Buyers can expect continued price declines for high-brightness light emitting diodes (LEDs), despite strong unit demand growth, as LEDs are designed into everything from cell phones to ceiling lights.

LED prices will drop because of oversupply and intense competition among manufacturers, such as Cree, Lumileds and Nichia for market share and as suppliers improve their manufacturing efficiencies.

"Simply put, demand is healthy but supply is greater than demand," says Robert Steele, director of optoelectronics for market researcher of Strategies Unlimited in Mountain View, Calif. "There are a lot of companies in Asia making LEDs and prices are being driven down."

The average price of a high-brightness LED was 19.5¢ in 2004. In 2007 it dropped to 11.7¢. Prices will fall 15–20% in 2008, says Steele.

Despite falling prices, the global high-brightness LED market will grow from about $4.5 billion in 2007 to $5.1 billion in 2008. By 2012, the LED market will reach $11.4 billion.

In the recent past, mobile appliances, including cell phones, personal digital assistants, and digital cameras, drove the LED market accounting for 57% of revenue. In 2007 the percentage was 44% because as the price of LEDs dropped, they started to be used in more applications, including automobiles, notebook computers, televisions and architectural lighting.

"The mobile phone market is maturing," says Steele. "That is what drove a lot of the growth in the first half of the decade, but price declines for LEDs used in handsets have been stronger than the growth in units."

The next big application for LEDs is backlighting in portable computer LCD screens. Currently, most portable computers use cold cathode fluorescent lamps (CCFL) as backlights. However, LEDs are replacing CCFLs. Last year about 10% of notebook computers used CCFL. In five years, virtually all notebooks will use LEDs instead of CCFL, says Steele.

The main reason is energy efficiency. White LEDs are more energy efficient than CCFLs and battery life of the computer is extended. "Laptop makers want to promote products that have long battery life and this helps," says Steele. He says the display accounts for 30–40% of the power in a laptop and LEDs reduce the energy use in laptops by 10–20% and the power savings will grow in the future.

Ultralight notebooks use LEDs, but in the next few years, LEDs will be used in more mainstream portable computers because they allow the top lid of the notebook to be thinner. For example, the Macintosh Air couldn't have been made without LED backlighting, he says. But LEDs in such an application cost about $10–$20 more than CCFLs and the differential is shrinking.

LEDs are also being used in liquid crystal display (LCD) and projections televisions and monitors. Samsung has a line of televisions and a few monitors with LED backlighting. While LEDs improve energy efficiency in portable computers, in televisions they are used to improve picture quality. "An array of LEDs is used to illuminate the screen and you can selectively dim sections of the screen, providing a higher contrast ratio," says Steele. Another expanding LED application is automotive headlamps. High-end cars are starting to use LED headlamps and eventually they will be used in mainstream vehicles as well.

However, the Holy Grail for LED manufacturers is general lighting for homes and businesses, says Steele. "Everyone in the LED industry would like to replace halogen, incandescent and fluorescent with LEDs," he says.

Last year, the segment accounted for about 7% of the total high-brightness LED market. But it is growing about 40% annually and will continue to grow as LED prices come down. But the price has a long way to go. For example, a recessed can downlight, an R-30 incandescent lamp, costs about $4. A cathode fluorescent version of the lamp costs about $6. The best current LED version costs about $100, says Steele. But the price of the LED lamp will drop over the next few years and it will be more widely used.

In addition, the LED will last longer and will consume less electricity than the incandescent or cathode fluorescent.