This is the first part of a two-part blog examining Lighting as a Service, a relatively new idea in the lighting space but one that is becoming more popular. The first part will look at the context around LaaS, and the second part will explore the role of design.
We are all used to the idea that a product can be revolutionary, there are countless examples through history of products that have created billion dollar markets almost overnight, iPods and iPhones as a recent example. A little closer to home, the LED has rewritten the lighting rule book, offering a game-changing improvement in efficiencies over halogen sources. Are products the only thing that can be revolutionary? how about the way that a product is provided, can that be revolutionary? The world’s largest taxi company does not actually own any cars (Uber), the world’s largest accommodation provider doesn’t own any of the rooms that its offers (AirBnB), the world’s largest media distributors don’t produce any content (Facebook, Youtube, Twitter). With this in mind, might there be further disruption to come in the lighting industry? Although this time not related to technology but through innovation in business models.
The idea of Software as a Service (SaaS) has become increasingly popular over the last few years with several high-profile companies have stopped selling lifetime licences to their software. Adobe and Autodesk now only offer subscription access to their latest products. Even Microsoft have started to shift focus of their key product Microsoft Office to a subscription platform with Office 365, starting in the enterprise sector and now consumer markets too. What benefits does SaaS offer to purchasers that have seen it become so popular? Software especially enterprise grade has traditionally been expensive. Photoshop as a stand-alone product was nearly £1000, AutoCAD could be well over £4000 for a licence. A monthly or yearly subscription lowers the high bar of entry and creates and even predictable cash flow rather than big irregular purchases. So SaaS creates benefits for the user and the seller.
Alternatives to the traditional purchase models are not new or a product of the internet. In the 18th Century, James Watt invented a radically improved version of the steam engine. His new engine was around 70% more efficient than the models that were in use at the time. Although perhaps the biggest innovation was in how the Watt engine was sold. Rather than buy the engine with a high one off price – the owners effectively leased the engines by paying the company one-third of the money that they previously spent on coal. After the market for their engines matured they shifted the model so that the owner leased the engine for a fixed rate per ‘Horsepower’ per year.
Whilst LED as a product has proved massively disruptive as a technology over the last 5 years, will this disruption only be in terms of product and technology or will LED help to create new business models for the lighting industry, and how might that happen? An alternative to the standard procurement model, has started to emerge over the last few years, known as Lighting as a Service but what exactly is it and how does it work? And what might the effects of this be on the quality of lighting design how these services will be provided
Lighting as a Service at its most simple level generally looks like this; The project owner receives a brand new package of LED light fixtures, which are installed by a dedicated installer, and who will then provide the maintenance. Rather than paying for the services upfront, much in the same that the Watt steam engine was paid for, the gap between the cost of the old installation and the new more efficient installation is then used to repay the cost of the lighting supply over a contractually defined time period. At the end of the deal, the client can then either collect the full benefit of their electricity reductions or refresh the installation again with the latest version products, again creating a cost saving. At the more complex end of the offerings, a fully managed, analysed, and remotely updateable, installation is possible to eke out the most energy saving.
The nature of Lighting as a service means that not every project will be suited to it, projects that will work to the strengths of the model will typically be large and have a long occupancy period, some good examples include; hotels, offices, hospitals, and airports.The opposite characteristics will mean that Light as a Service is perhaps not the best route for lighting procurement. whilst no upfront costs is likely to be very appealing, a minimum scale is needed to ensure that an ROI is possible and that the project is commercially interesting, at least at the beginning. The payback cycles on projects will likely be in the region of 5 to 10 years so a project owner who only has a short contract may not be able complete the agreement. Also, clients with poor credit ratings are also likely to struggle, due to the financial element involved in long term deal like this.
One big question to ask is, why now? What is it about the last few years that has meant LaaS has become a viable business model? After all, fluorescent lamps were (are) 60% more efficient than halogen lamps and able to offer massive savings, dimming and sensors have been a standard part of the project landscape for many years. One reason could be that the LED market is starting to reach a maturation point. Rapid advances in efficiency, output, and quality have started to slow down. Which reduces the marketing effect of hype breakthroughs “we are the first company to reach blah blah efficiency”. However, it also gives a more stable platform for lighting manufacturers to work from. Modern LED chip products are generally able to have a 12-month lifespan before being refreshed, and when the model is updated it is more likely to be evolution not revolution, rather than large upgrades every few months.
As a market matures, typically we see three signs;
1 – Reduced demand
2 – Reduced Sales
3 – Lack of differentiation in product offerings
Whilst growth estimations still predict plenty of growth in the LED market, especially at the top end of the market where some of these factors are starting to show. There is starting to be very little variation in quality or efficiency amongst the more established chip manufacturers. This makes it hard for luminaire manufacturers to give their products a unique selling point. The two options are to achieve a low price point for their product, or innovate, either through associated technology, or how they do business – LaaS is a facet of this.
To be continued in part two…