NanoMarkets Report Smart Lighting Markets and Opportunities 2013 Nano-625

Published May 2013

Entire contents copyright NanoMarkets, LC. The information contained in this report is based on the best information available to us, but accuracy and completeness cannot be guaranteed. NanoMarkets, LC and its author(s) shall not stand liable for possible errors of fact or judgment. The information in this report is for the exclusive use of representative purchasing companies and may be used only by personnel at the purchasing site per sales agreement terms. Reproduction in whole or in any part is prohibited, except with the express written permission of NanoMarkets, LC.

Smart Lighting Markets and Opportunities 2013 This report is NanoMarkets’ latest analysis of the worldwide smart lighting market. Revenues from smart lighting are expected to escalate rapidly in the coming decade, driven primarily by rising energy costs. However, NanoMarkets believes that the biggest wins in the smart lighting business will go to those who can differentiate themselves in the market by offering value-added features and interfaces to other building automation systems.

As it happens, it is becoming increasingly easy to achieve such differentiation. The latest lighting research indicates that smart lighting can also lead to improved health and mood, while newer technology is showing the way to using smart lighting systems for air quality monitoring and even the delivery of information services. At the same time, improved control algorithms will permit the basic lighting management functionality of smart lighting to be performed much more effectively.

With these important developments in mind, this NanoMarkets’ report offers guidance on where new smart lighting business revenues will be generated over the next few years and beyond. The report builds on NanoMarkets’ previous smart lighting report published in 2012 as well as on our seven-year experience of analyzing the solid-state lighting industry.

In this year’s report, we have considerably extended the report coverage to include analysis beyond the energy-saving features of smart lighting to other business opportunities that the arrival of smart lighting is creating. But as with NanoMarkets previous report on smart lighting, this report shows how new value is being created in the lighting market by adding enhanced electronics and intelligent luminaires and how such product strategies will be able to build on the massive trend towards introducing LED lighting.

Also included in this new report is an analysis of the smart lighting strategies of the firms that NanoMarkets expects to see as major players in the smart lighting space. We examine what the prospects for start-ups are in this space. In addition, there is an eight-year market forecast with breakouts by type of product, end-user market segment, and the regions/countries where this report will be sold.

NanoMarkets believes that this report will provide much needed data and strategic analysis for planners and marketers throughout the lighting, semiconductor, sensor and networking industries.

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EXECUTIVE SUMMARY E.1 What has Changed Since NanoMarkets' Last Report on Smart Lighting: Two Generations of Smart Lighting E.1.1 No Money from Old Lights: Generation 0 E.1.2 First Generation Smart Lighting: The New PBX? E.1.3 Possibilities for Second Generation Smart Lighting E.2 Smart Lighting Systems as a Networking Technology E.3 Opportunity Analysis of Smart Lighting by Type of User E.4 Some Risks to Consider for Smart Lighting Manufacturers E.5 Smart Lighting Systems Marketing Strategies E.6 The Making of the Smart Lighting Industry: Firms and Sectors to Watch E.6.1 Smart Lighting Start-Up Strategies E.6.2 Channel and Partnership Factors E.7 Summary of Eight-Year Forecast of Smart Lighting Systems CHAPTER ONE: INTRODUCTION 1.1 Background to this Report 1.1.1 Energy Efficiency: Prime Mover for Smart Lighting 1.1.2 New Functions for Smart Lighting Allow Market Differentiation 1.1.3 Enabling Technologies on the Brink 1.2 Objective and Scope of this Report 1.3 Methodology of this Report 1.4 Plan of this Report CHAPTER TWO: SMART LIGHTING SYSTEM PRODUCT AND TECHNOLOGY EVOLUTION 2.1 The Shifting Meaning of Smart Lighting 2.2 Generation 0 Smart Lighting: Occupancy Sensing and Daylighting 2.2.1 Occupancy Sensing 2.2.2 Daylight Sensing 2.2.3 Time Clocking 2.2.4 Interfaces to Building Automation Systems 2.3 Generation 1 Smart Lighting Systems: Smart Ballasts and Beyond 2.3.1 Expansion of Ballast Functionality 2.3.2 Intelligent Ballast Suppliers 2.4 Generation 1 Smart Lighting Systems: Central Controllers as Early Competitive Battlefield for Smart Lighting 2.4.1 Possible Technology Innovations in Smart Lighting Controllers 2.4.2 Scalability and Modularity Options for Smart Lighting Controllers 2.4.3 Market Specialization 2.4.4 Internet Access and Protocol Openness as a Future Strategy in the Smart Lighting Market 2.5 Other Competitive Factors in Today's Smart Lighting Systems 2.5.1 Standard Competitive Factors for Generation 1 Smart Lighting Systems 2.5.2 Broadening the Market Scope of Smart Lighting Systems Management 2.6 Generation 2 Smart Lighting Systems: Where Energy Efficiency Meets Health and Mood 2.6.1 Recent Research on the Human Impact of Light and Light Changes 2.6.2 Implications of Current Research for Smart Lighting Systems Opportunities 2.6.3 Color Tuning and the Need for Dynamic Mood and Health Lighting 2.7 Generation 3 Lighting Systems: Visible Light Communications 2.7.1 Evolution of Li-Fi Technology 2.7.2 Lighting-Related Applications for VLC/Li-Fi

