Thomas Edison’s Dream Smashed

By Adam J. Crawford, Analyst

The incandescent light bulb was invented in the very early 1800s, but at that time was a device too crude and impractical for mass adoption. Over the next 80 years, at least 20 inventors contributed to its improvement, until, in 1880, Thomas Edison developed and patented a bulb that would last a miraculous 1,200 hours. Edison’s product was the first to offer the levels of functionality, durability, and affordability necessary for widespread commercial appeal. That’s why he gets credit for inventing the light bulb, even though he was decades late to the party.


Some 130 years after Edison’s patent was approved, the incandescent light bulb has basically the same features… a filament inside a glass bulb with a screw base. And for all those years, it’s been doing yeoman-like work providing clean, quality lighting (compared to the candles and oil lanterns of the 19^th century), in millions of homes and offices. Today, however, the incandescent light bulb is on its way out… and a multibillion-dollar industry will be forever changed.

Done In by Inefficiency

The incandescent bulb, though very effective, is notoriously inefficient. To understand why, one need only understand how it produces light. The filament (or wire) inside a bulb is heated by an electric current until it becomes so hot it glows.

The problem: only about 10% of the energy used by an incandescent bulb is converted into light; the rest is dissipated as usually unwanted heat.

This is a problem, not just for the homes and businesses using these bulbs, but also upstream at the power plants that produce the required energy. In an era when producers are wondering how they’re going to keep up with the surging demand amidst rising fuel costs and concern about the environmental impact of energy production is running high, such inefficiencies are frowned on.

Governments, of course, have the ability to put muscle behind their frowns… and they’re doing just that. In 2013, it became illegal in the United States to manufacture or import 75 and 100 watt incandescent bulbs. 40 and 60 watt bulbs were added to the ban in January of this year. The U.S. isn’t the only government actively limiting the use of incandescent bulbs. The European Union, Canada, Brazil, Australia, and even China are among many that have phase out programs aimed at forcing users to convert to an alternative technology.

For household applications, that primarily means a switch to those twisty shaped compact fluorescent lamps (CFLs), or the newest competition in town, light emitting diodes (LEDs).

A CFL’s spiral tube contains argon and mercury vapors, and they are far more efficient than the old Edison bulb. When an electrical current is passed through the vapors, invisible ultraviolet light is produced. The ultraviolet light is transformed into visible light when it strikes a fluorescent coating on the inside of the tube.. all at about one fourth the electrical cost for an equivalent amount of light from an incandescent lamp.

LEDs, in contrast, don’t use commonplace materials. Rather, they’re made from somewhat exotic semiconductor materials, like indium and gallium nitride. When an electrical current is passed through these semiconductors, energy is released in the form of particles called photons—the most basic units of light in physics, i.e., light’s equivalent of individual electrons. In the process, little is lost to heat and the materials take minimal wear, making for another very efficient light source, and one that lasts far longer than its competitors.

Comparing the Alternatives

Right now, LED bulbs are relatively expensive to produce. That’s because a bulb is not just a bulb when it comes to LEDs—it can’t be made brighter by just putting in a thicker filament or tube. Instead, each bulb is a complex web of up to dozens of small diodes, each roughly the size of a pinhead, wired together and to a ballast that regulates the electricity flowing through them.

When compared head to head with incandescent and CFL light bulbs, LEDs come out the clear winner in operating costs. But even with millions of these bulbs now shipping to Home Depot, they still fall down on initial cost:

60-WATT Equivalent	Incandescent	CFL	LED
Lumen	880	800	800
Life (hours)	1,000	8,000	25,000
Initial cost	$1.19	$5.00	$9.98
Yearly operating cost	$7.23	$1.81	$1.45

However, when you add up those advantages over that 25,000 hour lifetime, then the advantages start to become clear:

60-WATT Equivalent	Incandescent	CFL	LED
Yearly operating cost	$7.23	$1.81	$1.45
Years	23	23	23
23-year operating cost	$166.29	$41.63	$33.35
Initial cost	$1.19	$5.00	$10.00
Replacement cost	$28.56	$10.00	$0.00
Total cost	$196.04	$56.63	$43.35

As you can see, to produce roughly the same lumens (a measure of the amount of visible light emitted by a source), both CFLs and LEDs are hands-down more economical than incandescent bulbs.

Of course, in a residential scenario where a bulb is run for maybe three hours a day, it would take about 23 years to realize that big a savings. But put them in place in a commercial or industrial setting like the hundreds of lights running 24 hours a day in the local Walmart, and the savings add up quickly.

Still, why are we so bullish on the prospects for LEDs if they barely edge out their CFL competitors over tens of thousands of hours?

The first difference is environmental. CFLs have the inherent disadvantage of containing mercury, a toxic metal that poses health and environmental risks. Break one of these bulbs and you have a biohazard on your hands. There’s a real cost to recycling these bulbs and containing the mess from those that are just tossed in the trash heap. It’s a cost that will certainly be shifted back to consumers of the bulbs if environmental legislation continues on its same path.

Further still, over its life, an LED bulb is already 25% more economical than a CFL. When compared to an incandescent bulb, either is a huge cost winner. But when it comes down to dollars and cents, the LED wins today. The only reason not go that route is the big upfront cost difference, which when buying tens of thousands of bulbs at a time (as many commercial companies do) can be a hard pill to swallow.

However, the cost of LEDs has been falling fast in recent years and will continue to do so. In 2011, a 60 watt equivalent LED bulb retailed for about $40. In 2012, the price fell below $20. Today, it’s less than $10.

As volumes increase and competition among manufacturers and retailers intensifies, prices will continue to fall. Some industry analysts see a $5 LED on the near horizon. We wouldn’t bet against it.

The price could go even lower if manufacturers can successfully implement a cost-reduction break through. Specifically, LED devices are built on expensive aluminum oxide substrates. But manufacturers are working on ways to build on substrates made of silicon, which would substantially reduce defects and thus costs. As prices drop, and if environmental law hits mercury laced CFLs next, LED’s cost advantage will start to widen significantly.

Inflection Point

This all means that the LED’s time has arrived. According to IHS, a global market and economic research firm, unit shipments of LED lighting devices will grow at a compounded annual rate of 40% between now and 2020.

In 2011, the size of the global lighting market was about $96 billion, and LED devices accounted for about 12% of that amount. By 2020, McKinsey & Company projects, the size of the market will be $136 billion, of which 63% will be attributable to LEDs.

With the LED bulb, we have a trend that’s been in the making for several years… and it’s now ready to surge. How should an investor play it? Certainly not with a blindfold and a dartboard, or a whole sector buy like an ETF, because not all participants in this market will prosper.

Some will not be a pure enough play to benefit, or will be cannibalizing their own incandescent and CFL business… like GE and Phillips. Others will find themselves producing a commodity with ever thinning margins… like Cree. And others still already have much of the anticipated growth priced into their shares.
However, we scanned the field and found a company that is well positioned to benefit from the growth of the LED market while, at the same time, actually improving its margins.

We believe this company’s stock is undervalued. That’s why we’re recommending it in the next issue of BIG TECH

For access to this recommendation and many more, simply sign up for a risk free trial of BIG TECH. 

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The article Thomas Edison’s Dream Smashed was originally published at Casey Research