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Did Amazon's Jeff Bezos Just Make Drones Cool?

6 December 2013 in Trading Ideas

Even coming as it did at the end of Thanksgiving weekend, it was hard to miss the revelation by Amazon CEO Jeff Bezos – first delivered on 60 Minutes – that his company was planning a drone-delivery system.1

Yes, it’s exactly what it sounds like — according to Bezos, in as little as four to five years, the company plans to be operational with a service called Amazon Prime Air, which would use small drones to deliver objects of up to five pounds that are within 10 miles of an Amazon distribution center.

Given the rate at which the company is putting up distribution centers, that stands to be a consequential customer base.

Bezos himself admitted the service is not close to ready, and that certain kinks would need to be worked out, for example, insuring the “reliability to say this can’t land on somebody’s head.”

And sure enough, the media was ripe earlier in the week with stories about how likely Amazon’s scenario was or wasn’t, and whether it could actually come to fruition at all.

To which somebody could wonder: Is that really the point? Bezos’ real accomplishment was successfully generating free publicity (did we mention the all-time stock high of $399 on the Monday after the 60 Minutes broadcast?) for Amazon for something that may never see the light of day.

But there was something else: Bezos’ plan, and the accompanying promo video of a drone flying to an earnestly waiting father and son, has seemed to bring a different shading to the utility of drones, which now, all of a sudden, seem to be a consumer-friendly “symphony of robots” (Bezos’ words), rather than the machines behind some of the less-positive global headlines for the past few years.

Yet the Amazon plan also is a reminder that the online retailer is only able to dream big because of the big business that drones have become. In other words, Bezos’ plan isn’t waiting to be hatched in somebody’s garage. It’s out there now, used mostly for defense purposes, with the law enforcement and commercial sectors (including Amazon) just beginning to put it to use.

The FAA, for example, estimates there could be 30,000 drones flying over America by 2020. Meanwhile, the defense consulting firm Teal Group estimates that the global market for drones is likely to double over the next decade to $11.6 billion by 2023.2

modern warfareOur Modern Warfare motif also suggests that businesses and shareholders have been reaping the benefits of so-called smart technology, like drones, that have allowed global militaries to be more efficient while cutting on-the-ground costs.

The motif is up 44.5% so far in 2013. The S&P 500 has increased 24.5% in that timeframe. In the past month, the motif has gained 0.6%; the S&P 500 has risen 1.0%.

And while US defense spending faces an uncertain future, American defense contractors have looked overseas to maintain growth in drone sales. Northrop Grumman, which accounts for a 14% weighting in the Modern Warfare motif, sold $1.2 billion worth of drones late last year, according to Bloomberg.3

General Atomics, a private Southern California firm, recently moved $197 million worth of drones to the United Arab Emirates.

What has yet to be determined is how Bezos’ more benign vision for drones ultimately plays out amid the new reality of continual government-spying scandals that risks citizen backlashes over privacy concerns.

While military use is still the current go-to market, it figures to be the rate of commercial adoption that will determine how significant an investment opportunity drones will become.

1Alex Fitzpatrick and Courtney Subramanian, “Amazon Chief Reveals Drone Delivery System,” Time.com, Dec. 1, 2013, http://techland.time.com/2013/12/01/amazon-bezos-drones/.

2Geoff Dyer, “US drone market comes under fire as it tries to take off,” Financial Times, Oct. 8, 2013.

3Jillian Berman, “12 Companies Cashing In On Drones,” huffingtonpost.com, March 11, 2013, http://www.huffingtonpost.com/2013/03/11/companies-making-drones_n_2849569.html#slide=2196942, (accessed Dec. 4, 2013).