Amazon Prime Air: just another pipe dream or technological breakthrough?

Amazon Prime Air

Amazon Prime Air

On 1 December, Jeff Bezos revealed on CBS’ 60 Minutes that Amazon is working on the creation of a new drone delivery system. The new service, labelled Amazon Prime Air, will enable Amazon to offer 30-minute delivery through the use of unmanned Octocopters. These drones will be able to deliver packages weighing up to 2.3 kg within a 10-mile radius from the given fulfillment center.

The announcement became the leading tech news globally, however its public reception was largely mixed. Due to current U.S. aviation regulations, the service cannot be implemented in the next couple of years. Many experts and tech bloggers attempted to answer why Bezos announced Amazon’s drone project now, given the restrictions in place. Some argued that it was nothing but free advertising before Cyber Monday, others believed that the announcement was a way for evoking Amazon’s indomitable spirit of innovation. I have a largely different view on it.

The free advertisement theory
Many critics argued that the only reason why Jeff Bezos announced the Prime Air programme is to capture media attention and increase sales for Cyber Monday. I have three reasons why this theory does not seem plausible.

Firstly, assuming a clear correlation between short-term sales results and the announcement of a vision is more than questionable. This drone service will not be implemented in the next two to three years, thereby no customers would benefit from it in the short run. This announcement could have increased brand awareness and impacted sales of a smaller company, but Amazon is the 10th most valuable brand in the world and the potential impact of this announcement on its brand awareness is minimal if not insignificant.

Secondly, why would Amazon announce this drone delivery project after the Black Friday weekend? According to the National Retail Federation’s estimate, the total retail revenues between 29 November and 1 December was around US$57.4-billion. According to the latest news, the total sales of Cyber Monday was slightly above US$1.7-billion. As a CEO of the world’s leading retail business, if my goal with this announcement would be the maximisation of sales, executing it after Black Friday would be nothing but a big timing mistake.

Last but not least, it is obvious that Cyber Monday’s impact on Amazon’s annual results is almost negligible. Amazon is on track to record US$75-billion in sales this year. This means that even if Amazon would have captured 100% of the sales of Cyber Monday, it would be less than 2.5% of its annual revenues. Believing that Jeff Bezos would be willing to risk his reputation and credibility, by advocating a technology that he does not fully believe in, for an additional 2.5% of annual revenues does not seem realistic.

The decade-old drone business
Amazon’s Prime Air may revolutionise the retail industry and can largely impact the future of the traditional brick and mortar retail and transportation businesses. So far, Amazon offered cheaper prices while its traditional competitors had the ability to offer immediate purchase for its customers. By reducing the delivery time to 30 minutes, Amazon will largely challenge the existing business model of these retail stores.

Although, the use of Amazon commercial drones can disrupt these sectors, the drone technology in different forms has been around for more than a decade. Next to early experiments (such as this or this) in 2000, the use of drones for police and governmental agencies became common during the last few years. The US Federal Aviation Administration (FAA) approved 1 400 permits for these purposes.

Many companies have been also experimenting with the use of drones for commercial purposes. In China, a delivery company called SF Express is testing drones in the southern city of Dongguan, DroneDeploy meanwhile recently announced a partnership to help deliver medical supplies in West Africa. Moreover, an Australian textbook rental start-up called Zookal already announced that it would begin utilizing drones for deliveries in Australia next year. To sum up, Amazon is not the inventor of this technology and not even the first who attempted to use these drones commercially.

Endorsement for a new, disruptive technology
So, the announcement was neither about boosting sales nor taking credit for a technological breakthrough. The main purpose seems to be a public push for a new, disruptive technology — a technology that faces regulatory issues and technological challenges at the moment.

This new technology may fundamentally change the way in which the retail and transportation businesses work. Amazon as a catalyst created a chain effect that will eventually lead to the commercial use of drones.

The impact of Amazon Prime Air - dpetz

One day after the Bezos interview, UPS announced that it also has its own unmanned flying courier programme in its lab and “the commercial use of drones is an interesting technology and we’ll continue to evaluate it”. What is the direct implication of this for the leading retail and transportation companies?

In order to remain competitive, Amazon and UPS’ competitors will either need to develop their own drone technology or they will need to acquire these capabilities in the next three to five years.

Eventually, this will mean a significant increase in demand for drone solutions. This demand will urge venture capital firms to invest heavily in this newly born sector because the exit opportunities (mainly acquisitions by these multi-billion dollar companies) will be very lucrative. In the first nine months of 2013, more than US$40-million has been poured into drone-related startups in the US.

Leading venture firms such as Google Ventures and Andreessen Horowitz have already invested into the sector. However, knowing that companies such as Amazon or UPS might acquire drone-related start-ups, investment firms will spend more and more on these technologies in the next few years. The appearance of this “cheap” money on the market will attract software developers and the number of drone-related start-ups will boom.

These new start-ups will enable the drone technology to overcome the current technological barriers (short battery life, sensor problems under specific weather conditions or safety and privacy issues) and the vision of Jeff Bezos may become reality very soon.

The appearance of these start-ups and the large investments into the sector will not only foster the technological development of drones, but they will also urge the FAA to develop a plan for the integration of commercial drones into the U.S. airspace in the coming years.

Bottom line
Amazon’s announcement about its Prime Air service using drones was neither a sales tool, nor a technological breakthrough. It was a public endorsement for a disruptive technology that will foster the development of new, drone-related start-ups and internal R&D initiatives within the leading retail and transportation companies.

These start-ups will face several challenges from safety issues to difficult weather conditions. However, with Amazon, UPS and leading venture firms on the board the real question is not whether commercial drones will be ever introduced, but rather when will they be…

This article by Daniel Petz originally appeared on Dpetz and is republished with permission.



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