Some simple economics of drone delivery

imgresMy knowledge of drones being used for the delivery of small packages is limited to the Amazon inspired puffery that has flooded the Internet this morning. From my reading, people think it is (a) cool and (b) something that may be the undoing of Amazon competitively. I’ll agree with (a) but that is true of anything that involves a flying object but (b) is a little hard to fathom.

The idea is as follows. People want stuff fast. So Amazon and others can’t rely on ground-based delivery mechanisms to achieve that. Absent a transporter — which you have to admit would be really, really cool — that means using the air. What is imagined is a fleet of drones going from Amazon distribution centres out to people’s homes in very short order. Of course, it is easy — very easy — to think of reasons why this might not happen including fear of flying objects and technical problems but let’s not let that get in the way of the future. I’ll take as an assumption that this could work.

The first issue is whether this means Amazon will have serious competition. That seems unlikely. The drone mechanism only gets you to the last mile. The goods still have to get to the distribution centre. That is something Amazon has a lock on. Then again, other firms such as Walmart have distribution systems too. So it seems to me that you would need to leverage that. This could, of course, make every local retailer into a drone delivery point. My point here is that Amazon will have no more competition than it already has for what it is good at — getting goods close to consumers and relying on generic delivery from that point. If drones become part of that system, Amazon’s competitive advantage doesn’t change.

A better approach is to consider how drones will complement new delivery systems rather than existing ones. First, note that the envisioned drone system has an economic problem relative to ground-based systems. In ground-based delivery, trucks are loaded and then move out from the distribution centre to many dwellings. By contrast, each drone will go back and forth. It could be that the point to point drone system out performs the point to many ground system but that is far from obvious.

Second, drones face some key power issues. At current technologies — and I know the problem with that assumption — drones have limited battery life. It is hard to get cameras up for more than 40 minutes let alone lifting packages. That means that each shipment will involve a certain amount of recharging time. This is not likely to be a future issue but I suspect it is a current bottleneck.

Third, given all of this, the most likely drone based system that supplants ground based systems in an important way will involve a hybrid, drone and blimp system. Here is what seems likely to happen. Amazon will load a bunch of products on to a blimp above a local area. That blimp will also have drones on them. It will then park itself over neighbourhoods whereby drones will leave the blimp, deliver the packages and return to the blimp base. That will save the drones having to expend fuel on lifting off with packages — they will only have to land with them — and will using the economical helium solution to keep packages in flight. This will also likely be easier to manage than point to point drone runs and less likely to lead to drone pollution.

The issue, of course, is that this does not play into Amazon’s strengths — the long tail. This system, it seems to me, works best for delivery of goods quickly that are mass market and popular rather than niche and rare. And it is from this perspective that drones may not be the fit for Amazon. In any case, I suspect urgency and genericity are correlated for consumers rather than urgency and rarity.

7 Replies to “Some simple economics of drone delivery”

  1. Interesting post. I had not thought of the blimp thing – that certainly changes the energy cost comparison with traditional ground-based networks. But once you brought it up and then went to the long tail I thought that perhaps there’s no contradiction if you get away from thinking about “THE” blimp. Why not several blimps doing circuits from the ground station to the overhead location?

  2. Helium is a non-renewable resource. Most of the helium on Earth escapes into space quickly, since it’s so light. A few pockets of trapped helium exist, strangely over 90% of which (by mass) is in the US. The US government has been mining and storing this helium for decades, but recently has been dumping the entire accumulated supply on the market in an effort to eliminate the cost of storing the helium. Basically, think peak oil with a massive dose of government interference.

    Once the helium is gone, there is no practical way to get more, unless we a) perfect nuclear fusion on a large scale, or b) figure out how to harvest it from the Sun or Jupiter. On Earth, the only natural source of helium is radioactive decay, which is very slow.

    Basically, helium blimps on a large scale are not sustainable even within our lifetimes.

  3. Are you people serious or is this a new kind of April Fool’s Day joke?

    Consider a nice, high-density, high-demand, high-profit delivery area like… Manhattan. Take an ‘easy’ case: a nice private brownstone. The drone has to identify and get to steps without hitting anything like people, trees, wires and leave a package where it won’t roll down the stairs or be stolen. This also requires a mapping system that ACCURATELY locates addresses. (Does Google Maps accurately locate addresses where YOU live? Definitely NOT where I live.) AND, the drone really should ring the doorbell to let the recipient know the package has arrived…

    Take a more ‘normal’ case: an apartment/condominium building. Now, the package has to be delivered INSIDE to the front desk…

    As I’ve noted, April Fool’s Day in December!

    Find a real messenger/delivery person who works in Manhattan and ask them what they go through during a typical day in order to complete their deliveries. Then ask yourself just PHYSICALLY how a drone could possibly do all that!

  4. Taking Jim Kay’s point in perhaps a slightly less impassioned direction:

    Amazon (at least for now) operates on razor-thin margins.
    It is possible that in X years, vanilla drone delivery (say to suburban areas which don’t have so many of Jim’s outlines problems) will be possible on razor-thin margins. But, I see people claiming that “Amazon are ready to go, just waiting for the Feds to loosen up” and frankly, that’s nonsense. There are problems with range, power handling and navigation. And unless someone invents fusion or something you have to think that given Amazon’s relationship with razor-thin margins, the basic fact that it always costs more to fly something than roll it along the roads has to be a big factor, no matter how technology develops…

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s