On Friday September 23rd UPS announced that it had delivered its first real package using an unmanned aerial vehicle (UAV). The significance of this event went probably unnoticed to most Americans, but the impact of this small incident will have repercussions in our lives beyond our current comprehension. It was the first time a major US company made a drone delivery since Part 107 came into effect on August 29th. This delivery was made using a vehicle manufactured by CyPhy Works, a UAV manufacturer in which UPS holds a stake.

Today I would like to focus on the impact that UAV deliveries will have, not only on the package delivery industry, including FedEx, DHL and of course the US Postal Service, but on the firms that rely on these shipping companies to bring products to customers.

The delivery industry has seen a huge spike in business since the general adoption of online shopping in the mid 2000’s. However, these costs to online retailers have been increasing steadily. Last year Amazon.com’s shipping costs were $11.5B or 10.8% of revenue as compared to 7.5% of revenue in 2010. The lion share of this money goes to its shipping partners FedEx, UPS and USPS. Product distribution giants such as Amazon.com have accepted this cost as part of doing business.

Well, not anymore.

On Sept 28th The Wall Street Journal reported that Amazon.com is building a massive distribution network as a first step in a series of initiatives aimed at lowering delivery costs. It's calculated that 44% of the USA population now lives within a 20 mile radius of the distribution centers Amazon.com is opening throughout the country. This development will make it easy for them to distribute their products using their own fleet.

ups2This where UAVs come in. The barriers to entry for UAV development are relatively low and large corporations are uniquely well positioned to develop and launch their own line of drones or acquire an established UAV company. Doing so will allow them to create their own fleet of delivery UAV’s which can be easily added to the more traditional vans and trucks. According to a UPS study conducted by Clarus Research 62% of Americans favor using drones to deliver medical supplies to places that are difficult to reach during disasters and 74% favor drone delivery to remote areas only reachable via water.

Delivering a pizza in Manhattan with a UAV probably won't be happening in the near future, but being able to deliver a small asthma inhaler to a remote island in Massachusetts or sending an agricultural machinery spare part to someone in North Dakota is perfectly feasible with today’s technology. However, current legislation regarding line of sight and certain limitations to independent UAV flight in urban areas seem to be reigning in the full deployment of UAVs for all applications. It's only a matter of time before both impediments are overcome though.

It is true that compared with the 40 Boeing 767-300’s that Amazon just leased to increase its distribution capabilities, the UAV initiative is small. That said, the investment and relentless focus on making it work seems to indicate that delivering using unmanned vehicles over short distances is a key part of their future strategy. But why is this focus on UAV’s important?

Simply put, the most expensive component of any delivery is the phase known as “last mile”. In other words, that's the last leg of the journey of this package just as it is about to hit the recipients door. Up to this point packages can be grouped by state, city and zip code but the last mile is the killer in terms of costs, due to the fact that it requires a driver to stop the vehicle and walk to the house, losing valuable time. Amazon.com is investing billions in delivery and long haul trucks, leasing a massive fleet of wide body aircraft and building hundreds of new distribution centers but until it can solve the conundrum of the last mile, the packages will always have to be delivered by hand to the door step.

And once again here is where UAVs come in handy; every package that can be sent directly from a warehouse to a home saves the company money and frees the traditional distribution network to deliver more packages.  These advances in distribution technologies are also changing the dynamic between traditional partners and creating potential competitors of once loyal business allies.

According to a study released by the White House in August, the commercial drone industry is projected to generate more than $82 billion for the U.S. economy in the next decade. A large portion of this contribution to the economy will be the unmanned distribution of online purchases by UAVs, and in some cases these vehicles will not necessarily belong to FedEx, UPS or the USPS. Instead, they may well be part of a private fleet owned by the vendor of the product being delivered. This is a big difference with today’s reality and the first real paradigm shift in terms of the economics of online shopping.