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Optogan – another bulb story?

Date: 25 May 2011

Optogan (http://optogan.com/) is a private company which works under the slogan “Lightning the 21st century”. Mikhail Prokhorov owns 50%+1 share together with management. If you go to their website you will hear a brave music symbolizing fight and victory. Let’s look at this company from investors’ point of view...

Just looked at this company from investor’s point of view and two questions attracted my attention:

1) How big is the market for LED lamps (one of Optogan’s products)?

a) “Мировой рынок светодиодов оценивается примерно в 10 млрд долларов. В прошлом году он вырос вдвое. Российский рынок светодиодов в 2010 году составил примерно 20 млн долларов. Однако, по оценке руководителей "Оптогана", к 2015 году внутреннее потребление светодиодов в России может увеличиться тысячекратно - до 20 млрд долларов! Такого масштаба рынок светодиодов может достичь с учетом перевода всей ныне действующей техники на светодиодные технологии.”

http://www.nkj.ru/news/19297/

We heard this story before. To replace a cheap product with an expensive one, whatever the return of this investment is, is just difficult. One company already tried to do exactly that. It was in 1986 in US, the country where managers are the most attentive to economic efficiency in the world. DioLight put to US market a lamp with a diode inside the bulb in mid 80s.

“It costs DioLight Technology Inc. to make a bulb that retails for $4.99 and lasts, on average, 6 years and 10 months if burned continuously, 50 years if used only two or three hours per day. DioLight's bulb costs the customer less than seven times as much to buy as GE's, yet it burns 60 times as long.”

http://www.inc.com/magazine/19860301/9470.html

The article is about that it was dam hard to sell these lamps. It looks like the company didn’t become very successful as we don’t know it. May be it managed to become a niche product supplier: their lamps “made sense for hard-to-reach places where changing a bulb was difficult and therefore costly. And they were good where aesthetics were important -- in signs or chandeliers, for example, where a dead bulb detracts”.

b) Upfront analysis leads to the same conclusion that this product can be only a niche product. “Crack the case” book by Marc Cosentino, the best book to prepare for strategy consulting case interviews, has the following case:

“GE has invented a new light bulb that never burns out. It could burn for more than 500 years and it would never blink. The director of marketing calls you into her office and asks, "How would you price this?" What do you tell her?”

The recommended answer comes to that regular GE bulbs are the most economical as if all of them replaced by bulbs that last for 50 years, the market would collapse in the long term. People will no longer need bulbs in the quantities closed to historical levels. The recommendation for GE is to make it very expensive and sell for areas where replacement is very costly while cost of bulbs doesn’t matter.
Допустим, мы - я, Вы и Хроноскопист летели на самолете через Тихий океан. В пути мы втроем накушались абсента, надебоширили, отломали дверь от туалета, и нас за это выкинули в море через аварийный выход. По счастью, рядом с местом нашего падения обнаружился маленький безымянный полинезийский остров.

2) Can Optogan be competitive?

“Глобальные игроки занялись выращиванием светодиодов и чипов много лет назад. Чтобы довести качество продукции до международного уровня, нужно пять-семь лет",— говорит генеральный менеджер Philips "Световые решения" в России, Белоруссии, на Украине, Кавказе и в Средней Азии Владимир Габриелян. У того же Philips Lighting на светодиоды уже сейчас приходится 7% оборота — свыше 450 млн евро. Через пять лет компания собирается довести их долю в выручке до 50%. Только на покупку четырех светодиодных компаний за последние десять лет голландцы потратили около 2 млрд евро”.

http://www.kommersant.ru/doc/1475624 (Журнал "Коммерсантъ Секрет Фирмы", №8 (300), 09.08.2010)

Phillips, one of the world’s most experienced companies in electronic and bulb industry invested years and billions of EUR in this technology.

“Участники рынка пророчат бум бытового LED-рынка примерно через пять лет, когда цена светодиодной лампы сравняется со стоимостью компактной люминесцентной. Максим Одноблюдов рассчитывает, что продукция его компании к тому моменту будет стоить примерно на 10% меньше, чем у глобальных конкурентов, при сопоставимом качестве.

Откуда у "Оптогана" возьмутся низкие цены? По словам Одноблюдова, за счет технологических ноу-хау и наращивания объемов производства”.

(the same source)

I don’t believe that Optogan can have better scale then Phillips, or if it does the investments to reach it would not be economically feasible.

The only chance for Optogan to generate IRR comparable to competitors is that mentioned know-how. Is it really that good?

To summary this brief market and competitive analysis:

Against:
- Market size (at least for LED lamps) will probably be lower than expected. History of DioLight in 1986 showed that to squeeze out traditional bulbs is almost impossible as they are very cheap. Calculations prove that even if that happens, market will collapse in the long term
- Competitors are way ahead in experience curve

Potential pros:
+ Optogan’s innovative technology can lead to cost leadership

I would not invest in Optogan now based on this risk and return profile.

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