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2.7.3 The Downside of VLC/Li-Fi 2.8 Smart Lighting Software 2.8.1 Smart Lighting Systems Software Functionality 2.8.2 Smart Lighting and Clouds 2.9 Specialist Chips for the Smart Lighting Industry 2.9.1 Smart Lighting Chips and the Semiconductor Industry 2.10 Smart Lighting Sensors 2.10.1 Smart Lighting from the Sensor Manufacturers Perspective 2.10.2 Sensors, Lighting and Nanotechnology 2.10.3 ZigBee and Smart Lighting 2.10.4 EnOcean 2.11 Smart Lighting and Smart Grids 2.11.1 Demand Response and Smart Lighting 2.11.2 DALI 2.11.3 Examples of Smart Grid/Smart Lighting Integration 2.12 Smart Lighting, Building Automation and Other Standards 2.12.1 Standards for Integration with Building Automation Systems 2.12.2 Other Protocols Worth Considering 2.13 A Final Note on Smart Lighting, New Materials and OLEDs 2.14 Key Points from this Chapter CHAPTER THREE: SMART LIGHTING SYSTEM MARKET DRIVERS AND OTHER FACTORS SHAPING THE SMART LIGHTING MARKET 3.1 Energy Efficiency: First Mover for Smart Lighting Systems 3.1.1 Policy and Social Context for Smart Lighting 3.1.2 How Dimming Issues May Help Promote Smart Lighting Systems 3.1.3 How Smart Lighting Systems May Enable Luminaire Firms Benefit from Demand for Energy Efficiency 3.2 Consumer Psychology and Smart Lighting Purchases 3.2.1 Economics and Consumer Choice in Smart Lighting Systems 3.3 Lighting Systems and Aging Populations 3.4 Information Services and the Need for Generation 3 Smart Lighting 3.5 Factors Retarding the Use of Smart Lighting Systems 3.5.1 Cost and Supply Chain Issues 3.5.2 Use of Natural Light 3.5.3 State of the Worldwide Construction Industry: Retrofits and New Construction 3.6 United States Markets for Energy-Efficient Lighting Systems 3.6.1 Leadership in Energy and Environmental Design (LEED) and Other Related Codes 3.6.2 Energy Policy Act of 2005 3.6.3 Energy Independence and Security Act of 2007 (EISA). 3.6.4 Other Factors 3.7 Japanese Markets for Energy-Efficient Lighting Systems 3.7.1 Factors Driving Early Markets for LED/Smart Lighting in Japan 3.7.2 Regulatory and Legal Environment 3.8 Chinese Markets for Energy-Efficient Lighting Systems 3.8.1 Energy Usage in China: Current and Future 3.8.2 Phasing out of Traditional Light Bulbs in China 3.9 Korea Markets for Energy-Efficient Lighting Systems 3.9.1 Impact of Government Energy and Industrial Policy 3.10 Taiwanese Markets for Energy-Efficient Lighting Systems 3.11 Indian Markets for Energy-Efficient Lighting Systems

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3.12 Energy-Efficient Lighting Systems Markets in Other Parts of Asia 3.13 European Markets for Energy-Efficient Lighting 3.13.1 Rules for Phasing Out Incandescent Bulbs in the EU 3.13.2 Efforts at the National Level 3.14 Key Points from this Chapter CHAPTER FOUR: MARKETS FOR SMART LIGHTING – AN EIGHT-YEAR MARKET FORECAST 4.1 Methodology of this Forecast 4.1.1 Addressable Markets 4.1.2 Matters of Definition 4.1.3 Data Sources and Assumptions about Market Size and Penetration 4.1.4 Products Forecast 4.1.5 Differences From Last Year’s Forecasts 4.2 Residential Buildings 4.2.1 Eight-Year Forecasts of Smart Lighting in Residential Markets 4.3 Commercial and Industrial Buildings 4.3.1 Eight-Year Forecasts of Smart Lighting in Commercial and Industrial Buildings 4.3.2 Smart Lighting in Industrial Buildings 4.4 Government and Public Buildings 4.5 Smart Street Lighting and Other Smart Outdoor Lighting 4.5.1 Street Lighting 4.5.2 Other Outdoor Lighting 4.5.3 Eight-Year Forecasts of Smart Lighting in Street Lighting and Other Outdoor Lighting 4.6 Smart Lighting Systems for Automobiles and Other Forms of Transportation 4.6.1 Eight-Year Forecasts of Smart Lighting in Automobiles and Other Forms of Transportation 4.7 Smart Lighting Systems for Other Applications: Urban Farming and Hospitals 4.8 Summary of Eight-Year Forecasts of Smart Lighting Markets: By Type of Application, Product, and Generation 4.9 Eight-Year Market Forecast of Smart Lighting Systems Revenues by Country and Region 4.10 The Importance of the Retrofit Market for Smart Lighting 4.11 Key Points from this Chapter Acronyms and Abbreviations Used In this Report About the Author

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LIST OF EXHIBITS

Exhibit E-1: Smart Lighting Markets – Product Generations and Opportunities

Exhibit E-2: Business Case for the Current Generation of Smart Lighting

Exhibit E-3: Requirements and Opportunities for Smart Lighting Systems, by End User Segment

Exhibit E-4: Eight-Year Forecasts of Smart Lighting Revenues by Application ($ Millions)

Exhibit 2-1: Smart Lighting Systems Generations

Exhibit 2-2: Design/Technology for Automation Controllers

Exhibit 2-3: Two Scenarios for Smart Lighting Connectivity to the Internet

Exhibit 2-4: Possible Markets for Dynamic Mood and Health Lighting Systems

Exhibit 4-1: Eight-Year Forecasts of Smart Lighting Shipments to Residential Real Estate Markets

Exhibit 4-2: Eight-Year Forecasts of Smart Lighting Shipments to Commercial and Industrial Real

Estate Markets

Exhibit 4-3: Eight-Year Forecasts of Smart Lighting Shipments to Government and Public

Building Markets

Exhibit 4-4: Eight-Year Forecasts of Smart Lighting Shipments for Streetlights and other Outdoor

Lighting Markets

Exhibit 4-5: Eight-Year Forecasts of Smart Lighting Shipments for Transportation Markets

Exhibit 4-6: Eight-Year Forecasts of Smart Lighting Revenues by Application ($ Millions)

Exhibit 4-7: Eight-Year Forecasts of Smart Lighting Revenues by Product Type ($ Millions)

Exhibit 4-8: Eight-Year Forecasts of Smart Lighting Revenues by Technology Generation ($

Millions)

Exhibit 4-9: Eight-Year Forecasts of Smart Lighting Revenues by Geography ($ Millions)

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Executive Summary

E.1 What has Changed Since NanoMarkets’ Last Report on Smart Lighting: Two

Generations of Smart Lighting

In NanoMarkets’ 2012 report on smart lighting, we defined “smart lighting” as a system that adds functionality to basic lighting systems in a manner that increases their responsiveness to outside stimuli of various kinds. While this definition covers all manner of systems, the focus in our 2012 report was on lighting systems equipped with a range of sensors, control electronics and communications interfaces that supposedly makes lighting more energy efficient. Other kinds of functionalities were considered secondary.

