot.

There have also been major changes in who holds the best strategic position in solar. First Solar (NASDAQ:FSLR) was once the undisputed king of solar, but it's now virtually shut out of the distributed solar market because its panels aren't efficient enough. SolarCity (NASDAQ:SCTY) is a relative newcomer to the industry, but it's now once of the most valuable companies in solar.

So, who is in the best strategic position to win in the future? Let's explore that question.

What won yesterday won't win tomorrow
In any business, you try to differentiate yourself from competitors to gain a competitive advantage. In solar, the differentiators have changed in the last few years, and I think they will do so again before we reach a long-term steady state.

In 2010, cost was by far the biggest differentiator among solar module manufacturers. First Solar had a wide lead and generated margins that competitors couldn't come close to touching. But polysilicon solar costs dropped rapidly over the past three years, and today costs are hardly the only thing differentiating panels. In fact, SunPower (NASDAQ:SPWR), which has some of the highest costs per watt in the industry, has among the industry's highest margins. Quality and efficiency have become more important and replaced cost as a major differentiator.

FSLR Gross Profit Margin (Quarterly) Chart

FSLR Gross Profit Margin (Quarterly) data by YCharts

In 2013, the emerging differentiator among solar companies is business model innovation. SolarCity has used a leasing model to grow installations and opened up new financing options like securitization of its lease payments. For SunPower, First Solar, and Canadian Solar (NASDAQ:CSIQ), captive demand from utility-scale projects has helped them outperform manufacturers which didn't have the same capabilities. Right now, downstream capabilities are the biggest differentiator in solar, but will that trend pass like the cost advantage did for First Solar?

While offerings like leases have been a big winner this year, I don't think they will be a long-term differentiator in solar. Just look at how fast they've expanded in the last few years. Companies like SunPower, SolarCity, Sunrun, and Clean Power Finance are all offering leases, and, as investors get comfortable with the model, the options will grow. All you need is installation partners, and there are hundreds of those around the country.

The analogy I make to solar leasing is auto leasing. When auto leases were introduced they may have been a competitive advantage for early adopters, but today everyone offers them. What would keep Home Depot from offering solar installations and financing through a major bank in the future instead of SolarCity? Will Lowes, homebuilders, Best Buy, or whoever is selling solar in a decade need leasing companies of today, or will a bank do the job? 

Then there's the challenge of predicting the best financing model of the future. If solar costs keep falling, why wouldn't a homeowner get a solar loan for $10,000 to buy a system instead of leasing? The point is that in the future I don't think 90% of distributed solar installations will be done with a lease, so the leaders today will at least need to adapt. 

In my opinion, the solar lease itself isn't a differentiator long-term the way it is today. The installation and financing of solar will only get more competitive, and companies like SolarCity won't be able to generate $2 or more in value per watt installed once consumers become more educated about a system's costs and when larger competitors emerge. Don't get me wrong, these are important products for companies to offer just like leases are to automakers -- I just don't think they'll define winners and losers long-term because they're too easy for others to replicate.

What's unknown is how service plays a role in the future of solar. SolarCity, SunPower, Sunrun, and others view service as a key part of their lease offering, but that's not consistent with other industries. You don't lease shingles on your roof, your air conditioner, or appliances in your kitchen. But if something goes wrong you can just call a repair company. Will an analogous service industry evolve in solar instead of being rolled into a lease? I think it will. 

The differentiator of the future
When I look at the future of solar, I think the product itself will become more and more important. The panels, monitoring equipment, and storage options will be what sells a system, not the fact that you can get a lease or a loan for a system.

Continuing the auto analogy, now that leases, loans, and cash sales are offered by almost every dealer, the financing isn't the biggest driver of a sale, the product is. That's why I see products like SolarCity's DemandLogic or SunPower's X-Series panels becoming differentiating products in the future.

I also think the days of viewing panels strictly as a commodity are coming to a close. As costs have fallen, efficiency, form factor, and energy system offerings will become more important. We've already seen this trend begin to play out. SunPower is sold out of panels for the next 18 months and is building another 350 MW of capacity, the only major player to add capacity this year. If efficiency didn't matter and solar panels were commodities, we would see SunPower struggle -- but instead Suntech Power went out of business, LDK Solar is struggling to survive, and Chinese manufacturers are generating the lowest margins in the industry.

Foolish bottom line
The solar industry is still evolving rapidly, and investors need to stay nimble as a result. What's important to keep in mind is that what has led the industry in the past may not be what wins in the future. I think product differentiation will continue to be more important in the future as costs fall across the industry.

Solar investors should know by now that it's far easier to cut costs than it is to improve technology, and that's why I'll side with the technology leaders every day of the week.

Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.