The economics of cheap drone delivery

by on December 2, 2013 at 7:15 am in Economics | Permalink

Let’s say 30-minute drone delivery to your home were legal, well-run, and, for purposes of argument, free or done at very low cost.  You would buy smaller size packages and keep smaller libraries at home and in your office.  Bookshelf space would be freed up, you would cook more with freshly ground spices, the physical world would stand a better chance of competing with the rapid-delivery virtual world, and Amazon Kindles would decline in value.  Given that the storage costs for goods would fall (more storage by specialists, accompanied by later delivery), expected inflation would more likely be converted into price hikes today.  The liquidity premium of money (NB: not currency) would rise and the liquidity premium of goods would fall.  Some drug markets would be taken off the streets and the importance of gang “turf” would fall.

Addendum: What do we know about network economies in drone delivery systems?  FedEx and UPS and USPS, taken together, dominate the market for physical delivery of parcels to homes.  How much room would there be in the market for “lone drone” operators?

Alex Godofsky December 2, 2013 at 7:20 am

ebooks should have already freed up all of your bookshelf space.

dead serious December 2, 2013 at 10:42 am

Libraries and – to a lesser extent – ebooks have kept my bookshelf space to a minimum.

Tom T. December 2, 2013 at 7:20 pm

I can’t fathom how “faster, cheaper delivery of stuff” is somehow going to result in people having less stuff. It seems obvious to me that the opposite would be true.

Brett December 3, 2013 at 4:06 am

The idea is that if it’s so cheap and easy for lots of things, then you might choose to simply “rent” them periodically instead of owning items that mostly sit around unused. It’s like how you can rent/stream movies and TV off of Netflix and Video On Demand instead of buying DVDs/digital movies that you almost never watch.

The exception would be goods where owning them as status symbols is the point. Most clothing is like that if you’re buying higher-end expensive stuff as opposed to what you can get at Walmart.

dearieme December 2, 2013 at 7:45 am

I suppose they’ll deliver drugs too.

8 December 2, 2013 at 7:52 am

Eliminates the face-to-face problem completely. Buy drugs with Bitcoin, receive by drone.

9 December 2, 2013 at 8:11 am

Police would order drugs and just catch and keep all the drones –> this business model only works for large portions (drone included in price, no following it back home) and is more likely effective for crossing borders.

Rahul December 2, 2013 at 8:54 am

Even better, police dummy-advertise and then instead of your cheap drug drone a cop-car arrives at your doorstep.

Dan Weber December 2, 2013 at 9:23 am

“Drop your weapon. You have 20 seconds to comply.”

Explodicle December 2, 2013 at 11:39 am

Cops can do that already with low-tech packages, but don’t because:
1) BUYing drugs is a minor crime; cops just want dealers.
2) The recipient still pays anonymously, so the cops can’t prove the recipient actually wanted the delivery.

Z December 2, 2013 at 9:27 am

Police would just get what they need from the bitcoin database and arrest everyone who used the coin for drugs.

Rahul December 2, 2013 at 9:40 am

There is no “bitcoin database”.

Z December 2, 2013 at 10:33 am

@Rahul: There is a record of every transaction for each minted coin. That’s how it has to work. Otherwise, counterfeiting would be rampant (more rampant) in short order.

dead serious December 2, 2013 at 10:42 am

Someone doesn’t understand how Bitcoin works.

- still not a fan

Explodicle December 2, 2013 at 11:49 am

@Z – Google “coin mixer”.

Z December 2, 2013 at 12:52 pm

@Explodicle: I did and the first link was for a cake mixer. How did you know?! I kid, I kid. Seriously, the fact that such a service exists proves my point. Sure, you can take evasive action and risk your capital in the process of cloaking your transactions. A currency that makes it more difficult for people to conduct commerce will have a short life.

Computer Scientist December 2, 2013 at 2:14 pm

That is not how coin mixers work. That is also not how the blockchain works.