Currently the technology development emphasis in the lighting industry is still more on lamp replacement, with an efficiency-driven trend towards compact fluorescent lamps and solid-state lighting. But lamp technology—in its current incarnation—is inherently "dumb," so the opportunities for smart lighting development reside primarily in the electronics and luminaire sectors. As such, NanoMarkets believes that smart lighting represents an opportunity for luminaire and electronics components firms to capitalize on the latest requirements for energy efficient lighting.

For the purposes of this report—for understanding the opportunities that smart lighting really presents—we have divided smart lighting into a number of generations; each generation has its own opportunity profile. These generations are profiled in Exhibit E-1 below.

E.1.1 No Money from Old Lights: Generation 0

Such smart lighting systems are essentially the next generation of the familiar rest-room lighting attached to, and switched on and off by a motion sensor.

There are also more elaborate lighting control/management systems from large lighting companies and designed for use in commercial and industrial buildings. These have been available for decades; since the 1970s at least. They have either been sold as independent systems or as part of building automation systems with more general applicability. These building automation systems are actually now quite common for controlling HVAC, but they are far less common for controlling lighting.

Whether this older type of arrangement should be considered “smart lighting,” is a matter of definitional choice. If one includes them in the mix, then it certainly results in much higher market values. But NanoMarkets, thinks that such an approach is a bit self-deluding. These high market values do not really represent opportunities. The market for these basic systems may well be growing, but they are mature and unlikely to be profitable for newcomers.

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Exhibit E-1: Smart Lighting Markets – Product Generations and Opportunities Generation Type of Products Timeframe Opportunities Limitations

0 Simple occupancy sensors, lighting modules in traditional building automation systems

Available for a few decades and actively being sold. Could fade out in a few years if new types of smart lighting systems are successful

Minimal. Revenues are significant, but margins are likely to decline and there is no incentive for market entry

Primitive technology; IR sensors and relays

1 Focused on multifunctional energy efficiency. Format is usually lighting units managed though a central controller

Beginning to emerge now and will probably come to dominate lighting management over the next three to five years

This where most of the opportunities are now. Competition is on price/performance, but also on pure marketing factors such as branding and access to marketing channels

Basic design strategy likely to run out of steam as did a similar strategy with business telephone systems in the 1980s. Also large lighting and electronics firms will eventually catch up technologically with start-ups

2 Products have a focus on health, mood and job performance. This is likely to be combined with energy saving features but may not be

This type of smart lighting is emerging now and we expect it to become much more prominent in the next couple of years with significant revenue generation in perhaps three years.

Health, mood enhancement and job performance define large addressable markets. Opportunities are being expanded by full-spectrum lighting developments

Efficacy of this kind of lighting will have to be established before market can really take off.

3 LiFi communications for in-building needs. Unclear the degree to which this will be combined with conventional lighting applications.

No significant use for several years and may never generate significant revenues

Being touted as cost effective way of providing high data rate in-building communications

Demand unproven. Over the past couple of decades there have been several attempts to develop very high data rate systems of this kind, but none have found much traction

Source: NanoMarkets, LC

E.1.2 First Generation Smart Lighting: The New PBX?

In this year’s report, we have little to say about these early—“Generation 0,”—lighting systems as it were, because, as noted, there doesn’t seem to be much money in them. We did have more to say about “Generation 0” in the previous NanoMarkets report, but have decided to largely drop coverage in this year’s study.

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There is however, a “Generation 1” system that is both the focus of this report and of the smart lighting sector as a whole. This is also what we spent most of our efforts on in last year’s NanoMarkets report. However, we believe that since last year, the specific directions being taken by these Generation 1 smart lighting systems have become clearer and the firms operating in this space have become more confident. We believe that if smart lighting is ever to be a profitable sector of the lighting industry it is this Generation 1 system that will show the way over the next few years. The business case for Generation 1 smart lighting systems is set out in Exhibit E-2, below.

So what is involved in a Generation 1 system? What we are talking about here is—like the Generation 0 system—smart lighting that is primarily focused on energy efficiency, but with additional features and functions that help distinguish it in the marketplace.

Exhibit E-2: Business Case for the Current Generation of Smart Lighting Business Case Component Support of Smart Lighting

Markets Concerns and Risks

Need to use energy efficiently— the primary market driver

Likelihood that the real costs of energy will grow, promoting long-term concerns with energy efficiency

With economic growth unlikely to recover for quite a few years and population growth also likely to decline worldwide, could cost trends for energy begin to reverse themselves

Market gap—large lighting and electronics firms seem to have neglected lighting management systems using the latest technology

There is a market window for smaller firms to get into the smart lighting systems and an apparent exit strategy through selling the company to larger firms without their own smart lighting systems

Large firms that do not currently have Generation 1 smart lighting products have the resources to quickly play catch up

The bulk of the value in lighting systems comes from fixtures and electronics not the light emitters themselves

Smart lighting systems enable light fixture/luminaire and electronics firms to capitalize on the need for energy efficiency

Some markets—and it is not yet clear which—do not need or do not want the level of energy efficiency that smart lighting systems can provide. Other factors—such as aesthetics—may take priority

New functionality is being enabled by new types of light emitter

Although, some Generation 1 smart lighting systems are intended for use with CFLs, such systems are increasingly targeted towards LEDs, which are more controllable than any other generation of lighting systems that went before. This means that LED-based smart lighting systems have more opportunities to fine tune energy saving functionalities

More technical options may or may not convey more commercial value. In the text we discuss how the small business telephone system eventually overshot its potential market and the relevance of that to the current generation of smart lighting systems

Source: NanoMarkets, LC

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Are Generation 1 smart lighting systems a disruptive technology? These Generation 1 systems NanoMarkets sees as a genuine opportunity. They offer (or at least potentially offer) lower price/performance ratios in the lighting market than any lighting management system that went before and as such they may well have the capability to expand addressable markets. Whether Generation 1 smart lighting systems will ever qualify as “disruptive” is hard to say.

