Goldman Sachs estimates commercial drone sales market to be $20.6 billion and consumer sales to be $14 billion in the next five years. Even with all of this demand, early stage investors are not likely to invest in hardware or drones themselves but in the services that drones can provide.
Why? Most drone hardware is available from China at minimal cost, and the basic software is open source in many cases, meaning that drone makers will face plenty of competition. Like the computer industry, making hardware is easily commoditized. Operating systems are becoming low margin. But using software to solve a problem is high margin.
In many cases, it is not economically efficient for buyers to own and operate drones themselves, so companies providing “drone as a service” businesses and tangential services have cropped up and could be interesting investments.
Drone insurance is another emerging industry. Drones can crash. From startup insurance brokers to major players like AIG, this niche industry will only grow larger as more and more drones take to the skies. Today’s policies mirror standard aviation policies, but as usage grows, issues of operator safety, privacy, cyber security, property, and access rights are likely to arise.
Then, there is drone security. We are seeing infrastructure plays on the defense side that provide drone detection and response.
So how do investors make sense of this? Clearly, we are seeing more activity in this sector targeting real enterprise issues that are mission critical, but we need to keep close relationships with the regulators.
This is a thoughtful article written by an angel investor. The consumer will benefit from the race to the bottom. Certification and other emerging requirements will take out the fringe players – not only is this likely to be an expensive process, it will certainly delay time to market.
That suggests the evolution of what Mike Blades called a platform model on our panel at Drone Dealer Expo. That is an airframe that can be easily modified with specialized parts (e.g. sensors) and software without requiring certification of every iteration. Of course yet to be seen is if there will eventually be some form of software certification.
I found Ms. Amoils comments about insurance to be very insightful. There are a number of articles you might want to refer to if you are interested in the likely evolution of drone policies away from their traditional home in aviation.
For my thoughts on the evolution of the market and related investment opportunities, please read Fly It Forward: An Investment Opportunity.