Color Kinetics Incorporated

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Color Kinetics Incorporated

10 Milk Street, Suite 1100
Boston, Massachusetts 02108
U.S.A.
Telephone: (617) 423-9999
Toll Free: (888) 385-5742
Fax: (617) 423-9998
Web site: http://www.colorkinetics.com

Public Company
Incorporated: 1997
Employees: 122
Sales: $52.9 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: CLRK
NAIC: 335129 Other Lighting Equipment Manufacturing

Color Kinetics Incorporated makes microprocessor-controlled light-emitting diodes (LEDs), selling its lighting systems to the architectural, retail, and entertainment industries. The company's patented Chromacore technology digitally mixes millions of colors by pulsing electricity through LEDs at different rates, creating "intelligent" lighting displays for interior and exterior applications. Color Kinetics sells lighting systems and related hardware and software directly to customers and to original equipment manufacturers (OEMs). Color Kinetics also generates revenue by licensing its technology on a royalty-bearing basis.

ORIGINS

George Mueller and Ihor Lys started Color Kinetics to advance the capabilities of LEDs, envisioning commercial promise in a technology that had the potential to revolutionize the lighting industry. When electric light bulbs replaced gas lamps in the 19th century, the lighting industry made a massive technological leap forward, but after that, no substantial advancement in the industry's basic technology occurred for the ensuing century. Mueller, Lys, and numerous others believed that LEDs represented the lighting industry's next great agent of change. At stake was the $50 billion lighting market, a market served by fluorescent, incandescent, halogen, and gas-discharge light sources. Color Kinetics, among a host of rivals, hoped to render these conventional light sources obsolete, but the battle to bring the next generation of technology into the mainstream would be a difficult one.

LEDs first appeared in the 1960s, arising from British experiments with electroluminescence a decade earlier. The innovation, a semiconductor that released energy in the form of light when electric current passed through it, marked the beginning of LEDs' evolution from an indicator to an illuminator. The first visible-light LED produced a red glow far too dim to serve as an illuminating light source, finding commercial use instead as indicators in electronic devices such as calculators and videocassette recorders, with their red glow informing the user whether power was on or off. The low light output of the first LEDs limited their use in the marketplace, as did their color. To achieve a greater spectrum of color, scientists needed to develop LEDs capable of producing other colors, a technological barrier to mainstream commercial use that would be broken down gradually in the decades after red LEDs debuted. In the mid-1970s, green LEDs were developed, which, when combined with red LEDs, added the color yellow to the band of colors the semiconductors were able to produce. By the 1980s, when the first generation of "superbright" LEDs emerged, scientists were able to produce orange, orange-red, yellow, and green light, leaving only the development of blue LEDs to achieve a spectrum of color diverse enough to enable the production of white light. Blue LEDs appeared for the first time at the beginning of the 1990s, finally eliminating one of the technological barriers to widespread commercial use.

Other barriers blocking the mainstream introduction of solid-state lighting remained once white light was produced. One of the principal shortcomings of early LEDs was their output of light. The dim LEDs that served as power indicators gradually became brighter as semiconductor technology advanced, finding more commercial applications as they brightened. LEDs began to be used by the automotive industry, traffic signals were outfitted with LEDs, and digital watches employed LEDs. However, aside from gaining acceptance in niche markets, the light-emitting semiconductors could not begin to be considered a serious rival to traditional lighting technology until the power of semiconductors began to increase. Advancements in technology, the same leaps forward that would ignite the growth of the personal computer industry, began to occur at roughly the same time scientists developed the first blue LEDs. Semiconductors, following the precept of Moore's law, were becoming exponentially more powerful during the first half of the 1990s, which convinced two Carnegie Mellon University students that the long-heralded promise of LEDs' potential to make traditional lighting technologies obsolete had arrived.