It is possible that there is some pent-up demand for moderate-cost lighting control systems in the home, office and factory, but this isn’t entirely clear; which in itself suggests that smart lighting systems of the Generation 1 kind are not really that disruptive. Also suggestive of that conclusion is that there does not yet seem to be a huge take up of Generation 1 systems. But given that lighting accounts for a relatively high percentage of energy consumption, smart lighting systems would seem likely to be attractive to builders, building managers and building owners if they embody the right level of functionality at the right price and with the right level of user friendliness,

Energy efficiency as demand driver: This is, in fact, a good take off point to discuss the enabling factors that make Generation 1 smart lighting systems increasingly important commercially. It is not only that lighting accounts for a considerable amount of energy consumption in buildings, it is also that the price of energy seems to be on an upward trend that is likely to continue for more than a decade.

The cause of this rise is primarily that energy discovery is either not possible or is not permitted at a level sufficient for economic development, especially in the larger Asian countries. The result is that energy is becoming more valuable and there is more reason for users to take on capital expenditures to create more energy efficiency. In other words, while energy efficiency has always been important, it is more important now, and becoming more so. This is a key driver for Generation 1 smart lighting systems which have everything to do with energy efficiency.

Another way of looking at all this is that the latest generation of light bulbs and tubes (CFLs and LEDs) are inherently more energy efficient than what went before. What smart lighting provides however, is a way to leverage this capability for even greater lighting efficiency. Absent the introduction of smart lighting systems, “energy efficiency” in lighting is derived entirely on the bulbs themselves, which represent just 20 percent of the total value in a lighting system.

Smart lighting systems can reposition much of the rest of the value to be more in tune with the energy efficiency meme. That is, they can make luminaires and electronics "smart," thereby adding value and (perhaps) attracting new customers, as well as enabling new kinds of suppliers (luminaire and chip makers) to capitalize on the “need” for energy efficient lighting. It should be noted in this context that the luminaires and electronics account for almost 70 percent of the value of a lighting system.

One word of warning here. The growth in real energy prices may seem like an unstoppable trend at the present time. However, this may not necessarily be the case in the longer run. What has pushed up real energy prices has been a combination of factors. But what has been especially important is a rather unusual combination of rapid economic growth worldwide coupled with high population growth. However, the short-to-medium term growth prospects for the world are not all that bullish. And population growth worldwide is expected to fall.

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So in the long-term smart lighting systems could lose their current raison d'être. However, by then smart lighting systems will have moved to other functionalities that are not driven by energy efficiency.

Technology enablers: There are also two key enabling technologies that contribute significantly to viability of Generation 1 smart lighting systems. Both of these are at the level of semiconductors.

The first of these factors is really no more than the usual Moore’s Law effect that leads to higher performing chips at much lower costs. This has alleviated to the point of disappearance the clunkiness of the older lighting control and building automation system. It is also a factor in the sensors associated with smart lighting systems improving in performance. Because this is so important—not just for the smart lighting system discussed here but (literally) for all things connected to the Internet-of-Things—many chip firms are looking at this area as one of opportunity and, in a few cases, smart lighting systems are an areas of particular importance.

The other semiconductor-related factor that is giving birth to more new business revenue potential in the smart-lighting systems market relates to the lighting technology itself. Much of the world has now abandoned incandescent bulbs altogether, itself a trend driven by the need for energy efficiency.

The short-term replacement for incandescents has been CFLs, but these have already begun to be challenged by high-brightness LEDs. Indeed, increasingly the term “smart lighting” is associated with “smart LED lighting.” Three points are of importance here:

• LEDs are becoming more inherently efficient, so they are a natural fit with smart lighting. Currently they can achieve 180 lumens/W, but it is possible that with better phosphors—or no phosphors at all—this can be taken up to around 300 lumens/W

• The LED, primarily because it is a chip, is inherently more controllable than the types of lighting that went before it. So with LEDs, smart lighting systems are more of an obvious play than they were with earlier generations of lighting.

• What makes for an even closer association between LEDs and “smart lighting” is the fact that the prices and lifetimes for LEDs transform lighting into a kind of appliance as opposed to a disposable; the latter being what it has been for generations. An appliance is naturally in need of control, while a disposable does not seem to fit conceptually with a controller. (Note, however, that the Internet-of-Things concept actually does seem to make sense of a disposable that is also controlled.)

Nonetheless, a business case for an LED system that costs (say) $50 and lasts for 25 years, seems to cry out for more features and functions to help it sell against other similar products in the market. In addition, at that price point there seems to be room to include more functionality that there might not be with a more conventional bulb.

A cautionary tale from the world of small business telephone systems: Hopefully, the argument above establishes that smart lighting is an area to watch seriously as an energy efficiency play in the near-term future. NanoMarkets believes further that this opportunity is

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enhanced by the fact that (with the possible exception of Philips) some of the largest electronics and lighting firms are not that strong in this area; so there is a window for start-ups.

But NanoMarkets also cautions that this window will close for at least a couple of reasons. One of these is that the big firms are going to jump into this market soon and play catch up. Perhaps even more important is that there is a limit on just how many ways intelligence can be added to smart lighting systems to simply enhance energy efficiency.