10 December 3, 2013 at 3:40 pm

No, you just have to leave a deposit.

Robd December 5, 2013 at 2:21 pm

Shoot down with shotgun.

Rahul December 2, 2013 at 8:03 am

This is really in the realm of SciFi I think. I wager you are not going to see 30-minute drone delivery at zero or very low cost in the next decade at least. I just don’t see the signs.

9 December 2, 2013 at 8:14 am

But what is the expensive part? The electricity? (drones can charge at night when the price is low) The drones? (just a bunch of plastic, simple elec motors, and a $30 smartphone – okay, the battery). Overall drones should be available for $100 with mass production.

david December 2, 2013 at 9:00 am

Inhibiting theft, particularly through a campaign of politically-motivated destruction of drones, out of a perception that they’re invading your privacy or stealing your jobs.

It’s like… constructing a highway, in terms of infrastructure. It’s not that it’s expensive, in itself. It’s that there are a vast number of people whose voluntary acquiescence is needed, where you are badly positioned to technologically prevent all of them from engaging in petty destruction, and you are badly positioned to prevent opportunistic theft/blackmail from being legitimized through political cover (left-wing or right-wing).

I will believe in drones when I see them first commercially employed in Japan.

steve December 2, 2013 at 9:28 am

The U.S. hasn’t obtained voluntary acquiescence to build a highway in a hundred years. They don’t even try. They just go straight to eminent domain.
So, if the infrastructure is so cheap, why aren’t highways cheap.

Z December 2, 2013 at 9:30 am

Every little kid would be out trying to swat down the drones. That alone would drive up costs. Throw in the adults who would make a sport of drone hunting and what you get a giant carnival game trying to be a supply chain.

noah December 2, 2013 at 9:52 am

Why do you expect that destruction of property will suddenly become more popular and tolerated? If a kid swats one down, guess what? His parents get to pay for it, same as a broken window or other vandalism. The first adult to discharge a firearm “hunting” a drone in a city will go to jail.

Christian December 2, 2013 at 8:04 am

How do you avoid development of a market in “shooting down” and intercepting drones carrying valuable physical goods?

9 December 2, 2013 at 8:16 am

GPS and live cams on the drone maybe… GPS alarms police and nearby drones (maybe police drones who follow the hunters ;))

Urso December 2, 2013 at 1:28 pm

How do you avoid a market in hijacking UPS trucks?

JWatts December 2, 2013 at 3:52 pm

A drone carries one package. Your average UPS/FedEx truck carries hundreds. So, it’s doubtful if it would be particularly lucrative. At first there would almost certainly be a lot of people shooting at drones just for the novelty, but that would wear off pretty quickly.

Brett December 3, 2013 at 4:08 am

It depends on what the drone is carrying, and whether it’s being monitored from a central location (probably yes). If one gets shot down or crashes, they notify the police, who start asking around the neighborhood – or more likely, they start asking around if it’s happening too often, since a lot of petty theft just isn’t worth their time.

Slocum December 2, 2013 at 8:18 am

Well, I don’t think drones are ever going to a widespread solution — they won’t work in wind, rain, or snow, can’t ask for signatures, can’t leave the package inside your storm door, etc. But the question did prompt me to google this analysis of the ‘last mile’. For his scenarios, last-mile costs range from $4-$13 — is the actual, average cost for UPS and FedEx in that range? And then, oddly enough, the best low-cost approach for the small, light-weight packages that TC images delivering by drones is…the postal service. I guess it is pretty much impossible to beat their hit-density.

Slocum December 2, 2013 at 8:19 am

Oops — here’s the last-mile analysis:

http://www.scdigest.com/experts/Wulfraat_13-10-15.php?cid=7483

Dan Weber December 2, 2013 at 9:26 am

Driverless cars seem much better for this than drones. They can use existing infrastructure, are harder to steal, and can carry specialized equipment for, say, collecting or dropping off deliveries with a specialized box at your house.