Mueller and Lys began experimenting with LED technology in 1992, five years before their research led to the formation of Color Kinetics. Both were students at Carnegie Mellon, where their friendship and mutual interest in the potential of LEDs to overtake traditional lighting technologies took root. Mueller was graduated with a dual major in electrical and computer engineering at Carnegie Mellon. He worked at the university's Field Robotics Center and enrolled at the Graduate School of Industrial Administration before venturing into the business world. In 1994, he and his brother started an Internet-based research firm, Internet Securities Incorporated. Internet Securities developed into an international success, delivering news and information on emerging markets through a network of offices in Latin America, Europe, Asia, the Middle East, and Africa. Although Mueller would author nearly two dozen patents, Lys figured as the lead engineer in the partnership that spawned Color Kinetics. He earned bachelor's, master's, and doctorate degrees in electrical and computer engineering at Carnegie Mellon, gaining expertise he applied to his own start-up venture, LYS Software. Lys founded the company, which developed TOFWARE, mass spectrometry data acquisition software, in 1991 and served as its chief executive officer until 1996, the year before he and Mueller launched Color Kinetics.

Mueller and Lys had a single, overarching goal when they founded Color Kinetics: to fulfill the potential of LEDs to supplant conventional lighting technologies. Their work focused on ways to control LEDs with microprocessors and software, which gave birth to their Chromacore technology, the foundation of Color Kinetics' intelligent LED lighting systems. Mueller and Lys discovered a way to combine red, green, and blue LEDs to produce a light capable of shining in more than 16 million colors, including white. Software was developed to pulse electricity through LEDs at different rates, which enabled colors to be mixed digitally for custom applications. Mueller and Lys established their company in August 1997, obtaining their start-up capital from a small number of investors, including Noubar Afeyan, a biotechnology entrepreneur who greatly influenced the creation of Color Kinetics' business plan.

COMPANY PERSPECTIVES

With our time-tested approach and proven track record, we believe that Color Kinetics is uniquely able to deliver complete solutions that can thrust intelligent LED lighting into the mainstream—including the replacement of conventional sources and the entire rethinking of light itself.

SHIPMENT OF FIRST PRODUCTS: 1998

From their offices in Boston, Mueller and Lys began turning their research and development efforts into marketable products. Mueller took the titles of chief executive officer and chairman, assuming responsibility for corporate strategy and raising venture capital to fund Color Kinetics' development. Lys served as the company's chief technology officer, devoting his time to creating lighting systems and perfecting Color Kinetics' Chromacore technology. The company began shipping its first products in the spring of 1998, targeting niche applications in the lighting market. The company's solid-state systems, which gave customers the ability to control color, brightness, and special effects, were used to decorate bridges, theater stages, restaurants, airport terminals, and swimming pools. Multicolor systems provided dramatic lighting for television game show sets, bars, casinos, and cruise ships. There were numerous applications for Color Kinetics' systems during the company's first years in business, enough to fuel modest yet steady revenue growth, but they were not part of the mainstream lighting market, Mueller's ultimate aim. For entry into the main segment of the market, Mueller would have to wait.

The performance of LEDs compared to fluorescent or incandescent light sources left little room for debate about which technology was superior. LEDs were superior by far. Cool to the touch, flexible, and able to sustain the weight of a car without breaking, LEDs were ideal for the specialized uses of architectural, retail, and entertainment lighting. For use as illuminating light sources in more mundane settings, LEDs excelled as illuminators as well. LEDs generated around 30 or more lumens per watt, while standard incandescent bulbs produced around 12 lumens per watt. LEDs had a life span of more than 50,000 hours, by far eclipsing the 750-hour life span of a conventional bulb. LEDs were safer, more efficient, and longer lasting than conventional light sources, but they were exponentially more expensive to manufacture—the major barrier blocking the adoption of LED technology by the general lighting market. LEDs cost roughly 100 times more to make than 50 cent incandescent bulbs, which forced Color Kinetics to rely on the specialized, niche markets on the fringe of the mainstream market.

