AT&T (T 2.15%) and Intel (INTC -1.13%) recently announced that they would jointly test consumer drone flights on AT&T's LTE network. The partnership will focus on testing connectivity at higher altitude flights up to 500 feet. Intel declared that the companies would "test and define" how a drone connects to an LTE network, while AT&T added that the tests would improve real-time streams from the drone's camera.

Image Source: Intel.

LTE-connected drones can potentially be piloted for longer distances, beyond the pilot's line of sight, with the aid of telematics. AT&T also said that connecting drones to an LTE network could minimize "potential interference with manned aircraft" -- which has become a major issue due to several near collisions with helicopters and airplanes. Let's take a closer look at what this partnership means for both companies.

What drones mean to AT&T
During the past few years, AT&T has been expanding its presence in the Internet of Things (IoT), which consists of wearables, connected cars, smart appliances, and other connected objects. This move diversifies AT&T's wireless business away from the mobile market, which has been slowing down due to market saturation. AT&T finished last year with more than 26 million IoT devices connected to its network.

Connected cars are a major component of that market. BI Intelligence estimates that the percentage of connected cars worldwide will rise from 13% to 75% between 2015 and 2020. Last quarter, AT&T added a million connected cars to its network, and signed a new connectivity deal with Ford, which could bring "at least" 10 million more cars online during the next five years. It also renewed a similar deal with BMW in January. Last year, AT&T unveiled a Wi-Fi device which turns any car into a Wi-Fi hot spot, which tethers even more cars and passengers to its network.

Image Source: AT&T.

AT&T's expansion into drones complements its automotive strategy. Research firm Markets and Markets estimates that the global drone market will grow at a compound annual growth rate of 32% between 2015 and 2020 to become a $5.6 billion market. A large portion of that market could consist of automated drones for enterprise purposes. In a press release, AT&T IoT chief Chris Penrose hints at those potential applications by stating that the company's "LTE network is uniquely positioned to connect industries like delivery, agriculture, construction, and insurance"

What drones mean for Intel
Intel is expanding into drones to strengthen its IoT business, which also makes IoT modules for devices like wearables and smart appliances. That unit's revenue rose 7%, to $2.3 billion, last year, but only accounted for 4% of Intel's top line. Intel's IoT business is small, but it helps offset the weakness of its Client Computing (PC and mobile) business, which posted an 8% decline last year due to sluggish demand for PCs, and a failure to gain ground in mobile devices.

During a Credit Suisse conference last December, Intel CEO Brian Krzanich noted that IoT chips also complemented the company's larger data-center business by funneling more data over the cloud to Intel-powered servers. The telematics systems of LTE-connected drones powered by Intel chips can certainly benefit from constant connections to the company's data centers.

During the past year, Intel invested in three drone makers (Airware, Precisionhawk, and Yuneec), developed collision-avoidance technology for autonomous drones with Ascending Technologies, and integrated its Atom chips with RealSense cameras in reference designs for drones. The combination of depth-sensing RealSense cameras, telematics software, and LTE connections could allow Intel-powered drones to travel autonomously across AT&T-powered networks. That combination would be a breakthrough for companies that want to use drones for automated deliveries and other purposes.

Let's not get ahead of ourselves
The partnership between AT&T and Intel could establish the network foundations for more-sophisticated drones for consumers, and autonomous ones for enterprises. However, the market still faces lots of regulatory red tape, especially in the United States.

The FAA currently requires recreational drone pilots to register their devices, fly below 400 feet, maintain a direct line of sight, and avoid certain areas like heliports, airports, and infrastructure buildings. The FAA approves the enterprise use of drones on a case-by-case basis.

For AT&T and Intel, those regulations could limit their near-term growth in drones. However, investors should view the drone market as a small piece of the broader IoT market, which should strengthen both companies' businesses in the long run.