Yes. It is a revolution. But it’s still early days, so the landscape is complex.
Even if you have no immediate plans to buy a drone (yet), a lot of people do. In a few years we’ve gone from a hobbyist niche to an estimated one million consumer-class or small-business drones sold last year in the U.S. alone. Such a steep growth curve has all the earmarks of a new product category.
“Drones are on track to be 'huge'. A new Goldman Sachs analysis sees a cumulative $100 billion "total addressable market" over the next five years alone.”
Venture capitalists have poured nearly a billion dollars into new drone companies (almost 90% of the money last year too), including deals led by storied venture giant Kleiner Perkins and the prescient tech team at Lux Capital. And that doesn’t count private corporate spending on drones from Boeing and General Atomics to Intel and Qualcomm.
Drones are on track to be ‘huge’. A new Goldman Sachs analysis sees a cumulative $100 billion “total addressable market” over the next five years alone. India’s RNR Market Research just released a 1,000 page analysis that concludes drones will be a $37 billion annual global business in a half-dozen years. The drone trade association, AUVSI, forecasts over $80 billion will be added to the U.S. economy from drone commerce in the coming decade. (You know a new industry has arrived when there’s a trade association for it in Washington D.C. There is as well the newer Small UAV Coalition that focuses exclusively on the micro-drone market.)
The eventual market is far broader and deeper than even Goldman’s speculation. YouTube uploads of drone hijinks and new forms of entertainment from the Dubai drone Grand Prix to aerial wedding selfies may be amusing, but they don’t begin to capture the scope and seriousness of this new industry.
So where are the rising public tech companies where the rest of us can place a bet on this revolution?
The drone market today is still dominated by military spending (as was the case for computing at the dawn of that age). According to Goldman and others, precision agriculture is the big commercial application that has immediate potential to become a multi-billion industry alone. Other applications are limited only by imagination and the inevitable and rapid maturation of the underlying technologies. They include such things as emergency services, ecological surveys, journalism, surveying, cinematography, and of course package delivery.
But first, a detour: before digging into the techno-architecture of the revolution, consider what the government, specifically the FAA is doing with regard to the new category called micro Unmanned Aircraft Systems (microUAS).
Disruptive regulation, or “Mother May I?”
The future for drones is as much about policymakers and regulators as it as about the technologists. As I wrote recently elsewhere, tech companies’ mantra of “disruptive innovation” should give way to “disruptive regulation.” One can only imagine what regulators might have done to the budding Internet circa 1990 if it were obvious that disruptors would later emerge in the form of Google, Amazon, Twitter, AirBnB, or Uber.
If you buy a drone today, a microUAS, you not only need government permission to use it, but how, when and where you may use it. FAA Administrator Michael Huerta asserted at last week’s massive SXSW tech confab in Austin, Texas, that the “safe integration of unmanned aircraft is a goal that we’re committed to pursuing together [with industry]” and promised to soon release rules for the new micro category for Unmanned Aircraft Systems (UAS). As they say, the jury is out.
Much has already been written about how the FAA is thwarting the nascent drone industry, including studies and papers from, for example: Eli Dourado at the Mercatus think tank, the Center for Law and Economics, the team at Bard College’s Center for the Study of the Drone, and the University of North Dakota’sCenter for Unmanned Aircraft Systems. (The latter may surprise some, but not when you see its proximity to one of the military’s major drone bases at Grand Forks, N.D.)
For a lucid view on what the FAA should do, I recommend the refreshingly brief March 10, 2016, Congressional testimony from Gregory McNeal, a Pepperdine University law professor and co-founder of AirMap, a venture-backed drone software company. At that U.S. Senate Committee on Small Business and Entrepreneurship hearing, McNeal asserted: “American entrepreneurs, students & educators, journalists, and volunteers are ready to use unmanned aircraft to save lives and generate significant economic activity, yet they have been held back.”