We may see a return of the milk chute.

Z December 2, 2013 at 10:45 am

This reminds me of the eBook debate. The advocates compared eBooks to CD’s, which quickly displaced vinyl and tape. The missing piece, however, was the fact eBooks are not superior to books from an end-user point of view. The narrow economics supporting eBooks never factored in the emotional aspects of book buying and reading. Here we are a decade on and eBook sales account for 27% of unit sales and just 14% of book revenue. That says free and near zero priced books still make up a big portion of sales. There’s a role for eBooks, but not the same role as physical books. (I buy both)

Mechanized delivery strikes me as a similar issue. In a very narrow sense, it is just transporting the goods to the customer. But, that’s not all there is. My UPS guy knows me. When I’m out of the office, he will come back after hitting the rest of the building. Or, leave my parcel with another office. At home, neighbors regularly sign for things when their neighbor is away. I could go on and probably list a hundred things where the robot would fall down on the job. The thing is, there is no *improvement* in the service from the customer’s point of view. The cost reduction, therefore, will have to enormous for it to work.

The bottom line is this is just a publicity stunt for a company sporting very shaky fundamentals. Amazon will be in bankruptcy before they deploy robot deliverymen.

Dave K December 2, 2013 at 12:43 pm

It sounds like you and I have very different relationships with UPS. My relationship with UPS is transactional, not emotional, in nature and he has never left a package with a neighbor. Instead, I get a slip on my door indicating that he’ll be back at the same time the next day (which tends to be during working hours…when I’m not home!).

The “improvement” in the service would be receiving a product/good ~30 minutes after ordering it. Even if that’s extended to a few hours that is quite a bit of an improvement over what’s currently available.

Michael B Sullivan December 2, 2013 at 6:01 pm

Taking as the basis for conversation a world in which both drones and driverless vehicles are technically possible and easy-to-use (I don’t think either are right around the corner), then I think you use both for your delivery.

Forget last-mile delivery, this is more about “last 15ish miles” and “last quarter mile.” You send your driverless big old truck out with hundreds of packages. It has with it a small fleet (maybe 5-10) of drones that handle the last quarter mile of the delivery. Your truck trundles along on big streets that can accommodate it; the drones blitz out with packages and back over short distances, charging up from the big batteries of the truck on a rotation. This allows you to deliver far heavier packages (the drones don’t need a battery capable of delivering X kg over 15km, they need a battery capable of delivering X kg over 0.5km), at overall lower cost (the majority of your trip is via low-energy rolling along roads, not high-energy helicoptering), but with the same convenience of the actual delivery (no giant truck moving along narrow residential streets, no need for some kind of klutzy mechanical linkage between a robotic vehicle and your drop-box at your house). It’s probably less legitimately awful in terms of aviation control, too.

Rahul December 2, 2013 at 11:23 pm

Makes sense but I’ll just caution that a lot of this analysis is premature because it will crucially depend on the exact technology specs that we are not sure how exactly will evolve yet. e.g. the cost of a commercial drone, its robustness to elements, payload capacity, who attaches payload to drone, whether your delivery profile often has 5 destinations in a 0.5 mile radius, what’s the total battery life (not just charge life) and battery replacement cost, where exactly does drone drop package, how does it handle packages needing signatures etc., what if some destinations need indoor entry or stair climbing.

Usually novel tech solutions must embrace existing conventions & work flow. To assume say, that all your clients will suddenly move mailrooms to a drone friendly location is unlikely.

Overall practical engineering tends to have a lot of concerns that futurists with rosy outlooks don’t appreciate.

Brian Timoney December 2, 2013 at 8:26 am

Unfortunately for David Simon, he killed off the two characters who could’ve made the transition to a drone-based drug trade. Stringer Bell would be reproducing aeronautical charts of West Baltimore at his copy shop and Prop Joe would have had a nice little side business in drone-repair-with-discretion.

