Philips’ Hue: A Bright Idea for Tech Investors

I was in my local Apple (NASDAQ:AAPL) store last Friday morning. On the way in, I passed a bunch of security guards, a now-empty roped-off lineup space and a swarm of pumped-up Apple staff. There were people inside picking up their iPad Minis, but it wasn’t the crowd I’d expected for the new tablet’s launch.

Then, I walked past the new iPads on display (nice enough, but I think I’ll make do with my existing iPad for now) and grabbed a package of light bulbs.

Yes, you heard me. I drove for half an hour, dealt with mall parking and risked a (nonexistent) mob at the Apple store during a major project launch day to pick up a $200 pack of LED lightbulbs. These weren’t just any lightbulbs, though — I was after a starter pack of Philips (NYSE:PHG) Hue, web-enabled, iPhone-controlled LED bulbs.

Currently an Apple exclusive, the Hue system launched last week. The bulbs not only use a fraction of the energy of traditional incandescent lightbulbs, but can be programmed remotely (via the web) and controlled with your iPhone (there’s also an Android app). Plus, you can choose the color and intensity of each bulb individually.

While the kit was available on Thursday through Apple’s website with a one- to three-day delivery, that had already slipped to one to three months by Friday morning. Thus, the panicked call to the brick-and-mortar store to see if they still had some in stock. I now have the system set up and it’s indeed pretty darn cool.

The Next Big Thing

With this new technology, an article in Optics has posed this question: “With the Hue, has lighting reached its iPod moment?”

First, a quick history lesson — and one you probably are familiar with. After years of “okay” MP3 players, Apple seemingly came out of nowhere with the premium-price, premium-design iPod, quickly dominating the market for digital music.

The first iPod established iTunes and set the stage for the computer company to transform into consumer electronics giant. In the weeks prior to the iPod launch, Apple’s stock was trading in the $9 range; in the six years between the iPod launch and the introduction of the iPhone, iPod sales helped drive Apple’s stock to $123 — a 1,266% increase.

If Hue represents lighting’s iPod moment, this is just the beginning.

Two Hot Technologies

LED bulbs are nothing new, but some factors are tipping in their favor now. For one, incandescent bulbs are being slowly but surely eliminated worldwide (even China, not known for its “green” policies has committed to 100% LED lighting by 2020). Consumers and environmentalists are also souring on compact fluorescent bulbs (which haven’t lived up to the hype and pose disposal concerns) and LED bulbs are reaching a level of effectiveness and price point where they are practical for home lighting.

LED lighting currently has single-digit market penetration, but estimates in the potential savings on annual electricity bills worldwide have been put in the $150 billion to $200 billion range. With that in mind, it’s almost no wonder that governments worldwide are beginning to offer consumer subsidies for buying LED bulbs.

The U.S. government got in the act last year with the $10 million “L Prize” for an affordable, green lightbulb … and Philips won that “L Prize” (although with a more traditional, non-connected LED bulb). In other words, the stage is set for LED home lighting to take off in a big way.

There’s another home technology trend that’s on the increase — a demand for automation, especially “smart,” web-connected and smartphone-controlled systems. One of the stars of this movement is the incredibly popular NEST learning thermostat from Nest Labs.

In fact, Philips may have learned a few things from Nest Labs. It made sure its Hue was programmable by using an iPhone, for example, and designed the bulb (and its packaging) to look like something Apple itself might release. Then it made Hue available through Apple Stores.

With such attention to detail and cutting-edge technology, Philips has positioned its Hue system to capitalize on the convergence of these two trends.

A Bright Outlook

Philips hasn’t released Hue sales figures, but I have to imagine that the company is pleased with the launch. The next step is to beef up the capabilities (adding energy consumption reporting, for example), expand the lineup to include other bulb types and grow the Hue’s retail presence beyond Apple stores and into the mass market.

The company makes a wide range of products — including healthcare equipment and consumer electronics — but it’s the lighting division that offers the opportunity for explosive growth if LED lighting technology takes off in a big way. Philips is the world’s largest lighting maker. In the quarterly report last month, it said LED sales were up 50% year-over-year, with LED representing 25% of the total lighting mix. And the lighting division accounted for 35% of total revenue and 32% of profits.

Competitors in the LED market include General Electric (NYSE:GE) and a raft of startups, but if the Hue becomes Philips’ iPod moment, the company has a chance at capitalizing for big gains.

It’s not all good news, however, as the company will incur restructuring charges as it shutters plants that make incandescent bulbs.

But Philips has already ditched its money-losing flatscreen TV business and boosted profits nearly 200% compared to the same quarter last year. It’s stock has been on an upward trend lately, gaining 12% since the start of the summer. Still, at $25.70, it is nowhere near its $47-level highs in 2000. That leaves plenty of room for growth.

And this technology — a combination of two promising advances — might just flip the switch and make that growth a reality.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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