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Amazon’s Drones May Not be Ready to Fly but its Popularity is Soaring

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By: Nancy Kross
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Amazon (AMZN) CEO Jeff Bezos set the tech world abuzz with the demonstration of the retailer’s octocopters. He showed off the drones on CBS 60 Minutes, which are being considered for potential order deliveries that could potentially cut shipment times down to just 30 minutes.

Bezos’s statements have sparked mixed sentiments with some analysts saying that the CEO came up with this ‘stunt’ just to try and boost his company’s business right before Cyber Monday, the biggest e-shopping day of the year. Regardless of whether this is true, the news of the drone delivery system has certainly caused Amazon to make headlines, and Amazon.com was among the three most visited websites this weekend. Moreover, the company reported 25% higher client sales compared to Black Friday last year, as of Friday noon EST. Still, don’t expect any packages to be delivered to your doorstep by octocopter for at least the next few years.

This is because there are legal hurdles that currently prevent Amazon from delivering shipments by drone are and the process to get past these is lengthy and complicated. Bezos is a self-proclaimed optimist, however, and has come a long way from his dreams of owning a forklift for his operations to now watching over the largest e-retail business that serviced in excess of 225 million consumers last year. And while we do believe that if anyone can disrupt the status quo, it is Bezos, there are many who question the impracticality of the drone idea, if not operationally than at least financially.

Will the Federal Aviation Administration (FAA), on the off chance that it allows delivery drones to clutter up urban skies, actually allow the drones to be unmanned or is Amazon going to employ drone operators for each delivery? This question has not been answered yet. What Bezos did say was that 86% of the retailer’s overall sales could qualify as deliverable by drones, considering they are under five pounds and are within a 10 mile radius of one its 96 “fulfillment centers.” According to Forbes, Amazon sold some 26 million items per day during its peak in 2012, which means the retailer could be overseeing 22 million drone deliveries on its peak days.

Outbound shipping costs for the world’s biggest online retailer have risen 28.7% from 2011-12 and nearly 500% since 2006. While Bezos’s desire to control all operational processes makes sense from a cost standpoint, it remains to be seen if drones are the answer to his quest for delivery efficiency and cost management. The company will not only face operational and financial feasibility issues, but also some of the biggest government bureaucracies in the FAA, and get critiqued by groups concerned about privacy rights of citizens. As it is the FAA was supposed to come up with legislation governing the use of unmanned drones in the commercial sphere by 2012, a deadline it missed and it is now aiming for 2015.

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The hurdles are sky high. Unfortunately, Amazon’s commercial drone delivery system still hasn’t taken off, and investors seem have lost focus of the company’s fundamentals over the last two quarters. The company, even on the back of record sales, has reported negative operating and profit margins, and made a loss of nine cents per share in its third quarter of fiscal year 2013, after posting a loss of two cents per share in the prior quarter. The stock is up nearly 40% over the same period though. Amazon better hope its drones take off the same way.

 

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