Study: Drones could take off as retail delivery vehicle

Discussion
Apr 23, 2015

If the FAA gives Amazon clearance for commercial rollout of its drone delivery service, the price a consumer would pay for the delivery of a five-pound package could be as low as $1.00, according to a study from the financial firm ARK Invest.

Equally impressive, delivery times could drop below thirty minutes. The cost in fact would be lower and the time significantly shorter than that achievable by delivery trucks and couriers. The findings were based on existing technology and prices.

Explaining how it came up with the $1.00 delivery charge, ARK Invest estimated that at least 400 million annual shipments from Amazon to U.S. customers would be eligible for drone delivery. With drones "relatively inexpensive," an investment of less than $100 million would support the upfront costs to buy the required tens of thousands of drones and related infrastructure. Another roughly $300 million would be spent annually for service, maintenance and fueling at full penetration, including the thousands of human operators needed to oversee the drones and ensure safety.

The findings assume human operators are responsible for drone landing and takeoff, but most of the drone flight would be automated. The study assumed each package weighs as much as five pounds and each delivery is no more than 10 miles.

Wrote Tasha Keeney, ARK Analyst, in a blog entry, "400 million packages delivered for $300 million in operating expenses and with a $100 million capital investment implies that Amazon could earn a healthy return on capital pricing the service at $1 per delivery."

Based on ARK original research, the delivery cost to Amazon would be 75 cents, a margin that would allow Amazon to break even after the first year.

Mr. Keeney added that, depending upon the operating expenses of the program, "it may make strategic sense for the company to effectively offer the program free to Prime members across all its major US metros."

While the FAA recently granted Amazon approval for drone testing, ARK Invest noted that drone delivery faces "significant regulatory hurdles" and the safety and reliability of drones needs to be addressed.

With less strict drone regulations abroad, Amazon may initially launch Prime Air internationally, ARK Invest speculated.

Amazon currently charges $7.99 for one-hour delivery of certain products in many cities through its Prime Now program.

Does the math around the low cost of drone delivery make sense to you? Has your view on the possible arrival of widespread drone delivery changed over the last year?

Braintrust
"I am either very old, very cynical or both. I just have a really hard time envisioning "widespread drone delivery.""
"The math may look good although I believe there are unaccounted costs, the most predominant of which are the failed deliveries resulting in lost merchandise and the added insurance."
"I saw the headline and could not help thinking of those futuristic graphics of cities with all kinds of things flying around."

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13 Comments on "Study: Drones could take off as retail delivery vehicle"

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Paula Rosenblum
BrainTrust

I am either very old, very cynical or both. I just have a really hard time envisioning “widespread drone delivery.” That opinion has not changed.

I mean, I’ve warmed up to tiny drones taking crowd photos, but that’s not quite the same as something large enough to carry a package flying around in the sky and dropping said package on a doorstep. It just seems really dangerous to humans, planes, automobiles and buildings.

I suppose a day will come when I see this happen and say to myself “Huh, who knew?” But I just don’t see it.

Ken Lonyai
BrainTrust

The math may look good although I believe there are unaccounted costs, the most predominant of which are the failed deliveries resulting in lost merchandise and the added insurance. Probably not enough to substantially impact these numbers, but an additional financial cost.

My view has not changed: I’m a tech guy firmly against delivery drones for a myriad of reasons. Essentially, I do not believe they are a practical reality no matter what journalists want to report. There are a lot of issues and opponents that go far beyond the FAA and they will surface as drone delivery moves forward.

Grace Kim
Guest
Grace Kim
2 years 3 months ago

Drone delivery could be more useful in developing countries where infrastructure is not there and fuel costs are high. In an urban area, I can’t even imagine what our skies would look like with drones flying everywhere for deliveries. Do we really need things in under 30 minutes?

Gene Detroyer
BrainTrust

I saw the headline and could not help thinking of those futuristic graphics of cities with all kinds of things flying around.