To subsist in specialized areas, the company licensed its technology to other companies, something Afeyan insisted Mueller and Lys do when he made his initial investment in Color Kinetics. In January 2000, the U.S. Patent Office awarded Color Kinetics the first patent for its color-mixing technology, the first of nearly a dozen the government agency would grant during the two ensuing years. Once the company secured its patents, institutional investors became more attracted to the small, Boston-based firm. Deutsche Bank invested in the company in 2000, providing much needed capital to fund the development of LED technology. "Having intellectual property is like having nuclear weapons," a Deutsche Bank representative said in an October 14, 2002, interview with Forbes. Patented technology also protected the company from the threat posed by much larger rivals, such as General Electric Co., Philips Lighting, and Osram Sylvania. "We believe this will be a very significant impediment to others trying to compete with us," Lys explained in the October 14, 2002, issue of Forbes. "Hopefully, they will come to us with buckets of money."

HIRING OF WILLIAM SIMS: 2001

To assist in his efforts to make Color Kinetics a commercial success, Mueller turned to outside help for managerial expertise as the company neared its fifth anniversary. William Sims was hired as president and chief operating officer in 2001, bringing with him more than two decades of experience in the consumer products and technology industries. Sims, who eventually succeeded Mueller as Color Kinetics' chief executive officer, spent much of his career at Zenith Sales Company and JVC Company of America, distinguishing himself as a senior executive capable of spearheading expansion. When Sims joined Color Kinetics, the company was on its way toward generating $16.6 million in revenue. The total was more than triple the amount recorded two years earlier, but the company's inability to post a profit caused concern, overshadowing its robust revenue growth. Color Kinetics registered a net loss of $14.6 million in 2001 after recording a net loss of $8.1 million in 2000 and a net loss of $3.1 million in 1999.

KEY DATES

1997:: Two Carnegie Mellon University alumni, George Mueller and Ihor Lys, found Color Kinetics.
1998:: The company begins shipping its first products.
2000:: The U.S. Patent Office issues its first patent for Color Kinetics' Chromacore technology.
2001:: William Sims is hired as president and chief operating officer.
2004:: Color Kinetics completes its initial public offering of stock.
2005:: For the second consecutive year, the company posts an annual profit.

Despite problems with profitability, the mood at Color Kinetics' Boston headquarters was upbeat. Mueller was convinced the next-generation technology his company sold was narrowing the gap between LED illumination and the general illumination market. "We're on the verge of an explosion," he exclaimed in an October 14, 2002, interview with Forbes. "This is the Holy Grail, the broad, general lighting market." Some industry experts expressed less optimism about the penetration of LEDs into the mainstream market, projecting a ten-year wait until LEDs would dominate the general illumination market. Regardless of when Color Kinetics reached the "Holy Grail," once the moment arrived, the company stood to benefit substantially from the widespread use of LEDs, which fueled confidence as the company's tenth anniversary neared.

Poised to reap the rewards of its pioneering role in an emerging industry, Color Kinetics introduced "IntelliWhite" and "EssentialWhite" product lines to answer the demand for specialty white lighting systems, part of its ongoing efforts to replace conventional lighting technologies with LEDs for general illumination. In the interim, while LEDs remained restricted to specialty applications on the periphery of the general market, Color Kinetics' management team enjoyed success in its niche market. In 2003, the company posted a net loss of $727,000, far less than the $7.4 million loss registered the previous year, and from there went on to record its first years of profitability, posting $2.3 million in net income in 2004 and $4.3 million in net income in 2005. Revenues during the period nearly doubled, jumping from $28.8 million in 2003 to $52.9 million in 2005. By the time the company completed its first decade of business, more than 10,000 sites in the world boasted Color Kinetics' high-performance lighting systems, including properties and events managed by Carnival Cruise Lines, Hard Rock Hotel & Casino, the Metropolitan Museum of Art, Northwest Airlines, and Wynn Las Vegas. In the years ahead, the company's customer base promised to expand considerably as the manufacturing costs of LEDs dropped. Color Kinetics was expected to become a formidable force in the commercialization of advanced, LED technology, at last reaching what its founder referred to as the Holy Grail.

Jeffrey L. Covell