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January 6, 2016

The Drone Buzz

Posted by Girish Pai (View Profile | View All Posts) at 5:09 AM



Amazon Prime Air To Provide Drone Delivery | Tech Bet | CNBC [Source: https://www.youtube.com/watch?v=i2kHa9Z5mKY]

Investors know what most of the world (including Amazon's legions of loyal customers) do not: That the stock of the Seattle-based company trades at an almost incredible price-to-earnings ratio (it has one of the highest p/e ratios of all companies trading on the U.S. exchanges). This means that investors are placing an amazing amount of confidence in Amazon's potential to become profitable. They have put a premium on the company's innovative track record and have a collective hunch that its big technology bets will someday pay off big.

But financiers will be the first to tell you that past accomplishments are by no means any guarantee of a company's future successes. For the second year in a row, Amazon aired advertisements (in the form of an Amazon Prime video) touting the web retailer's plans to deliver goods by unmanned drone aircrafts. This year the ads were even more polished and they featured one of the presenters from the hit British TV show Top Gear.

The publicity around Amazon's drone delivery got me thinking about the essentials of an omnichannel strategy. For an omnichannel strategy to succeed, the service must be convenient. What could be more convenient than a drone dropping off an item at your doorstep within hours of you purchasing it online? But then there's the second criteria, which is in this case a bit stickier: The strategy must turn a profit. Amazon drones have not yet taken to the air in force. Nor have they in any way shown that they can improve Amazon's bottom line. I'm beginning to wonder whether the promotions around drones are slightly premature, as there are no firm dates for a rollout yet. I know what you're going to tell me. Goodwill (in this case, the positive attention that Amazon's innovations receive in the press) is a part of the company's balance sheet and therefore accounts for something.

Certainly it does. But, let me tell you the story of a tech innovation in the 20th century. About 50 years ago, the American president, John F. Kennedy, got wind of the fact that a British-French aerospace consortium was building a supersonic airplane called Concorde. President Kennedy asked his advisors if the United States should build their own version. The answer he received was a resounding no. The Concorde would ooze prestige and upper-class notoriety, not to mention the technological bragging rights of operating a passenger jet that could cruise at Mach 2. The only problem, said Kennedy's advisors, was that the project would never make a penny. It would bleed money for the sake of the vanity of that particular aerospace consortium.

There's another part of the Concorde story that Amazon would do well to learn. Well into the development of the aircraft, it was discovered that the sonic boom created by Concorde's speed would create havoc on the ground below. So the plane would be relegated to routes over the ocean. The skies over economic powerhouses like India, the United States, and China, are already crowded. Amazon has yet to provide a clear answer as to how it will gain the regulatory approvals to run a fleet of aerial delivery drones across already-busy skies. Plus, who's to say that companies like FedEx and UPS, who have lobbying clout among national lawmakers, are going to roll over and play dead so that a web retailer can fulfill its aerial delivery ambitions?

Aerial drones are already proving to be valuable pieces of operations, depending on the industry. For instance, General Electric is investigating ways it can market bespoke drones to the utilities industry. Just think how efficiently a utility company could check on thousands of miles of energy infrastructure. Taisei, a huge Japanese construction firm, is using unmanned drones to efficiently check on the progress of its many building projects. Then there are farmers who can use drones to check on acres of crops in just a small portion of the time it takes them now.

No doubt, drones will become an important part of the future. Until they become practically feasible, convenient solution mechanisms are key. Amazon has already been doing this very successfully in India where deliveries in small towns are carried out by couriers on bicycles, and customers can also opt for cash on delivery. Simple solutions that are tailored to local markets and increase adoption and market share are equally important.

I'm all for the success of Amazon's drone delivery aspirations. I think there's immense potential in this venture and I laud the company's ingenuity. Yet, I think that the company could do well to chalk out a strategy and take heed of the possible pitfalls. A brilliant marketing campaign for drones deserves a success story with staying power, doesn't it?

Comments

Hi Girish,

That is indeed a thought provoking article on drones.

I was wondering on the security aspect of this technology,as in what if someone shoots down the drone during its flight and similar situations.

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