Committee Chair, Senator David Vitter (R. La) agreed, opening those hearings by noting that “the FAA’s failure to meet regulatory deadlines has limited the growth of the commercial “drone” industry.” If you want to drill a little deeper to gauge the state of the FAA debate, read the testimony from the four other witnesses at that hearing. An encouraging portent: in early March, AirMap’s McNeal was appointed to FAA Rulemaking Committee to help draft microUAS performance-based standards and operation requirements.
Few dispute the need for regulations to address reasonable concerns about privacy, safety and noise. But these are solvable technology problems. Nor are they unique in history, either in terms of social challenges or legal precedence. At the dawn of telephony, people worried about its privacy implications. Protests about noise during the early days of the automobile led to legislation requiring mufflers and similar.
Aside from noise and safety, there is much concern over the fact that most drones carry cameras. But privacy issues associated with picture-taking are also not unique. A camera on a drone does create a new category of device. So did a camera in a phone. With the latter, clearly most people believe the benefits greatly outweigh the problems.
The closest analog for the social and legal controversies from drone-cameras may be the invention of the consumer camera itself. A 1998 Yale law Reviewarticle that mapped out the legal precedents from the emergence of ubiquitous photography, noted that an 1885 book, “That Horrid Camera,” recommended its readers “put a brick through [the amateur photographer’s] camera whenever you suspect that he has taken you unawares.” Last year a Kentucky citizen, acting exactly in that spirit, was arrested (and later exonerated) for shooting down a camera-carrying drone hovering over his backyard and peeping, he said, at his sunbathing daughter.
Similarly, an 1890 Harvard Law Review article, “The Right to Privacy,” noted that “instantaneous photographs … have invaded the sacred precincts of private and domestic life … and have spurred the need for greater legal protection of the right ‘to be let alone’.” As the French lawyers say, plus ça change, plus c’est la même chose.
Odds are decent that regulators will eventually get it right. And pressure is building on the FAA from the industry as well. EEI, the electric utility trade association, has launched a partnership effort to unleash utility drones.
Clearly the FAA has to wrap its arms around the idea that a microUAS is to an aircraft as a lawnmower is to a bus. But even if the FAA doesn’t move quickly here, the market is booming globally.
Architecture of the revolution
There is relevance to this kind of deep history.
Innovators have been engineering new product categories for 200 years, each time propelling new sales, new companies, and sometimes entirely new industries. The new product categories create change, both beneficial and worrisome, in the social and cultural fabric, periodically disrupting the legal firmament. But every time along the way, society adjusts, benefits accrue, and fortunes are made.
In order to qualify as a big financial deal, a new product category doesn’t have to be as revolutionary as the PC and smartphone or earlier tech innovations such as the radio, telephone, camera, or air conditioner. Technology time-lines are replete with innovative category-creating products that don’t upend society but nonetheless make companies and investors a lot of money; to note a handful: the washing machine and clothes iron, the Walkman and VCR, the fax machine and photocopier.
The core issue to unravel with regard to drones both for investors and policymakers: Where are we in the drone revolution? Or, to use the obvious analogy (with the usual caveat about the limits of analogies), is today equivalent to 1979, the year before Apple went public and became a driver and player in the PC revolution, or 2007 the year Apple launched the iPhone?
In fact it’s surprising that there are no rumors as to whether Apple might do to drones what they did to smartphones. (One designer, though, has imaginedwhat an Apple drone would look like.) First to market is not necessarily the winner in new product categories. The iPhone was preceded by many earlier versions including IBM’s 1992 Simon, Apple’s own (fated) Newton in 1993, Nokia’s 1996 Communicator, the 1997 Palm Pilot, and the (then) wildly successfully BlackBerry’s introduced in 1999. A history of the PC industry looks similar: note that the product that lit the category on fire was IBM’s open-source PC in 1981, but it was preceded by the Apple II, Commodore, Brother, Altair, PDP, Wang, and the Radio Shack TRS-80.
As to why Apple, or any company or investor might chase drones? A reasonable estimate of the drone category could match the sales volume of the tablet, or even the Mac itself, both of which are 10% of Apple’s revenues. For many investors, the big question is whether Apple, Google, Amazon or any other cash-rich tech giant, might be on the hunt to buy a new category-killer company with their cash horde.