NanoMarkets thinks that there is a parallel here with what happened to small business telephone systems and this should serve, we think, as a cautionary tale for the smart lighting system makers. Back in the 1980s, manufacturers of small business telephone systems found a window of opportunity because—in the U.S. anyway—the main supplier of these systems were offering customers technologically obsolete (analog) systems.

Soon, many manufacturers crowded into this space with high-performance digital systems at attractive prices. These systems offered small business users the kind of features that previously only large customers could access from their PBXs. However, while these new small business systems were clearly superior to the older small business telephone systems (they were genuinely disruptive technology actually) they all had similar features. So they competed with each other on branding, after sales services and increasingly small performance/functionality differences.

The important fact here is that this strategy became increasingly hard to pursue, in part because it became more and more difficult to provide new features that were useful to end users in using the systems. For example, these systems often came with multiple variations of the “hold” function and eventually anyone assessing the opportunities presented by these small business systems would have to ask themselves, just why another version of “hold” was needed. Apparently it wasn’t, because within a few years, these systems became commoditized.

NanoMarkets believes that it is possible that this story could be repeated with Generation 1 smart lighting systems. As we mentioned in last year’s NanoMarkets report on smart lighting, there really isn’t that much to choose between the current generation of smart lighting systems, and we have been told quite openly by industry insiders that while smart lighting systems have a veneer of high-tech value-added about them, the success of these systems over the longer term may have more to do with branding than with proprietary functionality.

So based on this analysis, we see Generation 1 smart lighting systems as having some inherent strategic vulnerabilities. Firstly, there is a near certainty that the giants of the lighting and electronics industry will awake and take a sizeable share of the market to the detriment of current smart lighting start-ups.

Second, we think based on the parallel with telephone systems just discussed that despite their apparent claims to novelty and modernity, the current generation of smart lighting systems may run out of steam—which is to say might become unprofitable or with low margins—within a surprisingly short space of time.

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E.1.3 Possibilities for Second Generation Smart Lighting

We think that the forces just described are going to force suppliers of smart lighting systems to break out of the Generation 1 straightjacket within a few years, although not all smart lighting firms will do so. Some will simply go out of business or get swallowed up by larger firms and others may be able to eke out some kind of existence in the Generation 1 smart lighting systems for an extended period. It would be no surprise to see Chinese firms offering Generation 1 systems for some time to come, for example.

However, within a period of three to five years, we expect to see a transition to smart lighting systems with a much broader range of functionality than just energy efficiency, although energy efficiency will remain an important part of the mix even in these Generation 2 systems. We said something to this effect in last year’s NanoMarkets smart lighting report, but since then, it has become clearer with regard to which direction these Generation 2 systems might take:

• In particular, there are already important firms in the lighting industry that are looking at what’s next in the smart lighting sector and are concluding that it will be lighting that can be controlled to maximize health and assure improved mood. The ability to provide such capabilities is, in part, no more than an extension of the fact that we mentioned earlier in this chapter: LED lighting systems are more finely controllable than older types of lighting.

• However, to this should be added the fact that full-spectrum LEDs seem to be on their way and this would certainly be an enabling technology for lighting that is supposed to enhance mood and health. Control in combination with such full-spectrum lighting is also important in that smooth fine tuning of color would seem to be needed in the health/mood lighting market.

This product design direction for smart lighting is also being fed by new research studies that indicate a strong relationship between lighting on the one hand and mood, health and job performance on the other.

So, given declining profitability of Generation 1 smart lighting systems, it seems natural that smart lighting systems vendors will turn their attention to a Generation 2 system that while it retains a commitment to energy efficiency also begins to stray into the market for health and mood lighting The evidence that this is a direction worth taking for smart lighting is twofold:

• First, there is long-standing evidence that lighting can influence mood and health and that evidence is not only getting stronger, but the specifics of how light can be used in this regard are becoming clearer. It is also evident that the ability to use light in this way has a high market value.

• Secondly, as we have already noted, smart health and mood-enhancing lighting seems to be no more than an extension of Generation 1 lighting from a design and engineering perspective and this fact is a risk-lowering factor for firms moving into the Generation 1 smart lighting systems business.

Still, NanoMarkets is not yet ready to say that these Generation 2 systems are a sure thing as far as success goes. For one thing, there is always the obvious point that the market sometimes

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refuses to reward products that it “should” want. We also note—turning to the small business systems parable again—that when things turned sour for the small business telephone manufacturers they turned to the idea of evolving these systems into central building controllers. This was also an idea that seemed to make sense at the time, but didn’t go very far commercially.

E.2 Smart Lighting Systems as a Networking Technology

Since our Generation 2 concept of smart lighting is itself just emerging, any talk of a Generation 3 type of smart lighting must be regarded as highly speculative. That said, NanoMarkets believes that this Generation 3 type of smart lighting will have some kind of focus on networking.

This repositioning of smart lighting opportunities may occur in a number of ways. First, we anticipate that more attention will be given to networking lighting both as a way of enhancing the cost of managing lighting and as a way of fitting lighting systems more appropriately into the much ballyhooed Internet-of Things. More specifically, over time we think that there will be opportunities to create communications interfaces both for local communications (among local sensors and a local control box) and for connections to the Internet.

This kind of evolution of networking for smart lighting seems a high likelihood because it seems like a natural fit with existing functionalities and trends in smart lighting and it appears to NanoMarkets that improving networking could prove an important market distinguishing feature going forward.

A big open question in this space is the degree to which the Internet will be involved. Does Internet connectivity stop at a gateway or go all the way to local sensors. This apparently technical question has some structural implications in that the Internet-all-the-way approach seems to open up the market to a large number of firms from the data communications market, while the gateway approach essentially creates a demarcation point beyond which the lighting firms may well prove to be king.

We are not so sure, however, that taking networking to the next stage after this in lighting has much of future. The LiFi network proposal has its adherents and we have discussed this idea deeper in this report. However, it is important to remember the now almost forgotten history here; both “optical wireless,” and in-home high bandwidth optical networks have been tried before and it is still not clear—at least not to NanoMarkets—that their undoubted advantages are strong enough to build a substantial business out of them.

