Shiva, Lord of Destruction - courtesy Astrogems
Shiva, Lord of Destruction – courtesy Astrogems

Karma refers to the spiritual principle of cause and effect where intent and actions of an individual (or in this case a company) influence its future.

Unless you’ve been hiding under a rock you probably know that GoPro issued a recall for the new Karma drone November 8th. In this article I take a look at the recall, what the FAA did and didn’t do and the less than obvious but very real industry implications.

On the GPRO Q3 2016 Earnings Call, November 3rd, CEO Nick Woodman told analysts that:

“…We experienced production issues that resulted in lower than expected launch volumes for HERO5 Black and Karma. While our teams worked tirelessly to solve the problems; we expect the situation to have a negative impact on results for the second half of the year.”

Later during the call, in response to a question, we learned that Karma was expected to contribute <10% of revenue to Q4. So not good news, but in the grand scheme not the end of the world either. Still, the stock took a big hit.

Craig Issod writing in DroneFlyers.com wrote a brilliant analysis in late October tracing the whole Karma story (well worth a read) ending with a prescient forecast that “Based on the late and slow start it would seem difficult for sell through (actual consumer purchases) to meet even the most conservative of the targets. Wall Street’s sales target for the fourth quarter translates to sales of about 850,000 stand-alone Karmas – a virtual impossibility.”

Then, five days after the call, on November 8th (yes, Election Day) GoPro issued a short press release announcing a recall of all drones sold to date. In part the press release read:

“GoPro Inc. today announced the recall of the approximately 2500 Karma drones purchased by consumers since October 23. The recall was announced after GoPro discovered that in a very small number of cases, Karma units lost power during operation. No related injuries or property damage have been reported. Owners of Karma can return their units to GoPro, or their place of purchase, for a full refund. Replacement units are not being offered. GoPro plans to resume shipment of Karma as soon as the issue is resolved.”

Predictably the stock took another hit and generated more headlines. Early customers were annoyed that since they had purchased “more than a drone” they also had to return the camera and grip but…

Then came the confusion.

In the recall, Woodman wrote ” We are working in close coordination with both the U.S. Consumer Product Safety Commission (CPSC) and Federal Aviation Administration (FAA).”

Time to ask a leading question. What is wrong with this picture? Inquiring minds noticed and wanted to know how it was that the FAA and CPSC got involved
with GPRO?

Joe De Balzo and Sandy Murdock at JDA Solutions came out with a post November 10 headlined DUPLICATIVE REGULATION OF DRONES? GoPro Karma Is Being Investigated By CSPC. To put this in context, Joe is a former FAA Acting Administrator and Sandy for many years was the FAA Chief Counsel. Most of the article deals with why the CSPC has no jurisdiction in this matter.

BUT

As you start to think about this, you quickly realize that there is nothing in Part 107 about aircraft certification, and there are no reporting requirements for manufactures at all. (We will come back to the implications.)

JDA and DroneBusiness.center enjoy a collegial relationship so Sandy and I got on the phone Thursday morning to try and puzzle this out. Besides some “falling out of the sky” videos on YouTube, we both wondered how the FAA found out about the problem on a relatively miniscule number of units? And how and why did the CSPC get into it?

Finally, I said to Sandy, “What, if as a publicly traded company, GoPro proactively chose to be responsible citizens and went to these agencies themselves?”

In fact, that is more or less exactly what happened. After a reasonably thorough Google search, I found exactly one article that did anything more than report the recall and predict doom and gloom. The article, GoPro Drone ‘Recall’ Raises Oversight Questions: Neither the CPSC nor the FAA is charged with protecting consumers from malfunctioning drones was written by Allen St. John, a highly respected business writer who appears to have done the article on assignment for Consumer Reports.

It is a fine piece of reporting and I am going to use Allen’s words to provide
a narrative.

While the company has called the move a “recall,” that term can be confusing. For most products, a recall is a legal process in which a government agency has oversight authority and, along with other protections, it actually becomes illegal to continue to sell the devices under recall. But with drones, it’s not clear which government body should be overseeing the process.

SPOILER ALERT The moral of the story is that there is no process.

One of the people Allen contacted was Jeff Brown, the SVP Communications and Public Affairs for GoPro. Jeff picks up the story:

“We contacted the CPSC, and we said ‘It looks like there’s a statutory carve out for aviation. [Which there is, you will find the exact language in the JDA article, 15 U.S.C. § 2053 (5) CONSUMER PRODUCT. –such term does not include—(F) aircraft, aircraft engines, propellers, or appliances.]

Jeff continued, “We said to them, if you would like us to participate in the process we’re more than happy to do that. And the CPSC said ‘No, you don’t need
to participate.”

When they saw it in writing, CPSCs instruction to GoPro that they did not have to “participate” raised hackles at JDA who saw it as an overstepping of regulatory boundaries. In Allen’s article, CPSC spokesperson Scott Wolfson said, “We do not have jurisdiction over drones.”

GoPro also contacted the FAA. As Jeff tells it, “We called the FAA and they said ‘We are not going to participate in the process but we agree you should go ahead with your recall if that’s what you think.”

So let’s pause for effect. The only publicly traded drone manufacturer in the United States has just been told that no one has jurisdiction over their product. And that they are to proceed as they see fit.

