Kevin Keating figured he had a sure thing. So why didn't it walk off the shelves?
Suppose you invented a light bulb that, for all practicall purposes, never burned out. How would you market it?
About 1.5 billion incandescent light bulbs are sold every year in the United States. Most of them are rated at 750 or 1,000 hours of life, which is to say that if a group of them were burned continuously, roughly half would fail in less than two months, and half would burn longer. It costs General Electric Co., the market leader, less than a quarter to make such a bulb. The consumer pays maybe 75? to buy it.
It costs DioLight Technology Inc. 49? 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. Kevin Keating, co-inventor of the bulb and founder of DioLight, assumed that a light bulb that good would be easy to sell. "Once we started making them," says Keating," I thought all the work was done."
You think so too? You don't know the light-bulb business.
Since Thomas Edison developed the first practical bulb in 1879, Edison General Electric Co. and its successor, GE, has been the lighting industry's undisputed and rarely challenged market and technology leader. Almost every lighting innovation to gain commercial acceptance -- the tungsten filament, the gas-filled bulb, the frosted bulb -- have come from GE's labs. GE developed the machinery and processes to lower manufacturing costs, and it developed the distribution system to move its bulbs to residential and industrial/commercial users.
It also held most of the best bulb patents, and in the past would license other bulb makers to produce only what GE wanted them to produce.In 1923, for example, GE itself held a 61% market share. Westinghouse Electric & Manufacturing Co., GE's only "class A" licensee, was allocated 16%. The six "class B" licensees, including a little company called Hygrade Sylvania Corp., together were allocated 9% of the market. Licensees could exceed their quotas, but their license fees on the excess rose dramatically. And while GE didn't dictate bulb prices, it could revoke licenses on whim; licensees that wanted to stay in business stayed in line. By the mid-1930s, according to one estimate, bulbs accounted for about one-sixth of GE's sales, but as much as two-thirds of its profits.
Only GE's accountants and executives know what its light-bulb margins are today, but the overall market shares haven't changed much. GE is still on top by a hefty margin. GTE Lighting Products, manufacturer of Sylvania light bulbs, is probably number two, and if so, North American Philips Corp., which recently acquired Westinghouse Electric Corp.'s U.S. bulb business, is a close third. The three giants account for about 90% of all the incandescent bulbs sold in the United States.
To be sure, you don't need a huge share of a $2-billion market to achieve respectable sales, and there are plenty of nooks and crannies a small company can slip into. But it's not as if these niches are unoccupied. Last year, Duro-Test Corp. sold longer-life and specialty bulbs worth $68 million to claim about a 3.4% share of the market. Marvel Lighting Corp. and Supreme Lighting Co., among others, survive on "me-too" products (with smaller margins) sold through private labelers. Action Tungsram Inc. supplies "promotional" bulbs to such mass marketers as K mart Corp. and Zayre Corp. for special cut-rate sales, typically three for a dollar. (Selling GE bulbs at that price, Action Tungstram president Allan Merken has persuaded the big chains, would tell the consumer that the regular price was a rip-off.)
When Kevin Keating set out to break into this market, he figured his only problem was technological. A better mousetrap, so to speak.
Keating is 33 and grew up in the wealthy suburbs north of Detroit. If the automobile industry and Detroit's real estate market hadn't plunged into recession in 1979, he probably would still be eating his lunches at the Bloomfield Hills Country Club and doing big deals in the real estate firm his grandfather started. But when the market died, Keating began selling diodes -- the little energy-saving buttons people put in their lamp sockets -- for his brother, a vice-president of a diode company. Diodes cut the voltage to the light-bulb filament, reduce the power consumed, and extend the life of the bulb. Also, Keating learned, they chop the light output and can create shock and fire hazards.
Suppose you could put the diode inside the bulb, Keating thought, and get the benefits of the device without the drawbacks. He asked Russ Monahan, his friend and classmate (Brother Rice High School, class of 1970) at a party one night if the idea was feasible. No problem, said Monahan. A mechanical engineer, he took charge of designing Keating's light bulb.
If we can design the bulb, can we make a business of it, Keating asked Chris Callaghan, another Brother Rice classmate. Sure, said Callaghan, with the right research and development, manufacturing facility, marketing, financial backing, and management organization. An M.B.A., CPA, and Ph.D., Callaghan took charge of outlining Keating's business plan.
Keating himself wanted to know if the bulb they had in mind could actually be manufactured. GE wasn't going to tell him; neither were its competitors. So, dressed up as a priest, he toured an independent bulb-maker's plant in Mullins, S.C. His engineer brother-in-law, passing himself off as a student, went with him. Making the bulb, they decided, would pose no serious technical problem.
But who would make it? Potential domestic suppliers, the trio discovered, weren't interested, and most Taiwanese manufacturers declined as well. "As soon as we told them we wanted to make a long-life bulb," says Monahan, "they'd say, 'No way, Jose. We're in the bulb-replacement business." One, the last on their list of possibilities, finally agreed.
