Monday, August 15, 2016

Think Amazon’s drone delivery idea is a gimmick? Think again


August 11, 2016

NEW YORK — Amazon is the most obscure large company in the tech industry.

It isn’t just secretive, the way Apple is, but in a deeper sense, Jeff Bezos’ e-commerce and cloud-storage giant is opaque. Amazon rarely explains either its near-term tactical aims or its long-term strategic vision. It values surprise.

To understand Amazon, then, is necessarily to engage in a kind of Kremlinology. That’s especially true of the story behind one of its most important business areas: The logistics by which it ships orders to its customers.

Over the last few years, Amazon has left a trail of clues that suggests it is radically altering how it delivers goods. Among other moves, it has set up its own fleet of trucks; introduced an Uber-like crowdsourced delivery service; built many robot-powered warehouses; and continued to invest in a far-out plan to use drones for delivery. It made another splash last week, when it showed off an Amazon-branded Boeing 767 aeroplane, one of more than 40 in its planned fleet.

These moves have fuelled speculation that Amazon is trying to replace the third-party shipping companies it now relies on — including UPS, FedEx and the US Postal Service — with its homegrown delivery service. Its logistics investments have also fed the general theory that Amazon has become essentially unbeatable in American e-commerce — no doubt one reason Wal-Mart, the world’s largest retailer, felt the need this week to acquire an audacious Amazon rival,, for US$3.3 billion (S$4.43 billion).

So what’s Amazon’s ultimate aim in delivery? After talking to analysts, partners and competitors, and prying some very minimal input from Amazon itself, I suspect the company has a two-tiered vision for the future of shipping.

First, it’s not trying to replace third-party shippers. Instead, over the next few years, Amazon wants to add as much capacity to its operations as possible, and rather than replace partners like UPS and FedEx, it is spending boatloads on planes, trucks, crowdsourcing and other novel delivery services to add to its overall capacity and efficiency.

Amazon’s longer-term goal is more fantastical — and, if it succeeds, potentially transformative. It wants to escape the messy vicissitudes of roads and humans. It wants to go fully autonomous, up in the sky. The company’s drone program, which many in the tech press dismissed as a marketing gimmick when Mr Bezos unveiled it on “60 Minutes” in 2013, is central to this future; Drones could be combined with warehouses manned by robots and trucks that drive themselves to unlock a new autonomous future for Amazon.

There are hurdles to realising this vision. Drone delivery in the United States faces an uncertain regulatory future, and there are myriad technical and social problems to iron out. Still, experts I consulted said that a future populated with autonomous drones is closer at hand than one populated with self-driving cars.

“It’s a vastly easier problem — flying than driving,” said Mr Keller Rinaudo, the co-founder of Zipline, a drone-delivery startup that will begin deploying a system to deliver medical goods in Rwanda this fall. “If we had regulatory permission, we’d be delivering to your house right now,” he added, referring to the San Francisco Bay Area.

If Amazon’s drone program succeeds (and Amazon says it is well on track), it could fundamentally alter the company’s cost structure. A decade from now, drones would reduce the unit cost of each Amazon delivery by about half, analysts at Deutsche Bank projected in a recent research report. If that happens, the economic threat to competitors would be punishing — “retail stores would cease to exist,” Deutsche’s analysts suggested, and we would live in a world more like that of “The Jetsons” than our own.

Shipping has always been at the core of Amazon’s strategic investments. In its earliest days, as part of an effort to avoid collecting sales tax from most customers, Amazon purposefully placed warehouses in low-tax, low-population states, and then shipped goods to populous areas within three to five days.

The 2005 introduction of Amazon’s Prime subscription program, which gives customers two-day delivery on many goods for an annual price of US$99, changed Amazon’s shipping needs. Prime encouraged customers to buy a lot more stuff, and it also forced Amazon to deliver packages more quickly.

That explains why Amazon abandoned its tax-avoidance strategy earlier this decade and began building dozens of warehouses in populous areas. It also ramped up a system called “postal injection,” in which it uses prediction algorithms and complicated network analysis to figure out how to deliver every package to the US postal facility nearest a customer’s house. According to Deutsche, postal injection has allowed Amazon to slash the cost of the most expensive leg of shipping an item, the “last mile” from a warehouse to customers’ homes. So despite shipping most goods faster, between 2010 and 2015 Amazon cut its shipping costs from US$5.25 per box to US$4.26, Deutsche estimates.

But that’s still not low enough. Though Amazon has released a string of stellar earnings reports recently, its shipping costs are rising, and it faces capacity constraints. During the holidays two years ago, a surge of online orders overwhelmed UPS, leading to missed deliveries.

A more severe problem looms in the long run: The transportation infrastructure in the United States is aging, and the Department of Transportation has warned that unless urgent and expensive fixes are made, roads, waterways, airports and other systems will become alarmingly clogged by the 2040s.

For Amazon, that projected future is catastrophic: Pretty much all of Amazon’s current investments in shipping — in trucks, planes and crowdsourced delivery cars — depend on the traditional shipping infrastructure.

All, that is, except for drones — which explains why they are integral to Amazon’s vision of the future of retail.

I was first clued in to the importance of Amazon’s drone initiative, called Amazon Prime Air, when I met Mr Gur Kimchi, the head of the program, at an industry conference a few months ago. Though our conversation was off the record, Mr Kimchi’s detailed answers to my questions suggested I had been too quick to dismiss the initiative.

When I began talking to others in the drone industry about Amazon’s interest in autonomous flight, they all pointed out that drones offer a way to leapfrog roads. Because they operate in a new, untrammelled layer of physical space — below 120m, an airspace that is currently unoccupied in most of the country — they open up a vast new shipping lane.

Beyond posting several videos, Amazon has not revealed much publicly about its drone program, but it has been working with regulators worldwide to set up tests of the system. It envisions drones being able to deliver packages up to 2.25kg in weight, which account for 80 to 90 per cent of its deliveries.

Amazon also said it has built many different kinds of prototypes for different delivery circumstances. The first roll outs will likely be in low and medium-density areas like suburbs, where a drone might land in a backyard to drop off shoes. But the company said it was also working on systems to deliver to cities — for instance, drones could deliver packages to smart lockers positioned on rooftops.

As it happens, the shipping company DHL has tested just such a drone-to-locker delivery system in Germany; A representative told me that the test was a success and that it plans to expand the technology depending on regulatory approval. Amazon’s patent filings hint at even more fanciful possibilities — drones could ferry packages between tiny depots housed on light poles, for example.

Others project even wilder ideas. Mr Ryan Petersen, the founder of the logistics software company Flexport, pointed out that Amazon had filed patents that envision using trucks as mobile shipping warehouses. Such self-driving trucks, prestocked with items Amazon has determined a given neighbourhood might need, could roam around towns. When an order comes in, a drone might fly from the truck to a customer’s house, delivering the item in minutes.
Scenes like that are most likely in the far-off future. But according to Amazon, the earliest incarnation of drone deliveries will happen much sooner * we will see it within five years, somewhere in the world. 


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