E.3 Opportunity Analysis of Smart Lighting by Type of User

Different kinds of end users have different requirements for "smartness" in lighting. Our sense of the market is that the first large segments that will seriously buy into smart lighting will be the commercial and industrial segment and (perhaps) the street lighting segment. This is because in these areas energy efficiency can be easily translated into dollar savings and this in turn creates an immediately realizable opportunity; that is, smart lighting can be shown to be worth or not worth the price of entry. In Exhibit E-3 we summarize NanoMarkets’ key positions on where the markets are likely to be found.

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Exhibit E-3: Requirements and Opportunities for Smart Lighting Systems, by End User Segment Sector Main Factors Driving Use of

Smart Lighting Systems Main Opportunities

Residential There is little evidence that residential markets value energy savings in lighting all that highly, but future mood and health lighting may find a more significant market in this sector. (Note that multi-family dwellings have some of the demand characteristics of office buildings).

It may be a few years before smart lighting systems will generate significant revenues in the residential sector. We think that simple, DIY installation may well be an advantage in this sector. We also note that residential markets do not usually have energy management systems installed, so energy management that goes beyond lighting might sell well

Commercial/ Government Lighting is both a major and measurable cost in commercial and government offices, so it is reasonably easy to establish that a smart lighting system can save money. Generation 2 systems may also find a ready market to increase work performance

This is the market sector where smart lighting systems are expected to penetrate first. Commercial and government buildings are often equipped with building automation (BA) systems, so interfaces to standard and widely used BA systems may represent an opportunity, or at least be required. These sectors are areas that will most probably be served by professional installers buying from major building and electrical suppliers. So these groups have an opportunity from bringing smart lighting systems into their product lines.

Industrial Similar to the commercial/ government (office) sector. However, we note that industrial facilities often have few windows and are therefore more reliant on artificial light

Hospitals More or less the same considerations as commercial buildings but health/mood lighting may have special importance

Could be the first sector where we see any significant penetration of mood/health lighting,

Streets/Roads Major consumer of energy and again the value of energy consumed can be easily computed. No apparent need for Generation 2 systems

Lighting is collectively switched on and off and requirements may be relatively limited compared with commercial, industrial and residential lighting systems. The opportunity here seems to be for specialist smart-lighting systems tailored to the needs of street/road lighting

Automotive/transportation Energy efficiency in automotive/ transportation is of obvious importance, but how much is lighting really a contributor to energy use compared with engines? Mood lighting would seem to be important in the long run

Source: NanoMarkets LC

In individual residential units, it seems unlikely that energy savings are usually going to be enough to change consumer behavior. So, some of the other factors—impact of mood, health, aesthetics or even an ideological propensity towards "green lighting" are likely to play a major role in shaping the residential market.

One consequence of this is that as smart lighting becomes increasingly oriented towards health and mood, it may find more acceptance in the residential building market. Another consequence is that residential markets for smart lighting are likely to evolve after the commercial, residential and street lighting segments have evolved. However, this may be balanced by a surge of interest in mood/health lighting in the industrial and commercial context. Lighting of offices and factories

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has always been an important topic and smart LED lighting systems may be the first opportunity to profitably deploy lighting systems that can deliver on the mood/health promise of existing lighting research.

Something similar can be said about lighting in transportation as well. Here, energy efficiency is something worth having. But does lighting efficiency—as opposed to other kinds of energy efficiency—really matter that much in a car or a bus? Again, other factors that coincide with future capabilities of smart lighting are likely to be more powerful adoption factors.

Finally, there are large public and government buildings. These would seem open to the same kind of rational argument involving efficiency as other large buildings whether they are industrial, commercial or residential multi-tenant buildings. However, there is also an added dimension. It is not unusual in the case of such buildings for the owners to make some claim on posterity by including unique architectural features and smart lighting could in some sense facilitate that.

Smart lighting could achieve that goal by enabling the building owner or management to claim that the building is especially energy efficient; a selling feature for possible tenants/users. Or moving to the next stage of development of smart lighting, advanced lighting may add mood lighting, or something; which would also be a selling feature.

E.4 Some Risks to Consider for Smart Lighting Manufacturers

Obviously, the smart lighting business is subject to risks, some of which will probably be unexpected. However, a few risks stand out as being something for smart lighting firms to specifically look for.

Smart lighting's future may be like its past: As we discuss above, and throughout this report, there are powerful reasons to suppose that smart lighting's time has come round at last. However, one can, of course, never be quite certain of this, and, as mentioned above, the history of smart lighting—albeit under a different name—has not been one of unqualified success.

With this in mind, therefore, one cannot rule out the possibility that another promising way of reducing the cost of energy consumed by lighting systems will ultimately fail in the marketplace. Perhaps the additional complexities and costs that smart lighting systems will inevitably bring to the market will simply be too much to convince potential end users of their efficacy. In other words, in a sense, smart lighting may turn out to not be smart enough!

But this risk is mitigated somewhat by the fact that more advanced technology should permit smart lighting systems to offer more sophisticated and nuanced responses than older systems.

Technology risks: Another "hidden" assumption of this report is that there is no major change in the technology environment in which smart lighting is immersed:

• One part of this assumption is that computer/semiconductor technology is up to providing the kind of functionality that our analysis suggests will generate most of the revenues that we predict for the smart lighting sector. This seems pretty certain to be the case most of the time. However, there is a lot of technological uncertainty about the Internet-of-things concept that we see as playing a role in the growth of smart lighting

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• There is also the possibility of some major breakthrough that would propel the smart lighting business forward at a much higher rate than suggested in this report. Since high-speed processing doesn't seem to be a major requirement for smart lighting systems, the most likely point where such a breakthrough could occur would be in sensors that would enable smart lighting systems to take on entirely new functionality.