BT

rahul December 2, 2013 at 9:08 am

Talking of shooting down drones……

maharbbal December 2, 2013 at 8:34 am

On purely legal grounds, the Google car is more likely to make deliveries in 5 years time than Amadrones. Most transport laws and infrastructures are still designed for horse carts and are barely fitted for engine-run vehicles, it’d take nothing less than a revolution for drones to be a viable option. Google cars on the other hand require little else than a small adaptation of the traffic regulation.

And the last meters would be performed by dog robots…

ummm December 2, 2013 at 8:56 am

drones have become the new boogyman of the luddite fringe

HDL December 2, 2013 at 2:54 pm

Why is it Luddite to be less than enthusiastic about the prospect of multiple daily humming drones — Amazon would not be the only ones who would want to do this– filling the airspace in your neighborhood? So, a person must welcome EVERY type of technology lest they be called a Luddite for not supporting them all. It’s like anything else, some things you like, some things you don’t. Some ideas are better than others. It is much easier to press a button and have a book delivered in seconds to one’s device. The generations coming up will have gotten used to reading eBooks.

tt31 December 2, 2013 at 8:57 am

Color me a bit skeptical on the freshly ground spices. Demand might conform to what is cheapest and most easily distributed by these methods, and I’m not sure freshly ground spices will fit that bill. I’m thinking, by the way, of how people used to be so proud of having the highest quality sound for their music back in the CD / DVD era and in the age of digital download that has receded to the fringes. I think it’s an interesting question that I’ll bounce back out there as to in which areas we would similarly lower our interest in quality in a drone delivery system.

rahul December 2, 2013 at 9:05 am

What happens to refrigerators?

Tom December 2, 2013 at 9:09 am

Outside of food, I don’t know what I would buy from Amazon that I have to have in 30 minutes.On the good side, it should help hurt UPS and those #$%%unionized delivery drivers, thus helping fulfill Tyler’s futuristic Have and Have-nots/Koch brothers/Hunger Games fantasy of Average is over society.

steve December 2, 2013 at 9:31 am

I know who would use this service. Cigarette smokers.

Ian Brown December 2, 2013 at 9:37 am

Tom you unintentionally highlight why Amazon would pursue 30 minute delivery: you don’t buy things from amazon that you need immediately, but you probably would if they could get a product to your house (or whatever gps location you’re at) faster than you could do it yourself.

JWatts December 2, 2013 at 3:58 pm

Or cheaper than you could. If I need one thing from the hardware store, I have to make a 20 minute round trip and spend an hour. If I could get what I needed for less than a $5 delivery fee, I would use the option, at least occasionally. Just the savings in mileage would be a wash.

RM December 2, 2013 at 9:30 am

I think you are throwing too many things in the pot.

“Bookshelf space would be freed up”: This has already happened with ebooks. (Unless people have been storing their spices on bookshelves). Why would you give up your ebook so that you can get a drone to deliver a physical book? Maybe initially for the novelty?

“the physical world would stand a better chance of competing with the rapid-delivery virtual world”: The items that will be delivered by drones were never competing with the virtual world: There are no virtual spices (at least not as yet).

“you would cook more with freshly ground spices”: It is a pain to order something every time you need it, you know. Then you have to go to the front door to pick it up. And, it might have been sitting in Amazon’s warehouse for a few months anyway.

dearieme December 2, 2013 at 9:36 am

Spices are a bit different, but with herbs you surely grow your own, Mr Cowen?

Bill December 2, 2013 at 9:52 am

The tragedy of the commons.

Drones taking my privacy, sleep, scenic views.

Think of a bunch of lawn mower engines hovering over your backyard.

When do Libertarians respect the collective property of the commons?

Mark Thorson December 2, 2013 at 10:07 am

They will also cut up your over-the-air TV and cellphone reception. Also, they may impact bird populations. Widespread adoption of drone technology for delivering packages has a lot of consequences that have not been thought through.

