Insights into the forces shaping our industry.
The Golden Moment of Change
What attracts human attention is change, if the temperature around you changes, if the phone rings, your attention changes. The way in which a story begins is a starting event that creates a moment of change. Robert McKee.
The electrical industry has been in a moment of change for several years. The only difference in that change, is the pace of it. If you look back to the early 80’s, the Lighting industry had two sea changes in close proximity:
1. IC thermal protection of recessed cans (primarily for residential use)
2. Electronic ballasts for fluorescent
The biggest result of these two changes was the opening of the US borders to foreign manufacturers. The relatively small lighting market of about $7-8B/yr (fixtures only) was largely immune from foreign imports. The Big 4 lighting manufacturers of that time (Lithonia, Cooper, Hubbell and GenLyte-Thomas) comprised about 65% of the fixture market back then, with hundreds of smaller players. The lamp and ballast markets were even more concentrated with Universal, Advance (Philips) and Sylvania comprising over 80% of the lamp and ballast market.
In many ways, the relative ‘smallness’ of the lighting market made it far more manageable as everybody knew everybody. The rules of engagement were codified over generations of players. Every segment had their place and largely respected each other.
Electronic ballasts probably have had even more impact than the IC rating; although the drop in margins of the legacy recessed manufacturers was precipitous. But the entry of ‘electronics’ into lighting and then into other electrical equipment has changed our industry forever.
And then there’s the energy savings market. The IOU (investor owned utilities) community has controlled the adoption of energy saving equipment for nearly 30 years with the availability of rebates for converting your commercial or industrial operation to more efficient lighting products; HID, then CFL, then T-8 and now LED. The price lever of a rebate has had significant impact on the growth of energy saving products and has saved the IOU community billions of capital by avoiding new generation equipment.
But we’ve hit a confluence. Solar and wind power has grown significantly over the last several years; fueled by government incentives. Regardless of the political spectrum, energy incentives have worked: the US has reduced carbon emissions, energy generation from carbon sources and reliance on import fuels by over 50%.
But enter the ultimate change-maker: LED and its close partner SSL. LED alone has the ability to reduce commercial energy consumption by over 40%. Coupled with its native low voltage DC power source, it can be combined with innovative PoE (Power over Ethernet) distribution OR powered by native DC power generation sources, such as, solar or wind. So, where’s the confluence?
Channel structures that were clearly defined and abided by in the 80’s have been weakening over the past 8-10 years with advent of LED and new players in that market. The sales strategy for LED has and is still focused on end-users. The installed market of existing and largely obsolescent lighting equipment is estimated at 10 to 15 TIMES the new construction market. So new entrants went to where the money was, and still is. But now the traditional players are tweaking their legacy relationships. The major lighting manufacturers all have direct salespeople calling on end-users. Most of these direct sales staff are still directed to influence the sale back through the legacy structure; i.e. sell through a distributor to a recommended contractor. But not all.
New entrants into the market simply had trouble supplanting legacy relationships; and as the end-user, installed market was large and totally available to enter with little legacy restrictions… the process of new creative channel players has grown rapidly. We see new client companies that are best labelled: esco/distributor/specifier/contractors. I.e. when you’re not aware of how the lighting world has been played for 75 years, you simply create your own rules. When you can identify a customer that wants to buy your products, you can dictate how that transaction is completed. Enter the legacy guys:
IOU’s have had marketing departments or dedicated salespeople that call on their end-user industrial and commercial customers to promote energy conservation for years. For several IOU’s, they moved entirely into selling, installing and leasing back energy efficient outdoor lighting products. That’s not new. What is new.. some of the IOU’s are moving into indoor lighting sales. They’re promoting energy efficient equipment; which they buy direct from manufacturers and then lease to end-users. They’re the IOU partner, the energy audit firm, the contractor and the leaseholder for the equipment.
And next? If you’ve seen the newest Tesla solar home products.. you’re looking at the future of home building. Tesla can offer, with ready-now products, a complete and attractive solar installation, including DC powered LED lighting equipment, all tied together with their household sized battery backup system.
Solar and wind power have had a contentious relationship with the IOU community. There are technical issues of how wind power is generated that are difficult to easily add that capacity to the grid. And with solar, the resi contractors that are pitching solar basically lower the operating margins for the IOU; as their ability to charge for solar power, or credit back for excess solar generation has caused some significant blowback by the IOU’s. Many of these issues are embroiled in the annual rates, as well as the purview of services that can supplied by an IOU, as established by the public utility commissions. But it’s not impossible for IOU’s to take a much more aggressive stance in alternative energy generation. The real issue for the next change is.. when will the IOU community ‘own’ alternative generation? It’ll arrive.
And then, the IOU community will be positioned in the energy role of potentially being able to specify, design, install and lease back an entire electrical equipment project of either new construction or energy reduction. As the technology is currently available with Tesla providing cost-efficient energy storage for complete new residential developments and the IOUs already providing total services of energy analysis, specification of equipment, financing and installation of complete indoor systems… the rest of the electrical community may want to refocus their assessment of channel partners for the future.
This is a golden moment of change.