• One obvious risk is that technological changes occur in the energy industry that significantly reduce the cost of energy; this would reduce the value of any smart lighting system and probably kill off the smart lighting market as a whole. Such developments within the period considered in this report seem highly unlikely however and, again, a detailed discussion of such issues seems well beyond the scope of this report.

• Although “smart lighting” does not imply any particular kind of lighting technology, most of the opportunities spelled out in this report assume that general illumination is moving swiftly towards CFL and then on to LED lighting. This change is currently being driven by government mandates. It is far from clear how fast this transition market would appear without such mandates and the argument of those who favor mandates is precisely that the markets for energy-efficient lighting would grow slowly if action favoring them was not taken by the government; that is, there is claimed to be a market externality.

• This immediately raises the question of what would happen if the lighting mandates went away or weren't effective and the likelihood of this being the case. In last year’s NanoMarkets report on smart lighting we made the point that there had been some resistance to lighting mandates in the U.S. but this doesn’t seem to have amounted to much in the end. However, we still expect that some of the rules and regulations “banning” incandescent lighting will be disobeyed to some extent in other geographies; so penetration of the lighting place by CFLs and LEDs may proceed at a slower pace than some observers currently expect.

E.5 Smart Lighting Systems Marketing Strategies

While smart lighting systems can trace their conceptual history back decades, today's systems are obviously a new breed; bringing together the latest sensing, control, communications and illumination technology. If smart lighting systems move toward being designed for influencing mood, health, human performance and even data communications, tomorrow’s smart lighting systems will bear little resemblance to the lighting control and management systems of the past and the present.

As long as smart lighting systems don’t display much change or originality in functionality, NanoMarkets believes that firms in this sector can rely on (1) branding strategies, (2) strong distribution channels to compete. Indeed, NanoMarkets believes that there are quite a few smart lighting firms that feel that such non-technical marketing strategies can carry the smart lighting business forward for an indefinite period of time.

That said, much of the reason that this report is being written is the belief that smart lighting is on the verge of some commercially important technological changes that will disrupt (1) and (2) in terms of being viable strategies. As the technological evolution of smart lighting systems occurs,

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NanoMarkets believes that there will a need for a product/market strategy that focuses on market creation for these new high-tech smart lighting systems with radically new capabilities

This suggests to us that some specific marketing tactics will be required. It also suggests that the smart lighting market is one that is crying out for leadership from a firm that has the resources to create credibility for the current generation of smart lighting. Such a firm would probably have to be a large firm with an established role in the building automation—or much better—the lighting industry.

Messaging to end users: NanoMarkets continues to believe that manufacturers can—at present—most effectively serve or expand existing addressable markets for smart lighting systems by messaging how their systems can lead to reduced energy costs, and expanding this messaging as new functionality is added to state-of-the-art smart lighting systems.

Some of this messaging work will be aimed at the final consumer and will be designed to overcome reluctance to buy such systems that may have been created by the earlier generations of lighting management systems that often seemed to overpromise in terms of capabilities

Building an industry: In last year’s NanoMarkets report we said that “the smart lighting systems business at the present time finds itself in something of a ‘Wild West’ situation and is in need of an industry leader or a strong industry organization to tame it and give it credibility.”

We are not sure that this time has come, but we are aware of behind the scenes developments in the past year that suggests that the smart lighting sector is headed in the right direction in this regard.

We will talk more later in this report about how specific firms are shaping up to be leaders in this space. Here we note that several kinds of firm could play a role here. A pure-play smart lighting firm has a strong incentive to take this path, but they seldom have the financial ability to adopt this strategy. However, this may not be true of all smart lighting start-ups and if the availability of risk capital were to increase during the period under consideration here, this situation may change.

Under current circumstances, the "sheriff" that we are calling for here is much more likely to emerge from the ranks of the large lighting firms or the large control/building automation firms. The arrival of a large firm of this sort would go a long way to establish smart lighting as a credible product and not just a fad. There is no company one can point to as an early industry leader as yet, although Philips is getting close.

Standards: Part of the growing up process that smart lighting must go through to become a viable business, is the development of standards. NanoMarkets is sure that without smart lighting standards, future growth in the smart lighting industry will be seriously impaired. This is because smart lighting standards will be necessary for customers to achieve (1) the ability to mix and match products from different smart lighting system manufacturers and also (2) a sense that the system being acquired is to some extent future proof. The key aspect of smart lighting that is likely to be in need of standardizing is local communications so that customers can mix and match central controllers, specialized sensors, dimmers, ballasts and drivers.

Until standards of the sort mentioned above are mature, customers are most likely to buy everything in their smart lighting system from one vendor, if they buy at all. Where this happens it

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is good news for the supplier chosen, but in many cases we expect that potential customers will be put off buying any smart lighting systems.

Based on how slowly standards setting in such areas usually proceeds, we are not hopeful that smart lighting system standards will appear quickly and we therefore think that the absence of smart lighting standards will be a serious drag on the growth of the markets considered in this report throughout the period under consideration.

In addition to creating standards for solid-state lighting, there are also other relevant standards efforts such as BACnet in the building automation world, and the ZigBee wireless protocol. But in the not-so-distant future these and other protocols will have to be brought together and become more directed towards smart lighting.

E.6 The Making of the Smart Lighting Industry: Firms and Sectors to Watch

The smart lighting sector cannot yet be said to have evolved into an industry. However, at the present time, it can reasonably be said to have four segments: traditional building automation manufacturers, traditional lighting manufacturers, chip makers and start-ups.

The traditional building automation firms are long-established automation firms that can incorporate lighting into their general scheme of things. These firms include Johnson Controls, Honeywell and Trane. None of these firms have been especially proactive in smart lighting, but it is perhaps worth noting that both Johnson Controls and Trane have been expanding into new markets in the recent past.