I don’t think cost is an issue. From a cost point of view, the cost will be the cost, good or bad. But I can’t keep that vision of all these things flying around delivering stuff. That is the part that doesn’t compute for me.

Mohamed Amer
BrainTrust

The major weakness to the math is the assumption that the full 400 million packages that qualify for drone delivery will actually go that way. If that number turns out to be only 10 percent then the delivery cost explodes to $10 according to their cost/profit projections. And even if you can achieve close to 100 percent delivery of the qualified orders via drones, there will be a distribution cost shift from delivery to inventory in order to duplicate stock in drone centers to serve customers within a 10 miles radius.

Nevertheless, two big hurdles ahead: FAA approval for drone deliveries and what kind of density that will be approved for (if that happens). Second, consumer acceptance of flying drones in their backyards.

Progress doesn’t happen if we accept the status quo as a given. Amazon is certainly pushing the envelope of the possible. Whether it’ll make economic and social sense is another story which will be most interesting to be part of.

J. Kent Smith
BrainTrust

It’s one of those theoretical concepts, very cool and alluring, that needs A LOT of figuring out. Even if the technology is there — it’s not — there is a great deal of governance that has to be worked out before you see swarms of competing drones dropping off boxes at people’s houses, let alone the technical complexities.

Tony Orlando
BrainTrust

My thoughts on this haven’t changed, and Amazon will push hard to see this work as they are the 800 pound gorilla in the room for online business. I just can’t see this as a viable option, except in big cities, as staples like food wouldn’t work. And what about insurance costs to protect the product from damage or being stolen off the porches of the homes? There are a lot of crazies out there who would turn this into a great opportunity for criminal activity. Call me crazy, but in my opinion it has limited use, and five pounds is not a lot of weight for shipping stuff. Good luck.

Bob Phibbs
BrainTrust

Yesterday a drone landed on top of the Japanese minister’s office. It contained a radioactive liquid in a vial. I see no way how commercial drone flights will be able to deal with America’s national security unease. I am highly skeptical we will see commercial drones flying through our cities during our lifetime.

Ed Dunn
Guest
2 years 3 months ago

It’s not difficult to create an EMP that will literally drop these things out of the sky. I’m just surprised at all of the Captain Obvious things that are not being discussed as challenges/risks to this lofty idea.

Craig Sundstrom
Guest

The math totally makes sense: ARK (probably) only spent a few thousand dollars for this study, and is reaping priceless publicity.

What…that’s not “the math” you meant? Okay. No, it doesn’t make sense to me, or more to the point, I don’t believe it for a minute, for the simple fact that I don’t believe in the underlying premise (“most of the drone flight would be automated”); and then we get to all of the “unknown unknowns”….

Shep Hyken
BrainTrust

Amazon.com will work out the math. If they say it will cost a dollar, then I wouldn’t second guess them. What they are doing is finding a technology to reduce the shipping cost. That gives the consumer even more of an incentive to do business with them. And, the delivery will probably be fast. It’s win/win. Amazon uses drones to reduce shipping costs and they pass some of that savings to the customer. It’s another competitive advantage for Amazon. Amazon is “disrupting” again and the consumer will benefit.

Li McClelland
Guest
Li McClelland
2 years 3 months ago

I cannot get comfortable with the concept of drones flying around residential neighborhoods. The math makes no sense to me and the unintended consequences of widespread drone delivery are unknown, but certain to be newsworthy. I do. not. think. drones. for . delivery. are. a. good. idea.

gordon arnold
Guest

It is not about the math, it is about safety and security. Mistakes within our cities and densely populated areas will easily crush overexposed reinsurance companies. As for security, this owns an opportunity to quickly reduce years of national security efforts very quickly.

wpDiscuz
Braintrust
"I am either very old, very cynical or both. I just have a really hard time envisioning "widespread drone delivery.""
"The math may look good although I believe there are unaccounted costs, the most predominant of which are the failed deliveries resulting in lost merchandise and the added insurance."
"I saw the headline and could not help thinking of those futuristic graphics of cities with all kinds of things flying around."

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