So back to the question: for those eager to find stocks in public companies where can a bet can be placed on that future? While there are already a lot of players in this new market, there are few pure-play public companies. One of the most comprehensive lists itemizes 70 drone companies; most are private with some notable exceptions.
To see where and when to invest, consider the drone landscape in terms of four key features relevant to all new tech-driven product categories:
- The product itself – manufacturers of drones
- Software – drone operating systems, network management, analytics, etc.
- Enabling components – vision, navigation, powerchips, and propulsion
- Services – new services or businesses enabled by drones
Let’s fly over each segment briefly to get a picture of the breadth of investment opportunities.
Drone makers
When it comes to manufacturers of micro-drones, Chinese company DJI is today the undisputed and most wildly successful consumer market leader; its Phantom drone has a very Apple-like aesthetic. Approaching $1 billion in sales, DJI has captured about two-thirds of today’s consumer market and is alreadyvalued by its venture investors at an IPO-like $8 billion. If you want a piece of that, there is no option but to wait and see if an IPO is in the future. Rumored acquisition attempts were rebuffed; DJI’s CEO seems more like a Steve Jobs than a seller.
At least two-dozen other smaller private companies offer a microUAS, many worthy of note (but virtually all the domains of VCs still) including, to name a handful: 3DR with their Solo “smart drone,” Lily, Hexo+, Airdogs and China’sYuneec with its just released Typhoon drone (more about them shortly). Only a handful of small drone makers are public and close to being pure-plays: AeroVironment with 85% of revenues from drone sales, and Elbit Systems are both pioneers in a field where experience matters, both with a history in and significant sales to military clients. France’s Parrot beat DJI to market by one year with a consumer-friendly drone, and some analysts argue that GoPro is about to become a drone-centric company with its imminent release of the Karma.
For drones with long-range and heavy-lift capacity needed for military and many industrial applications (already a multi-billion dollar market) there are a number of big integrated players like Lockheed Martin, BAE, Northrop Grumman, and Boeing. While all of them are public, none offer investors a drone pure-play. And the other big player and pioneer is private, General Atomics, which arguably launched the modern drone era when, in 1994 in the Mojave Desert, its now famous Predator took first flight.
Software players
Software comes into play with every complex system, both to facilitate operations and for information and data analysis. While the drone domain is still largely dominated by software proprietary to specific products or services, cross-product solutions are emerging.
There are a number of venture-backed start-ups pursuing the Holy Grail of a broad multi-class drone navigation ‘operating system’ (OS), as well as solutions that offer universal cloud-centric software services. Santa Monica-based AirMap, noted earlier, has developed airline-class software intended to integrate and help navigation and safety for all drones. Airware has a drone OS for businesses to operate at scale. DroneDeploy’s cloud-based software is designed to analyze images from any drone, and Skydio is pursuing software to help drones be more ‘aware’ of their environment. All these companies bear watching as the industry matures.
For a sense of the scale of the opportunity: researchers at the University of Waterloo (Canada’s MIT) have proposed that we may need an Internet of Drones architecture, using the existing cellular communications networks. They may be onto something.
Component players
This brings us to the “picks and shovels” strategy for drone investing – perhaps the most fertile domain at this stage for drone investors. As with every gold rush, suppliers also ride the wave. Obvious historical examples include both Intel and Microsoft in the rise of the PC revolution, and similarly Qualcomm’s in the smartphone ascendancy. All of the large and small, public, and private drone makers are dependent on a variety of key component; in particular the sensors, microprocessors, power electronics and even propulsion systems.
Many of those key components are taken directly from the fruits of the smartphone revolution. But many others are unique to aviation, notably collision avoidance and propulsion. With aircraft in general, and drones especially, weight and efficiency are the game-limiting and game-changing metrics. Since it take 10 times more energy to carry a pound by air as on the ground, every ounce wasted in the weight of the components matters.