Explodicle December 2, 2013 at 11:57 am

Libertarians will recognize “collective property of the commons” as quickly as Socialists recognize a landowner’s right to defend himself from noise pollution. You’ll hear it when the market fails and a drone is shot down, but most of the time drones would avoid these places or pay for their safety.

TL;DR: this only works with consistent property rights; either respect property rights or enforce noise ordinances.

Bill December 2, 2013 at 1:14 pm

Explode, other than shooting your gun, do you have any alternatives than regulation protecting the commons. Or, is that off your radar?

Also, in your reply, please note that space includes commonly owned areas, just like the wind, which you don’t own either. Or the ocean.

Explodicle December 2, 2013 at 3:55 pm

Unless those regulations are completely optional, they too are dependent on shooting guns. So both the libertarian and socialist solutions show blips on my “gun radar”.

Although commonly-owned spaces do exist, you still have a right to defend your backyard from aggression which originates in public (or anywhere). If YOU reply, please note that everyone has a right to self-defense, and that pollution (noise included) is aggression.

Mark Thorson December 2, 2013 at 6:54 pm

If you and your neighbors have barrage balloons, you don’t need guns. Except near airports, I don’t think there are any regulations against them below 1000 feet. They wouldn’t need to be nearly that high.

Chris December 2, 2013 at 9:55 am

I don’t see why the value of Kindles would go down, unless the assumption is that people like physical books so much that they would switch back to physical with drones, and then throw them away after reading? (otherwise how is this both going to free up bookshelf space and devalue Kindles?)

Richard A. December 2, 2013 at 10:02 am

Amazon unveils futuristic plan: Delivery by drone
http://www.cbsnews.com/news/amazon-unveils-futuristic-plan-delivery-by-drone/

Ray Lopez December 2, 2013 at 6:11 pm

Amazon, like many innovators, runs into the bandsaw that is the Federal Goverment:

BusinessWeek: http://www.businessweek.com/news/2013-12-02/amazon-drone-flights-seen-grounded-by-expected-u-dot-s-dot-rules

Book and food deliveries by drones, such as those unveiled by Amazon.com Inc. (AMZN:US) Chief Executive Officer Jeff Bezos, may be grounded under rules U.S. regulators are writing.

The Federal Aviation Administration plans to bar operation of unmanned aircraft flying a computerized flight path instead of being controlled by a person, according to an agency document released Nov. 7 outlining plans for integrating the vehicles into the nation’s airways.

john personna December 2, 2013 at 10:35 am

Everyone’s environment is different. Right now I can jump the creek(!) and walk through the park to a nice market. I should do that more, not less.

anirprof December 2, 2013 at 4:25 pm

It seems like there are plenty of environments where drones would not work very well.

Best case: sprawling suburbs in Las Vegas or Phoenix where there is plenty of space to land by every home, and the weather is generally good (I think — windstorms an issue).

But think of some more difficult cases:

Manhattan: pretty much impossible — will they let these things land on a crowded sidewalk? It certainly won’t go into your building and ride the elevator up with your fresh-ground cumin. And just imagine the density of them in the airspace zooming between the skyskrapers, hard to see how that’s workable. And I’m sure someone like Bloomberg would freak on “terrorism!” grounds.

OK, less dense, like “triple decker” neighborhoods around Boston: still not much open space to land something — not uncommon for houses to have basically no front yard, just a few feet apart side-side, and a pretty narrow street. Right now UPS trucks just turn on their flashers and double park in those narrow streets, but that gets more interesting when the vehicle that wants to stop in front of you isn’t another road user, but suddenly drops out of the sky with decapitating blades spinning on all four corners.

Not so dense, but tree covered: I can think of plenty of neighborhoods in New England or in the Pacific NW where there may be yard / driveway space, but such a dense tree canopy that maneuvering down to the ground is not easy.

