11/30/2015

The Future of Delivery

Recently, Amazon released a video for Amazon Prime Air. Over the past year, there has been much discussion regarding Amazon using drones to deliver packages. Amazon touts the benefits of this service, suggesting deliveries can be made within a 30 minute timeframe. The video suggests this is how deliveries will be made in the not too distant future.

However, Amazon’s plan for drone deliveries has not been all smooth sailing. In June 2014, the FAA released a memo stating that Amazon’s plan for drone deliveries is illegal, which would seem to cause a rift between Amazon and the FAA.  Just last month, however, Amazon joined the FAA’s drone task force. The question I pose is, “why?”

On the surface, it would seem as though Amazon joined the task force because they want to make sure their business venture is successful.  As a member of the task force, Amazon may feel that they will be in a better position to help limit regulations, allowing them more freedom regarding drone deliveries. This may be true, but I think there is more to this.

As the drone registry program currently exists, there is no fee to register. A drone operator is only required to give his name and address, which is inputted into an FAA database. However, what if in a few weeks, those rules change? What if you now had to pay a high fee to register an individual drone? What if you had to go through expensive training to be allowed to register?  What if the FAA allowed only so many drones to operate in a given area, and sold the rights, similar to how cities sell taxi medallions?

The possibilities exist for costs to rise extensively and quickly. I believe that is why Amazon is on this task force. They want such regulations to be put in place. They want the prices to jump, so that competition will be limited in the market. I believe Amazon sees this as a strategy to raise rival firms’ marginal and fixed costs. As Amazon works closely with those who make the regulations, they will be set to benefit from the regulations, while other firms may be squeezed out for their inability to comply.  Thus, Amazon will be able to corner the market on drone deliveries and increase their profits dramatically.

3 comments:

Dr. Tufte said...

John Smith: 100/100

This is interesting speculation John. You're saying that one strategy might be to join the task force to forestall or minimize regulation, while another might be to help push for tighter regulation that will make it harder for others to compete.

Why not both? It is a sequential game, after all, and these could be alternative policy choices at most decision points along the way.

I'll add one more idea. Joining something is a form of real option. Presuming that being involved has upside potential, joining is like a call: you incur some minimal cost (the hassle of registration and involvement in this case) to gain access to managing your upside profit. Those could come from either of the strategies outlined by John Smith.

Brigham Kindell said...

I think joining the FAA is a smart move if they want to have influence as far as drone regulations. My question is, 'Do Amazon's consumers want drones carrying their orders?' Has anyone seen anything on this.

I can imagine that many packages could be damaged in the process. I also wonder if they plan on beefing up their packaging? What happens in bad weather? I know you can't answer these questions, but it makes me wonder if Amazon has, or are they just trying to get in with the millennials by being hip.

It does make you think what Amazon has in their sleeve.

Great article!

Dave Tufte said...

Brigham Kindell: 47/50 (you're missing a question mark).

I think you've raised concerns, but not big concerns. My guess is that what most people care about is cheap and quick delivery. For that, I think the drones have a big advantage over the employee, who gets pay and benefits and shirks sometimes.