As to the large lighting manufacturers—Philips, GE, Osram, etc.—these firms would probably be best positioned to promote smart lighting as a "champion. Philips seems to be the firm most likely to be innovative in this space, GE the least. However, for the time being these firms seem more interested in development issues around smart lighting rather than promoting the concept more generally. This is also true of the chip makers, but we note again that given the huge number of devices that could be demanded if smart lighting really takes off, smart lighting should be of considerable interest to traditional manufacturers of analog control chips and communications interface chips; especially the makers of Wi-Fi and ZigBee chips.

E.6.1 Smart Lighting Start-Up Strategies

The big question mark is really over the future of start-ups in this space. There are still as many as 20 small lighting control systems firms out there with some reasonably well funded. These include Cavet Technologies, Daintree Networks, Easylite, Ecoflex Solutions, Energy Automation Systems (EASI), Enlighted, Fifth Light Technologies, Lumenergi, Lutron, Redwood Systems, Starfield Controls and Universal Lighting Technologies. This is unlikely to be a complete list.

Most of these firms offer similar products, which are of a kind that one might imagine, would appear if smart lighting was seen as following a similar design path to business telephone systems in the 1980s. That is to say they are competing—or plan to compete—in the smart lighting market with products that are pure energy savings devices with features that are quite similar to what has gone before, but with some improved performance, better ease of use and lower prices.

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Which is to say that these firms are taking relatively few risks, although the ones that they are taking are quite large ones. Principally, they are betting that their clever designs and low pricing will be enough to establish a brand that can win enough battles against the large firms to stay in business, at least get cash-flow positive and possibly thrive.

NanoMarkets is, however, concerned that there is really not yet enough to distinguish firms and products in a way that will be truly meaningful to customers. In other technology markets this has tended to lead to firms having to fall back on hype in promoting their products. That is to say that—in reality—there is less to the features that smart lighting systems have than is claimed by their manufacturers.

Superior user interface including Web-based control: There is clearly competitive advantage in making the system easy to use and install, with at least one vendor promoting its system as plug and play. However, this strategy is easily copied.

Advanced communications interfaces: This aspect of competition in the smart lighting systems space covers a lot of ground and so affords plenty of room for competition. We suspect, however, that the aspect of advanced communications interfaces that will stand out in the market place will be the integration of smart-lighting systems with smart grid/smart metering solutions.

The reason for thinking this is that such integration could bring a new and useful functionality to end users. And smart metering is spreading fast. While the technology is new enough to promote sales it is also mature enough to be both reliable and accessible to many of those contemplating the purchase of smart lighting systems.

Number of lights that can be controlled: The number of lights that can be controlled by a smart lighting system obviously translates into which markets can be addressed. Not all systems will be able to control all the lights in a large commercial building, for example. And a smart lighting system designed for a large commercial building would most probably be inappropriate to the needs of a residential user.

A couple of notes here. Current design and capability trends for smart lighting systems—the ones that look like the telephone systems of the 1980s—essentially consist of bringing the capabilities normally associated with large building systems to smaller buildings and single family dwellings.

Secondly, even without this more dramatic trend, we still expect the line between smart lighting systems intended for small buildings and those intended for large buildings to blur as manufacturers of smart lighting systems recognize that there may be substantial revenues to be had from the small building sector. We expect them often to cater to this sector by creating a product range that is modularized and therefore can cater to a variety of building types and sizes without building completely new types of product. To some extent this is already being done. But we anticipate that this design strategy will be further adopted in the future.

Value-added features: Value-added features are the least “bland” of the strategies mentioned here. They are the missing link between the various generations of smart-lighting systems. Add enough of these features and they transform the system to a later generation. However, this is not necessarily the case.

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There are some value-added features that are distinct improvements on existing functionality but do not—in their current form anyway—shift smart lighting systems much from an energy management orientation.

Thus, one possibility for value added features such as "daylight harvesting," where ambient light is sensed throughout the day and the lighting is then raised or dimmed to a preset level. Another possible feature is to provide separate control to different zones in the building or even control of individual lighting fixtures. Yet another possibility is to combine a smart-lighting system with some kind of energy management/billing analysis service or enable the lighting management systems to grow into a more general energy management system; Redwood Systems has adopted the latter strategy. The service aspect of the marketing strategy of a smart lighting manufacturer may well also include installation or systems integration of some kind.

Of course, at some point, if one keeps adding such features, smart lighting systems become transformed into more than just energy control systems and into effective mood and health lighting or even into optical communications systems. As we note throughout this report, it is still not clear how long such a market will take to evolve. But there are already a few companies that are chasing after this opportunity.

Impact of ROI considerations: In addition to these specific factors, obviously all systems compete on generic economic factors; price and ROI. Based on what smart lighting systems makers have said thus far, 18 months to two years is about the level of ROI that one can expect from the current generation of smart lighting systems. This seems reasonable enough.

NanoMarkets is, however, concerned that there is really not yet enough to distinguish these firms in a way that will be truly meaningful to customers. In other technology markets this has tended to lead to firms having to fall back on hype in promoting their products.

E.6.2 Channel and Partnership Factors

At some point, smart lighting start-ups are going to have to compete with large lighting and electronics firms with strong and established channels and brand names. It therefore becomes imperative for smaller firms to enhance this part of their strategy and to do so quite quickly. One way for such firms to achieve this goal is to establish relationships with major electrical and building contractors and distributors in the countries in which they operate.

Extending this strategy internationally may be easier said than done, although we note Redwood Systems has been able to achieve some penetration in Asia by leveraging its relationship with Mitsui which is one of the investors in the company.

E.7 Summary of Eight-Year Forecast of Smart Lighting Systems

Exhibit E-4 summarizes our forecasts of smart lighting systems by end user market. These forecasts are taken from Chapter Four of this report, which shows how they are derived. In addition, Chapter Four shows a breakout of the market by the generations of smart lighting systems as shown above.

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For information about this and other NanoMarkets reports, please visit us at www.nanomarkets.net or contact us at sales@nanomarkets.net

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Total Smart Lighting Revenues: 2013-2020