Weather: Tyler should probably stock up on his ground cumin if the weather is supposed to be windy for several days in a row, as that little drone won’t be going out in those conditions. Or icing conditions. Or significant rain/snow, which will mess up the 3D LIDAR it will have to use to avoid obstacles. Probably not allowed in fog either.

So I come back to, great if you live in Arizona or even SoCal (except when the Santa Anna wind is up), but really problematic in many locations.

anirprof December 2, 2013 at 4:30 pm

Just to add, this is for retail delivery of random stuff to consumers.

I could easily see this being of use to businesses who would be willing to clear space, set up marked landing pads, the drones could fly regular routes, etc. Makes the problem much easier. You could imagine factories getting short-notice deliveries of key parts, etc. from metro area distributors, a retail chain moving excess goods from one facility to another one that ran short of something urgent, etc.

Eva December 2, 2013 at 5:17 pm

What about a drone delivering a person?

(Far in the future, when improvements are made, it could function like any other form of transport.)

Those making the drones will also have to watch what people send *back* to them.

Joshua Grass December 2, 2013 at 5:57 pm

To expand on your stipulations, suppose that automated driving was a solved problem as well. Also assume that delivery cars were the size of Car2Go cars (or even smaller) and carried multiple loads. What would be cheap: Air or Land? My gut tells me you’re paying a lot of energy to get something up and down in the air. It seems cool, but in the end I feel that automated car delivery would be more efficient in the end.

Chip December 2, 2013 at 6:23 pm

Same day mail, legal documents and other registered articles currently carried by couriers in cities and not served outside cities.

City buildings could have drone landing lads on the roof.

DCBillS December 2, 2013 at 8:04 pm

Bring em on. I can’t wait. I’m putting a stronger spring into my airsoft gun. Perfectly legal in FX county. Should be great sport and no wildlife gets hurt.

Dave Johnson December 3, 2013 at 8:10 am

Ok, I am in:

1. Order Pizza and sex with Google Glasses.
2 Order Rubbers thru Amazon.
3. Deliver both with Drones.
4. Ambush 28 year old Blond with Long legs, Flared Nostrils and A slight Over-Bite with Drone Kidnapper.
5. Use personal robot to rub her back, insert remote Penis (sends Wireless signal to my Penis-to-Pussy Sensing receiver module.
6. Use personal clean-up robot to clean up mess.
7. Use Personal Pre-Chewing Robot to break up dried up Pizza crusts which cut into my gums.
8. use personal Drug Infusion robot to floss, and brush my teeth.

You get the idea.

Boonton December 3, 2013 at 12:26 pm

FedEx and UPS and USPS, taken together, dominate the market for physical delivery of parcels to homes. How much room would there be in the market for “lone drone” operators?

1. It seems to me these big 3 would be excellent markets for using drone systems to replace or supplement drivers. You could offer a frequent customer multiple pickups and delieveries every day by quick drones while using the trucks for picking up the drop boxes or more occassional customers.

2. Think about auto parts. They don’t typically use Fedex. They typically employ a driver to drive parts to various local repair shops often making multiple trips every day to the same set of customers. This would seem a pretty good candidate. You have a predetermined route which reduces the AI requirements on the drone, you have customers using the service daily, and you’re avoiding competition with the big delievery firms. Also if you operate in an area with a lot of traffic congestions, you have a real premium on time saved.

That last point, I think, indicates the problem with the whole ‘tacocopter’ saga that began here. Self-driving cars seem to be coming online. They are a lot more energy efficient than anything that has to fly. You can even scale down to a ‘self-peddling bike type machine. Unless you need to get stuff somewhere really quickly and you have a big problem with congestion delievery drones seem to have an economic problem unless the cost of energy becomes a lot less.

On the other side of the ring is the 3-d printer movement which threatens to do away with the need to deliever much of anything except bulk raw materials which can be done by truck on a scheduled basis.

patwater December 10, 2013 at 2:29 am

I have to say I’m mildly in awe in this sort of aggressive speculation

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