Amazon's Delivery by Drone

Amazon.com is in research and testing stages of delivering packages by drone, according to Amazon.com CEO Jeff Bezos and reported by CBS news.  The method, currently called 'Amazon Prime Air' initiates robotic electric powered helicopters that pick up packages from Amazon's fulfillment centers and deliver them to the purchaser's selected GPS coordinates autonomously in 30 minutes or less (see video below).

While it will be at least several years some time before your next purchase from Amazon is delivered to your home by drone, this product concept is enough to make FedEx, UPS and the like nervous.  Amazon sells over 300 products per second and much of their current distribution goes through the traditional channels.  Many future orders will use Amazon's own drone technology to for delivery, shifting the supply curve and resulting in a significant loss of revenue to the mainstream couriers.

FedEx, UPS, USPS will also be forced to invest large sums of money into their own drone platforms to stay competitive, due in part from online retailers wanting to offer the same fast delivery that Amazon will be able to offer and corporations and government wanting transportation of documents and other packages more timely.  In the long run, anticipate overall shipping costs to be reduced by drone technology, which will decrease the amount of local delivery trucks, fuel and employees.  This new innovation will also drive an increase in the overall demand of transportation companies as more products are delivered directly to homes and businesses through online purchases.


Dave Tufte said...

Matt Walter: 100/100

Interesting. But not too much ManEc here. Let me add a little.

I have hard time seeing a market for this. That's actually the clue.

Think about this as a game. The strategies are either to pursue drone delivery, or not. Even if drone delivery is not a money maker, it's possible that pursuing it is a dominant strategy for Amazon. And the game isn't quite simultaneous. By moving first, Amazon has made pursuing drones a necessary response by the other firms. Either way, I think the firms end up at the bad equilibrium of a prisoners' dilemma: each offering faster delivery, and probably eating a lot of the costs.

Of course, this is consistent with Amazon's past strategies and outcomes: lots of revenue without much profit.

Mike said...

This past weekend I saw this posted on Facebook by a few people and I thought it was fake. After reading more about Amazon Prime Air, this idea can be used not only for Amazon but for other home deliveries such as prescription drugs. However I do not believe Amazon Prime Air will not be applicable for customers in the next few years as Amazon hopes because of infrastructure and regulation.
I do agree with Dr. Tufte that there is no market for this service currently; but I feel this will change in the next 5 years as technology improves and companies find better uses for drone home deliveries.

Dave Tufte said...

Mike 50/50

I agree: prescription drugs might be a good application of this technology.

Believe it or not, there have been applications on file with the FAA for drone delivery of fast food (or faster food :) for a few years now.

Quinn said...

I have to agree that currently I do not see a market for this. In another 5 - 10 years I could definitely see this becoming mainstream. Currently I believe this will have little, if any effect on how USPS, Fedex, UPS do business. This will not be cost effective for companies in the beginning. In my eyes this is forcing shipping companies to innovate. Will this become mainstream practice someday? Most likely, I mean who would've ever thought in the 90's people would be shopping online as much as they are now? This is the first step in creating a new mode of business. Will it affect the larger companies? Of course! Will they respond? Undoubtedly! The supply is being created and the demand is just around the corner

Ryan Brockway said...

I can see this becoming cost effective over time; less manpower and more efficient use of energy. I can also see this as a strategic way for Amazon to get into the Grocery business. This is something that they have wanted to try, but has been only feasible in the bigger, hub cities. I agree that if Amazon does this then the other players will have to as well. Amazon was not the first; however, to discuss the use of commercial drones. FedEx has "tentatively explored plans for a giant fleet of commercial unmanned drones to deliver packages." The first part of this has not been for door-to-door delivery, but to replace the huge airliners it currently uses. Knowing this Amazon's "Octocopter" is simply a strategic decision to vertically integrate. I see it as less of a cost issue, though the lower costs of entry are at play, and more of a streamlining of the Amazon experience.

Dave Tufte said...

Quinn: 44/50 (no period, no "and")
Ryan Brockway: 50/50

Quinn, Ryan, I think this is a lot of cheap talk. It's OK to make cheap talk on a blog ... but it's my job to push for something deeper.

When we say "there isn't a market for this" what we really mean is that at current prices no one will buy it. So the question is why might prices go lower?

I don't see economies of scale as important for drones.

Yes, there are some economies of scope with other delivery methods, but I can't see them being too large.

And I'm not sure about transportation costs. I can see 2 avenues where this might make a difference: 1) drones might be able to take a more direct route, and 2) the ratio of payload to delivery vehicle might be much higher for a drone.

Mazer said...

I see a few problems with this proposed idea. The biggest issue I see is that the initiative will just be too expensive, and these added costs will be largely shifted onto the customer. Currently, Amazon is only legally required to charge sales tax in 16 states. Sales tax is not collected in the other states because Amazon does not have what is called "nexus", or a sufficient physical presence, in those states. In order to feasibly offer 30 minute deliveries to most major cities, Amazon would have to establish warehouses in those cities. By doing so, two things occur; First, Amazon would consequentially establish nexus in those states, thus being required to collect sales tax which would raise the final price the customer pays for an item. Second, not only will it be expensive to establish the many warehouses that would be required to make 30 minute delivery possible, but inventory costs would significantly increase as each of those warehouses would need to be stocked for immediately shipment. However, Amazon would not fully stock every warehouse with every item, rather they would only offer a few items as "Prime Air Eligible". This would eliminate the possibility of economies of scale as the cost of the Prime Air program would be spread across only a few eligible items.

Another issue I see is the unfathomable journey of jumping through the infinite hoops of FAA regulation in order to get this program off the ground (literally).

Dave Tufte said...

Mazer: 50/50

Sorry Mazer, I missed this one.

You can't just assert that costs will be shifted to the customer. This is the point of studying incidence in Chapter 5. Costs will be shifted to customers to the extent that their demand is inelastic. Now, since Amazon doesn't have a lot of competition for order fulfillment, perhaps our demand is inelastic already, and it's fair to expect the costs to be shifted to customers.

But, I don't see sales tax as a big issue. Amazon is actually getting into the business of collecting sales tax for other firms, so they'd want to stick to the straight and narrow and make sure they're collecting it from drone deliveries.

FWIW: Mazer is right about the FAA. The first firm to propose drone delivery actually wanted to deliver tacos in Los Angeles. The FAA has been blocking that for 5-7 years.