This article originally appeared in Motley Fool Rule Breakers.
Believe it or not, lighting is a $100 billion global industry, on par with the total spend on online advertisements or annual worldwide sales of coffee. Lighting is indeed a huge -- and very mature -- industry. But the interesting part is that it is all changing, right now.
The Industry Today
Things have come a long way since Thomas Edison filed his first patent for the incandescent bulb in 1879. For well over a century, incandescents were considered the best-in-class technology for providing light.
As the technology matured, the industry became dictated by economies of scale. The automation of production lines demanded huge capital expenditures, which allowed three conglomerates to all but control incandescent bulb manufacturing. In the United States today, GE (NYSE:GE) controls 33% market share, Netherlands-based Philips (NYSE:PHG) controls 29%, and German-based Siemens (NASDAQOTH:SIEGY) 23%.
In addition to having created the manufacturing improvements, these large companies wielded enormous power in branding and distribution. Consumers relied on mass merchandisers, such as Wal-Mart (NYSE:WMT) or Home Depot (NYSE:HD), to pick up replacement bulbs. Purchase behavior was often driven only by necessity. Most lighting fixtures in the home (or office) were pre-installed, and consumers knew exactly what size, wattage, and brand to look for when they went to the store.
The Disruption Opportunity
But as I alluded to above, there's something interesting going on with lighting. The scale and brand advantages enjoyed by the conglomerates are losing their importance, largely because of a renewed focus on energy efficiency.
In 2007, the U.S. government passed the Energy Independence and Security Act, which mandated efficiency standards for lighting manufacturers. The legislation banned the manufacture of 100-watt bulbs (for sale in the United States) in 2012, of 75-watt bulbs in 2013, and of 40- and 60-watt bulbs in 2014. Several other governments, including those in Australia, China, Canada, and the European Union, made similar proclamations banning incandescent bulbs.
And just like that, the whole lighting game changed. The huge factories that were built to achieve scale are now more of a liability than an asset. The installed base of incandescent lighting (estimated by Goldman Sachs to be more than 1.7 billion lamps in the United States alone) is now up for grabs.
The Next Bright Idea
That is a huge opportunity for an innovative company to take advantage of.
A few value drivers could help companies appeal to consumers. The desire for low electric bills makes energy efficiency a necessity. The hassle of constantly replacing bulbs makes longer replacement cycles appealing. Lastly, automation and convenience devices are becoming increasingly popular in homes.
Put all that together, and light-emitting-diodes, or LEDs, seem like a technology poised to benefit. LEDs use semiconductor materials to emit light as photons rather than using filaments to produce light and heat from resistance. The new technology has its advantages. LEDs use 50% to 85% less energy than traditional bulbs and can last for several decades. Because they are electronic, they can also be controlled by software. This opens doors for several new applications -- home lighting-control systems, laser welding, and even patient treatment in hospitals.
Companies We're Watching
"Your customer can't ask for something they've never imagined. One of the things we've learned is you have to keep pushing the limits."
-- Cree CEO Chuck Swoboda
Keeping our focus on the consumer market, Cree (NASDAQ:CREE) could be a clear winner from a shift to LEDs. The company gets nearly 85% of revenue from the LED lighting market and has been growing its top line at nearly 25% per year. Cree prides itself on being the industry innovator; it's spent 25 years developing silicon carbide as a platform material for semiconductor applications. In March 2013, the company began offering 60-watt-equivalent LED bulbs for $10. If LEDs gain adoption, Cree is in the right place at the right time.
A different way to play the lighting-disruption trend could be Rule Breakers recommendation Universal Display (NASDAQ:OLED). Universal Display is developing organic LEDs, or OLEDs, which are even brighter and more energy-efficient. The company is licensing its OLED technology and selling materials into next-generation consumer electronics -- including smartphone and television displays for Samsung and LG (NYSE:LPL) -- and it also offers high-end consumer-lighting products. The company maintains more than 1,000 issued and pending patents worldwide.
The Foolish Bottom Line
Energy efficiency will be a huge topic of conversation for years to come, and it will have profound implications for the energy, power production, and automobile industries, to name just a few.
I've focused here on consumer lighting, which accounts for 40% of energy usage in the home. When you take into account that there are now 317 million people in America, lighting adds up to quite an electric bill. Government regulation, efficiency improvements, and functionality could drive an increased role of technology in the industry.
Could LEDs be the light at the end of the tunnel?
Simon Erickson owns shares of Universal Display and has the following options: short September 2014 $28 puts on Universal Display. The Motley Fool recommends Home Depot and Universal Display. The Motley Fool owns shares of General Electric Company and Universal Display. 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.
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