In 2013, Amazon (NASDAQ:AMZN) CEO Jeff Bezos went on 60 Minutes to unveil a big surprise: drone delivery. Called Prime Air, the program would allow the company to deliver packages in 30 minutes or less, and Bezos predicted it would start happening in four to five years.
Well, four to five years after that interview, the government is set to slash red tape and lift regulations that have prevented drone delivery from becoming a reality.
According to a report in The Wall Street Journal, limited deliveries are expected to start happening within months, and at least 10 Federal Aviation Administration-approved test programs for drone deliveries are expected to start in May.
Amazon's VP of Prime Air, Gur Kimchi, said he was hoping his company would receive the necessary permits by next year. Amazon's long-term goal is to deliver packages of up to five pounds in a 20-mile radius from warehouses -- a feat that would highlight why the company has been angling for drone deliveries for so many years.
A game-changing innovation
Amazon is no stranger to groundbreaking innovations. The company has become one of the most valuable in the world largely because of its spirit of experimentation and invention, which has led to breakthroughs like its giant e-commerce business, and the marketplaces and fulfillment business that go with it; its Prime loyalty program; cloud-computing with Amazon Web Services; and its voice-activated Alexa technology.
However, drone delivery could be the company's most important innovation yet, as it would leverage many of its strengths, and accelerate sales while saving costs.
Last-mile delivery is the biggest imposition to e-commerce today -- getting products to a customer's home by truck is costly and logistically challenging. By reducing the need for last-mile truck delivery, drones could cut costs for online shopping across the board. A research report from Deutsche Bank estimated that the average delivery cost per delivered unit would be cut in half in a decade with drones.
As a low-margin operator and by far the biggest e-commerce company, Amazon would be the big winner from the cost savings in drone deliveries. Over the last year, the company spent more than $20 billion on shipping, meaning drone delivery would have saved it more than $10 billion according to the Deutsche Bank analysis, which would have enabled it to more than triple its net income from $3 billion last year. As Amazon grows, the potential shipping-cost savings will only grow with it.
Aside from the air traffic and safety concerns, the biggest challenge to drone delivery has been finding a suitable place for drones to leave packages. Not all destinations have porches that can easily handle deliveries, but even here, Amazon is ahead of the competition. The company has Amazon Lockers placed strategically around cities to hold packages, and it could use them to receive drone deliveries as long as the lockers are outside. It's easy to imagine an apartment building placing such a locker on its roof to get deliveries by drone, thereby saving sidewalk space.
Beyond lockers, Amazon's development of Amazon Key and its recent acquisition of Ring show that its ambitions are to be able to easily deliver packages inside customers' homes. If a delivery driver could use Ring or Key to let themselves in to deliver a package, then a drone could probably do the same, as long as it fits inside the door. None of its competitors have made a similar amount of progress into such complementary features to enable drone delivery, giving Amazon an edge here as well.
With Alexa, Kiva robots, and now Ring, the company also has made considerable headway in artificial intelligence. With a smart drone, it's possible to imagine a fully autonomous delivery system where drones pluck items from warehouses without a human ever having to intervene.
In all likelihood, a company that's envisioned a blimp-like hub for drones to use as a base for deliveries has considered such a system, and that may even be its end goal in delivery. For the rest of retail and its e-commerce rivals, the advent of drone delivery means it's again time to play catch-up with Amazon.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.