The light bulb goes digital

January 26, 2010: 8:30 AM ET

Companies for years have toyed with light-emitting diodes, which use the same technology as computer chips. Now LEDs are having their day in the sun.

An assortment of new LED bulbs, including two models from Philips (top), Cree (bottom right), and Lemnis (bottom left), surround Philips's 60-watt replacement bulb, which hasn't hit the market yet.

The $100 billion global lighting industry is undergoing radical change: New office buildings and retail outlets are abandoning fluorescent lighting in favor of LEDs, or light-emitting diodes, those tiny, energy-efficient, long-lasting, and blindingly bright points of light. Giants such as GE (GE) and Philips are shifting production from incandescent bulbs to LEDs. Even the local Home Depot (HD) -- which today probably stocks only a couple of LED lighting products -- will soon carry a bouquet of LED bulbs, ultimately edging out fluorescents and halogen lamps. By the end of the decade, analysts predict, LEDs will be the dominant source for commercial and residential lighting.

LEDs, which are based on a technology similar to that of computer chips, have more in common in their design and manufacture with your laptop than with the incandescent bulb that Thomas Edison patented almost 130 years ago. As lighting goes digital, the industry is likely to encounter some of the same upheaval that took place when television, music, and other businesses shifted away from analog technologies.

Lighting is dominated by three enormous global companies: General Electric, Germany's OSRAM (makers of Sylvania products), and the Dutch company Philips. But with LEDs coming on strong, the industry is now opening up to companies such as Samsung, LG, and Panasonic (PC), which have expertise in semiconductors.

"From where I sit, lighting is undergoing the same transition that the film business did when digital cameras first came out," says Chuck Swoboda, CEO of Cree (CREE), a publicly traded LED manufacturer and lighting-systems company based in Durham, N.C. "I think the writing is on the wall for older types of lighting technologies. It's just a question of how quickly we make it happen."

Music. Movies. Light bulbs?

But incumbents such as Rudy Provoost, CEO of Philips Lighting, the largest lighting company in the world, are embracing change too. Provoost estimates that LEDs account for less than 5% of the almost $10 billion in lamps and fixtures his company sells today. "Where is the market [for LEDs] 10 years from now? Just pick a number," Provoost told analysts last fall. "It could be 70, 80, or 90% of our business. We think it's going to grow very, very fast."

Until very recently, however, the use of LED technology in lighting installations had moved very slowly, partly because the lights were so darn expensive compared with the products already on the market. The first visible light-emitting diodes were demonstrated by GE in 1962, but it was Monsanto (MON) and Hewlett-Packard (HPQ) that first put LEDs into commercial products: indicator bulbs for cars and displays for the electronics tools HP was selling in those days. The bulk of the cost of the groundbreaking HP-35 calculator, which sold for $395 when it was introduced in 1972, was for the red (the only color available then) LEDs it required.

In conventional incandescent bulbs, the direct descendants of Edison's invention, resistance causes a wound tungsten filament inside a globe to heat up and glow when an electric current passes through it. The vast majority of the energy is released as heat, a bit as light. Fluorescent lights work by introducing an electric arc to excite mercury atoms. The excited mercury atoms emit ultraviolet radiation, which is converted to visible light after it strikes a phosphor coating on the inside of the long glass tube (or wound glass tube in the case of compact fluorescent bulbs).

An LED works on an entirely different principle, that of the diode. A silicon-based semiconductor material is used to create a "p-n" (positive-negative) junction. Electrons flow from the p-side, or anode, to the n-side, or cathode, but not in the reverse direction. As the electrons transit the p-n junction they fall into a lower energy level, which causes them to give off a photon of light. The color of the light -- red, green, blue, or amber -- depends on the semiconductor materials used to make the diode. White light is created by combining light from different colored LEDs, or by coating a blue LED lens with phosphor.

Trends in the computer chip industry are described by Moore's law, which states that the number of transistors that can be placed on an integrated circuit doubles every two years. The LED industry is driven by Haitz's law, named for Roland Haitz, a retired engineer who led the optical engineering program at HP for much of his 32-year tenure at the tech company. Haitz's law predicts that the performance of LEDs -- the amount of light that can be produced per diode -- increases 20-fold every decade, while the cost of that light decreases 10-fold.

Today LEDs are about 10 times more energy efficient than incandescent bulbs, which will start being phased out in the U.S. in 2012 (the phaseout of incandescents has already begun in Australia and parts of Europe and South America). LEDs are about two times more efficient than compact fluorescent bulbs -- sometimes called "twisty bulbs" because of the distinct spiral shape -- which also have a good dose of mercury in them, making disposal problematic (not an issue with LEDs). The best LED bulbs have a lifespan of about 20 years, assuming three hours of use a day, about 20 to 25 times your average incandescent bulb. And, according to Haitz, who is now retired, performance is only going to get better. "Everything indicates we can do another 10 to 20 years of that improvement trend," he says.

Already corporate users are starting to see benefits. If energy cost and maintenance are a factor in your business -- say, a warehouse running 24/7 or a retail outlet with its lights on 12 hours a day -- you are already looking at switching to LEDs. Wal-Mart (WMT) and Starbucks (SBUX) are converting hundreds of retail outlets for that very reason (and for the green PR value). Payback on the $100 bulbs is about two or three years on energy cost alone.

Persuading the consumer to switch to LEDs is a different matter. For most people, purchasing light bulbs is an afterthought, and few homeowners are going to be easily prevailed upon to spend $30 or $40 for an LED light bulb in a bad economy -- even if that bulb can save them money over its lifetime. The initial wave of LED light bulbs are designed to be used as replacements for existing bulb styles and fixtures. Further out, because of their tiny size and low energy requirements, lighting designs will be able to take on new shapes and fit practically anywhere.

Priming the pump, er, bulb

Energy companies, government agencies, and corporations are working together on a series of programs and incentives that may encourage consumers to switch. Some utilities are mulling whether to subsidize the cost of LED bulbs, on the theory that their income statements will improve as their customers become more energy efficient. A few cities, such as Toronto, have launched programs to educate citizens about the benefits of the newfangled lights.

And the Department of Energy has initiated the L Prize, a contest aimed at finding ways to replace the nearly 1 billion 60-watt bulbs now installed in the U.S.? Among the submissions: a Philips LED replacement bulb that shines like a 60-watt incandescent but uses 80% less energy and lasts for 20 years. Philips's bulb exists: An example recently was displayed in its San Jose Lumileds subsidiary and could reach the market by the end of 2010.

Without subsidies or aggressive advertising campaigns, LED light bulbs aren't exactly flying off the shelves of hardware stores -- yet. At a Bay Area Home Depot, LED light bulbs sell so sporadically that each sale is a mini-event. "We just got 'em in, and we don't sell a lot," says an orange-aproned associate turning over a $20 Philips LED bulb in his hand as he works the electronics aisle. "But, hey, it's a revolution, and sometimes that takes time."

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Michael Copeland
Michael Copeland

Michael V. Copeland joined FORTUNE as a senior writer in September 2007. Copeland has covered everything from electric cars to e-readers. He is a creator of Tech Mate, an irreverent video series in which he debates (and skewers) digital issues of the day. Before joining FORTUNE, Copeland was a senior writer at Business 2.0. Copeland graduated from the University of Pennsylvania.

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