The recall was entirely GoPro’s idea.

Allen provides the punctuation. The FAA, meanwhile, has strict authority over how drones are flown, both by commercial and non-commercial users, but the agency doesn’t regulate the devices itself, except in the broadest terms.

FAA spokesperson Alison Duquette explained to Allen that the agency does not “certificate” drones during the manufacturing process the way that it does larger aircraft. “If a drone manufacturing defect that affects aviation safety were identified,” she explains. “The FAA would first contact the manufacturer to understand the issue and determine the best course of action to address the safety issue.”

As you will see in a minute, this is consistent with the FAA’s Safety Management System (SMS).

Allen then gets to the heart of it: GoPro’s issue with the Karma raises the question: If a similar failure was to affect a drone made by a company that was less responsive to consumer safety, would any government agency step in to try and get the products off the market?

Indeed, the regulatory confusion for GoPro should serve as a warning about the potential problems of dealing with a similar issue in the future.

“While we’re glad the company is taking back its products and offering owners full refunds, we’re concerned that defective drones seem to fall into a safety gap,” says William Wallace, a policy analyst for Consumers Union. “Congress should clarify which agency is in charge so that the agency can coordinate recalls and protect consumers from safety defects that could hurt them.”

As JDA points out this, is somewhat disingenuous as it is very clear that Congress decided a long time ago that the FAA was in charge, and even more specifically that aviation is not an issue for the CPSC.

But it does beg the question: If the FAA is in charge, what in fact are they doing about it?

The answer is that the FAA has done and is doing nothing.

Let’s take another look at the JDA article.

On June 28, 2016, the FAA issued a final NPRM, entitled Operation and Certification of Small Unmanned Aircraft Systems, 81 FR 42063-42214, 14 CFR Part 107, which created a new class of aircraft and established the basis for pilots to operate them. This regulatory action reflected an innovative exercise of the FAA’s statutory powers, in particular, relying on the FAA Modernization and Reform Act of 2012 (Pub. L. 112-95). Section 333 of Public Law 112-95; UAS aircraft (drones) will be able to operate under the limitations of Part 107 without the normal statutorily mandated certification of the design and manufacture of the vehicle. Specifically, the Final Rule stated: “As discussed in section III.J.3 of this preamble, the Department has indeed found that mandatory airworthiness certification is unnecessary to ensure the safety or security of these types of small UAS operations.”

“The FAA did not decline to exercise its authority to certificate the drones, as defined in the new regulations; rather, it decided —IN ADVANCE— that these vehicles were “AIRWORTHY”.

And with that the matter is apparently closed. But think about it. Though the ink is barely dry on Part 107, the FAA has not put a mechanism in place to see if they were right. And though their highly touted Safety Management System is data driven, the FAA is not collecting any data except from accidents reported under Part 107, Subpart A 4.5 Accident Reporting.

Sandy explained that this new approach reflects ever shrinking head count and an increasing effort by FAA headquarters to impose regulatory consistency within its far flung bureaucracy. I asked and he said that yes in his opinion, this is why under Part 107 airspace authorizations have been centralized instead of being granted locally. He added that senior managers are more aware of the operating parameters of UASs and so are more likely to find balanced solutions than their field personnel.

So why patient reader did I put you through this long narrative?

First, because I want all of us to tip our hat to GoPro. They chose to do something that they didn’t have to do at a critical time in their year. From a long term perspective, which is rare in the short term publicly traded world, it was the smart thing to do, even though in all likelihood it cost them Christmas and they will be remaindering Karma’s out the back door if and when they get them fixed. As the headline suggests, it was the right decision for GoPro’s future. Props to CEO Nick Woodman, General Counsel Sharon Zezima and SVP Jeff Brown. You are heroes. (Pun intended in a nice way.)

There is a larger point that I think that each of you, as investors in our industry, should be very concerned about.

The concept of manufacturer self-certification is central to the forthcoming Small UAV NPRM. The one that the FAA and their surrogates have been promoting with great fanfare. The one that will open the floodgates of utilization by allowing drones to operate over people. Specifically people who will not have a clue that drones will be present and who have not agreed to be filmed, FLIR’ed or
otherwise digitized.

Play it forward and you realize that this is foundational to automated delivery and other kinds of waivers.

Right now there is no FAA oversight of the manufacturers. To be clear there is not even a performance standard or a mandatory incident report mechanism.

WHY NOT?

It is easy to imagine that China Inc. is delighted with the status quo. They are continuing to get a free ride, lobbying against all legislation and regulation whilst profiting handsomely. Good for them.

But is it a good thing for us? No.

A low standard will do little to build trust or public confidence in our industry. Nor will it provide the data for decision making that is necessary for a risk-based industry to grow.

Unless we all make ourselves heard during the upcoming White House Office of Information and Regulatory Affairs (OIRA) hearings and make our voices heard during the NPRM, we can expect to see the FAA continue this laissez faire approach.

For more on OIRA, what it is and how it works, here is a post from Lisa Ellman and the UAS Team at Hogan Lovells. I will be meeting with Lisa on Monday. For a nifty diagram of the NPRM process see this post from Jonathan Rupprecht.

Please let me know what you think. Am I the only one out here who is concerned?