When Amazon was launched, it began as a online bookstore. Outside the span of economic opportunity was the chance of enhancing the buyer experience by widening the customers’ choice. Creating the world’s first online bookstore was recognizing that, in 1995, you couldn’t walk into any bookstore in the world and be able to review or purchase the millions of books in circulation. Even from the beginning, Amazon was focused on creating the best customer experience with a deliberate focus on convenience and the vision of pioneering other technological advancements as the end of the 21st century approached.
I believe it’s fair to say that Jeff Bezos and many others, including myself, believed the 21st century would include the convenience of flying cars, the convenience of getting your annual checkup without having to visit the doctor’s office, or being able to order a ride to anywhere in your city all at the press of a button. In 1995, all of these technological advances were just storylines of The Jetsons and other science fiction. Innovation has now made all but one of those storylines a reality – but I’m sure Elon Musk is working on getting us those flying cars.
Amazon has pioneered a number of technological innovations through their now-extensive product lines. From its conception, the company was focused on making every book available for purchase online, but their focus has now evolved into “selling everything to everyone.” Over the last 16 years they have come closer and closer to that goal. Their product lines include:
Amazon Fresh (currently in beta), where they sell fresh produce.
Amazon Prime, which provides video and music content instantly to customers via their smart devices.
Amazon Fashion, which launched last fall.
Amazon Marketplace, which provides customers with the opportunity to become entrepreneurs while utilizing the company’s logistics and distribution infrastructure.
Amazon Kindle, which I believe was the predecessor of all other tablet devices.
Amazon Web Services, which was a business born out of Amazon’s necessity to create a sustainable infrastructure for their online operations. They did it so efficiently that they had extra capacity to support the infrastructure of other companies, some of which could be considered their competitors.
Their latest and possibly most ambitious endeavor, Amazon Prime Air, will revolutionize ecommerce as well as logistics and distribution. Amazon Prime Air extends the products that the company can sell. With a vision of leading innovation in Unmanned Aerial Vehicle (UAV) delivery, Amazon Prime Air will enhance all of their other product lines by allowing their customers to get the goods they order much faster, effectively enhancing the Amazon customer experience. Skeptics (including myself) have wondered how big is the customer base that would use such a service and why would anyone ask for a drone to come anywhere near their house. Drones definitely get a bad rap, and rightfully so, but most of those concerns are out of place within the APA discussion as these UAVs will not have missiles or cameras attached to them. So the real question is, does this product line and technology have a customer base or serve any real need outside of its “coolness” factor? Well, let’s take a look at what the data says:
Amazon has been working on UAV technology for some time but it wasn’t until November of last year that the Federal Aviation Association (FAA) announced a plan to create a standard for the commercial use of Unmanned Aircraft Systems (UAS). It is obvious that Amazon has to go on a public relations blitz to inject the acronym “U.A.V.” into the public discourse in the place of “drone” in regards to APA as it will enhance the public’s perception once they launch the platform. And according to the FAA’s UAS commercial integration plan, they have plenty of time.
Here is the FAA UAS integration timeline. It is broken into 3 phases Amazon Argentina:
The first phase, Accommodation, extends into 2015. During this time, I believe Amazon will work to attain the Certificate of Airworthiness (COA). The second phase, Integration, extends into 2020, and in this phase I believe Amazon will mostly focus on beta testing in select markets. The third and final phase, Evolution, extends past 2021; Amazon would have not only developed a UAV ready to interact with the public but also a UAS that incorporates the various aspects of storage, fulfillment and distribution. At this point, they can expect that there will be many competitors who would also utilize UAVs as a form of logistics such as Fedex, UPS, other online retailers, and big box stores such as Walmart and Target. So Amazon’s main focus at this point should be creating a UAV/UAS that will be the safest and most reliable, and not only meet FAA standards but exceed them with the goal of Amazon Prime Air becoming synonymous with UAV delivery. The FAA has made it clear that it is not a matter of if but when, and if Amazon follows through with its plan, it could pioneer a completely new form of delivery.
The day after Amazon Prime Air was announced on the show 60 Minutes happened to be the largest consumer holiday of the year, “Cyber Monday.” It was also the first time that Cyber Monday surpassed Black Friday in sales. Utilizing the Google Trends tool I was able to gauge consumer interest. Google Trends is a research tool that allows users to gain insight on Google search data by comparing search phrases. In this graph “Cyber Monday” was at 100pts with “Amazon Prime Air” and “Amazon drone” representing 75 and 74 points respectively. So for every 4 people that searched for Cyber Monday deals, 3 searched for Amazon Prime Air. I believe it is fair to say that for every 4 people who made a purchase on Cyber Monday, 3 would have been a customer of Amazon Prime Air!
The data shows that there is some consumer interest, but whether this is a true reflection of real opportunity is to be confirmed. Regardless, a showing of 3 out of 4 consumers definitely leans towards further investigation. The opportunity and economics of this new business line must be examined. Amazon Prime Air’s current prototype has a max payload of 5 lbs or less, which qualifies 86% of their shipments as eligible for Amazon Prime Air. According to resources, their free shipping policy on select orders cost the company about $6 billion just last year and with FedEx and UPS (their shipping partners) increasing the rate by 4.5% they can anticipate that this cost will go up and continue to increase over time. The data available on the Amazon Prime Air R&D budget is not publicly available so I had to get creative and also make a few assumptions. I deduced the opportunity cost by multiplying 86% of their daily shipping count which at its peak represents 13.5MM by the lowest ‘one-day shipping’ rate which is the closest service to Amazon Prime Air and then the highest ‘one day shipping rate’ and captured an amount totaling $52-103 billion. I then took this a step further, considering Amazon’s customer-centric philosophy and their current business model of low margins. Even at a 2% margin they would still net $1-2 billion dollars. The opportunity is large enough that Amazon will either be a huge customer of UAV delivery or a huge provider of UAV delivery.