Now just as the demand for tens of millions of PCs stimulated technology in a way that thousands of mainframes couldn’t, so too will the sheer volume of demand for tens of millions of drones propel technology in a way that thousands of big aviation platforms has not. Drones will create a significant market for components even for some companies already as big as Intel, Qualcomm (QCOM), or Osram Opto Semiconductors (ETR: OSR).
Osram supplies the laser and detector chips that end up inside the lidars—laser radars—that drones (and self-driving cars) need to be able to see and navigate. Velodyne, inventor and producer of the lidar that is famously seen atop Google’s autonomous cars, is driving its technology down in cost and size which will make them drone-suitable. Another private company, venture-backed Quanergy, promises a tiny and low-cost lidar. Some, maybe most, of these companies could end up acquired before a possible IPO: optical navigation company Advanced Scientific Concepts was recently bought by the German auto tech company, Continental.
The vision challenge also provides an example of the kind of innovation that drones are inspiring. Intel has bet on drone vision with their RealSense chipset that gives drones (or robots, or cars) obstacle detection and avoidance capability. Early in the year Intel acquired Ascending Technologies, a small company producing professional instead of consumer drones, and before that invested in both drone software and services companies, including a $60 million venture investment in earlier noted Yuneec.
Qualcomm, for its part has developed and released an integrated solution for drones. Called Snapdragon Flight, it promises to lower costs and weight, and integrates and combines a half-dozen functions: the CPU (Qualcomm’s Snapdragon of course) with, radios, vision chips, obstacle avoidance, motion planning, and fast charging. Yuneec is using Snapdragon Flight. And DJI’s latest Phantom drone uses a power-sipping ultra-light vision processor from a venture-backed Irish chip company, Movidius. (Perhaps an IPO on the latter to watch for?)
There are a variety of relatively small public companies where drones could have a bigger impact on the bottom line than for the established tech giants. Some analysts properly note that motion-tracking chips from InvenSense (INVN) are critical for all drones. Similarly, drones will propel growth for companies like Ambarella (AMBA) with its HD video capture chips. (The company says that 10% of revenue last year already came from drones). One should also include in the pantheon of suppliers powerchip companies like IXYS (IXYS) that offer leading-edge capabilities for higher efficiency and lower weight in the critical power electronics.
And one more ionic example of how drones are driving innovation: Scientists at CERN, the massive multinational physics research center in Switzerland, needed a sensor-carrying drone that could navigate the 15 miles of machine-filled tunnels. Not finding any viable commercial solution, they invented an entirely new LED-based precision navigation package weighing just one-quarter of an ounce. That technology was spun off last year as a small private company called Terabee, selling the TeraRanger sensor for a mere $140.
Power players
And finally, on the component front, there is the propulsion system itself, a critical and mission-limiting component. Virtually all consumer and commercial drones use electric motors powered by smartphone-class batteries. The first thing to do is improve the efficiency of all the power electronics and systems to eek out more range from the battery.
We can expect drones to accelerate commercialization of power control software/algorithms like that offered by Packet Digital of Fargo, N.D. It will also create demand for the new class of hyper-efficient powerchips that use gallium-nitride (GaN) instead of silicon from companies like Macom (MTSI) and Infineon (ETR:IFX). And GaN technology is critical for efficient optical components and active antenna radar as well. While private, it’s worth watching the trajectory of the new GaN player, EPC, founded by powerchip pioneer Alex Lidow. (Yet another IPO candidate for the future?)
But in the end, lithium battery technology, as good as it has become, is simply not up to the speed, range or load demands needed to unleash many drone applications. Flight times of minutes and payloads counted at a pound or less are not sufficient, and not just for carrying packages for delivery but also for carrying the kinds of high-performance sensors, cameras and communication systems ‘heavy’ commercial applications require. Better batteries will come, but drones need power densities ten-fold better and no existing or theoretical battery chemistry can deliver that. Hydrocarbons and hydrogen can.
Oil-fired engines, including hybrid gasoline/electric solutions similar to that found in cars, will increasingly show up as one solution to meet big payload and distance demands. But fuel-burning engines are noisy, and adding noise-reduction hardware adds range-robbing weight. Quiet, hydrogen-burning fuel cells offer a solution.
