Some Simple Economics of Drone Delivery

By Joshua Gans

Posted on December 3, 2013


My knowledge of drones being used for the delivery of small packages is limited to the Amazon inspired puffery that has flooded the Internet this morning. From my reading, people think it is (a) cool and (b) something that may be the undoing of Amazon competitively. I’ll agree with (a) but that is true of anything that involves a flying object but (b) is a little hard to fathom.

The idea is as follows. People want stuff fast. So Amazon and others can’t rely on ground-based delivery mechanisms to achieve that. Absent a transporter — which you have to admit would be really, really cool — that means using the air. What is imagined is a fleet of drones going from Amazon distribution centres out to people’s homes in very short order. Of course, it is easy — very easy — to think of reasons why this might not happen including fear of flying objects and technical problems but let’s not let that get in the way of the future. I’ll take as an assumption that this could work.

The first issue is whether this means Amazon will have serious competition. That seems unlikely. The drone mechanism only gets you to the last mile. The goods still have to get to the distribution centre. That is something Amazon has a lock on. Then again, other firms such as Walmart have distribution systems too. So it seems to me that you would need to leverage that. This could, of course, make every local retailer into a drone delivery point. My point here is that Amazon will have no more competition than it already has for what it is good at — getting goods close to consumers and relying on generic delivery from that point. If drones become part of that system, Amazon’s competitive advantage doesn’t change.

A better approach is to consider how drones will complement new delivery systems rather than existing ones. First, note that the envisioned drone system has an economic problem relative to ground-based systems. In ground-based delivery, trucks are loaded and then move out from the distribution centre to many dwellings. By contrast, each drone will go back and forth. It could be that the point to point drone system out performs the point to many ground system but that is far from obvious.

Second, drones face some key power issues. At current technologies — and I know the problem with that assumption — drones have limited battery life. It is hard to get cameras up for more than 40 minutes let alone lifting packages. That means that each shipment will involve a certain amount of recharging time. This is not likely to be a future issue but I suspect it is a current bottleneck.

Third, given all of this, the most likely drone based system that supplants ground based systems in an important way will involve a hybrid, drone and blimp system. Here is what seems likely to happen. Amazon will load a bunch of products on to a blimp above a local area. That blimp will also have drones on them. It will then park itself over neighbourhoods whereby drones will leave the blimp, deliver the packages and return to the blimp base. That will save the drones having to expend fuel on lifting off with packages — they will only have to land with them — and will using the economical helium solution to keep packages in flight. This will also likely be easier to manage than point to point drone runs and less likely to lead to drone pollution.

The issue, of course, is that this does not play into Amazon’s strengths — the long tail. This system, it seems to me, works best for delivery of goods quickly that are mass market and popular rather than niche and rare. And it is from this perspective that drones may not be the fit for Amazon. In any case, I suspect urgency and genericity are correlated for consumers rather than urgency and rarity.

The preceding is republished on TAP with permission by its author, Joshua Gans, Chair of Technical Innovation and Entrepreneurship and Professor of Strategic Management, Rotman School of Management. “Some Simple Economics of Drone Delivery” was originally published December 2, 2013 on Digitopoly.