Drones will now stimulate fuel cell technology much as cellphones stimulated lithium battery technology. Without the power density of lithium, there would never have been a mobile revolution. Before mobile phones and mobile computers, the 3-fold gain in energy density from lithium chemistry came at such a high price that it couldn’t gain traction where most applications were too price-sensitive and could manage just fine with the performance of existing lead or nickel chemistries.
But for mobile computers and phones, lithium was game-changing and worth it at nearly any price. Then the astounding volume for mobile uses created market pull and technology progress that drove down lithium battery costs. Even so, lithium chemistry, regardless of the now low cost, is a factor of 10-fold below the power-to-weight ratio needed to make drones really fly.
Fuel cells are far more expensive than batteries, and engines, and have struggled for years to gain market traction. But fuel cells have all the right attributes needed for drones. They offer energy density to rival engines, but are inherently quiet like batteries, producing electricity that can power the same electric drive systems. That fuel cells are stubbornly expensive is far less important in the context of the share of a total system cost. With potential demand for tens of millions of systems, you can expect venture investments to have already started.
There are a handful of public companies where a fuel cell bet could be considered. Start with the now venerable Ballard (BLDP), a pioneer and producer of big utility-scale fuel cells. Last year Ballard acquired Protonex, a leader in drone-scale fuel cells. A Protonex system powered a small Navy Ion Tiger drone for 24 hours with a six-pound payload. Protonex has significant military contracts and enough revenues, not to mention prospects, to finally move the meter on Ballard’s bottom line.
Then there is Intelligent Energy (LSE: IEH), a London-based fuel cell company that went public on the London Exchange in 2014 on high hopes and hype, but its stock now trades at one-sixth the IPO price. While the company’s initially targeted the smartphone market (with rumors of Apple’s involvement), management figured out that drones comprised a good market and revealed earlier this year a range extender for micro-drones.
Drone services
It was only a couple of years ago that Amazon ignited interest and controversy around the potential for using drones to deliver packages. That interest has spread to every other delivery company from FedEx and UPS to Pizza Hut.
Start-up Flirtey is pursuing a drone-based delivery model, as is Matternet, and Sky Futures (the latter based in London). Other start-ups and venture-back firms are providing turnkey drone-based inspection, safety and survey services to energy companies, commercial building, construction and agricultural firms, naming only a handful: Cyberhawk, PrecisionHawk, SenseFly, Sky-Futures, Redbird, Sharper Shape, and The Kansas City Drone Company.
We are only at the beginning of a proliferation of such companies and services. But so far the investment opportunities are mainly for venture investors, none are public plays.
The bottom line – the next big ‘product category’
While drones in one form or another have been around for a long time. In fact the first remote-controlled unmanned aircraft was flown off of Long Island in 1916, at the dawn of aviation. The Navy cancelled that project soon after the demonstration because the technology wasn’t ready for prime time. Military drones became ‘real’ only fifteen years ago, and we are still in early days for the consumer and commercial microUAS business.
It should, by now, be obvious that drones comprise an entirely new product category.
Analogies are always imperfect, but the migration of drones from military and heavy industry into consumer and business applications is arguably as big a deal as the migration of mainframe computing from the military (were computers were born too) and big corporate regimes to the desktop and pocket. We are, in equivalent terms for drones, at the dawn of ubiquitous computing circa 1980s.
Drones epitomize a foundational transformation in technology: the emergence of information systems embedded into physical things. Engineers call these cyber-physical systems wherein computing and communications are not just bolted onto physical platforms, but become an integral part of how physical things operate in real time. Robots and self-driving cars are cyber-physical systems.
But civilian drones are unique in the pantheon of cyber-physical technology in that they are now fully practical. And that will unleash a revolution.
So place your bets.
P.S. – To see what consumer drones portend, check out the Gofor Drones video, a brief, semi-serious spoof but still accurate vision — which, by way of full disclosure, was produced by two professional product creators and videographers that happen to include one of my sons.
This piece originally appeared at Forbes
This piece originally appeared in Forbes