Amazon's drones aim to take out UPS, FedEx

CEO Jeff Bezos unveiled plans for Amazon Prime Air, a service that would offer automated airborne delivery to your doorstep in less than 30 minutes.

By TheStreet.com Staff Dec 2, 2013 12:05PM

Amazon testing drones © Amazon.com

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By Chris Ciaccia


NEW YORK (TheStreet) -- Amazon (AMZN) has disrupted countless industries: retail, cloud computing, music, movies and so much more. Now, it's onto its latest venture: upend the shipping business.


In what is an attempt to disrupt the businesses of UPS (UPS) and FedEx (FDX), Amazon CEO Jeff Bezos unveiled Amazon Prime Air on CBS' (CBS) "60 Minutes" Sunday -- a new drone delivery service Amazon hopes will allow it to get packages into the hands of customers in 30 minutes or less.


"I know this looks like science fiction," Bezos said during the interview, while unveiling the automated delivery drones. "It's not."


The normally secretive Amazon unveiled the drones to interviewer Charlie Rose, who promptly responded with "Oh my God!" when seeing the technology at work.

There's been a lot of early skepticism about the drones, with a parody Twitter (TWTR) account set up, and millions taking to other forms of social media to mock the new service. Bezos, however, is extremely optimistic about the service and its future. "It will work, and it will happen," Bezos said during the interview. "And it's going to be a lot of fun."

Bezos did not disclose the cost of the drones, or how they would work, which are dissimilar to the drones that the U.S. military uses.

The idea behind the drones from the Seattle-based Amazon is to get packages and goods into the hands of customers quickly, with the drones originating from Amazon's vast network of fulfillment centers. Though Amazon has never publicly confirmed how many fulfillment centers it has around the United States, Bezos did confirm during the interview the e-commerce giant is on its seventh generation of distribution centers. Amazon has said previously it intends to add a net seven fulfillment centers this year.


Currently, Amazon offers Amazon Prime, which allows users to pay $79 per year to get free two-day shipping for goods. The service also allows users to watch movies and television shows, in an attempt to compete with Netflix (NFLX). 

Amazon has never publicly disclosed how many customers use the Prime service, though it did say in its third-quarter earnings release it signed up "millions of new Prime members."


On Amazon's website, the company noted it expects to roll out the service by 2015, and is working with the Federal Aviation Administration to get the drones to be regulated. "Putting Prime Air into commercial use will take some number of years as we advance the technology and wait for the necessary FAA rules and regulations," Amazon said on its on its website.


This new service is a clear shot at the business models of UPS and FedEx, which Amazon currently relies upon. Amazon does not break out how much in operating expenses it incurs by shipping with UPS and FedEx, but it's clearly a significant portion of expenses. In Amazon's third quarter, it had worldwide shipping costs of $1.53 billion, and $811 million in net shipping costs. Net shipping costs accounted for 4.7 percent of of all worldwide sales.


During the third quarter, fulfillment expenses totaled $1.96 billion, or 11.5 percent of Amazon's $17.09 billion in quarterly revenue.

By contrast, UPS generated $13.52 billion in revenue during the third quarter, up 3.4 percent year-over-year, with $8.3 billion of that revenue coming from domestic operations. UPS recently announced it was raising 2014 shipping prices by 4.9 percent for "UPS Ground, Air and International, and Air Freight rates within and between the U.S., Canada and Puerto Rico," according to a press release.


Similarly, FedEx announced in September that FedEx Express package and freight rates would go up an average of 3.9 percent.

To curb those costs, in part, Amazon recently announced a deal with the United States Postal Service to deliver packages on Sunday. 

During the "60 Minutes" interview, Bezos said the drones can carry packages up to 5 pounds as far as 10 miles, after taking off from Amazon's fulfillment centers.

Amazon has over 225 million customers around the world, according to the interview. Though drones (Bezos's phrase) are not coming tomorrow, it's clear Amazon is working on disrupting yet another industry. One drone at a time.


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39Comments
Dec 2, 2013 1:45PM
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My dog can't wait to get ahold of one of these things as it tries to leave a package at my house.
Dec 2, 2013 2:30PM
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Question is, how do you make money with something like this? Delivering one package with a drone is going to be damn expensive.

Plus, how do you protect the drones and the packages against theft and vandalism? Kids with BB guns are going to have a lot of fun.
Dec 2, 2013 1:04PM
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An insurance nightmare.  

If I cant get decent healthcare,  they better not get a break on insuring weed eaters falling from the sky.

Dec 2, 2013 2:12PM
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Oh good now they can see where you live, and what you have. Just another invasion of privacy. Imagine how many drones will be in the sky if this happens. Birds killed packages lost, and what is to stop someone from shooting them down?

More importantly, drones are an invasion of privacy, and will be used like all other technology to take away your freedom and job!

Dec 2, 2013 1:09PM
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I wonder if my Drone hunting license is good for these too?
Dec 2, 2013 2:05PM
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Immediate gratification, an American disease, carried to an absurd end. One can appreciate entrepreneurship and ingenuity without embracing this nonsense.
Dec 2, 2013 1:43PM
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It will need license plate from DMV for ID in my opinion.  What if some one use it to deliver a bomb.  I don't like that.

Drone, self driving car, there go more jobs down the drain.

Dec 4, 2013 1:38PM
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Will never fly. Will never get past FAA. They would stand a better chance with carrier pigeons
Dec 2, 2013 1:56PM
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Not practical at all.  Interesting idea, but like a lot of ideas won't work for many logistical reasons.  Lack of range and package weight, weather, unknown wires or obstacles, basic cost......etc. Amazon is killing local small business the same way Walmart does..cheap crap from China and Americans love that stuff!!  Sad really....
Dec 2, 2013 1:02PM
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The drones are an interesting idea - still plenty of kinks to work out.  I've often wondered why a company like DHL or Roadway Package Systems wasn't a takeover target for Amazon - it would make perfect sense.  I'd like to know what percentage of UPS or FedEx business comes from Amazon - a merger deal would be an interesting play.

Eventually, Amazon is going to have to do something to turn in some serious bottom line numbers.  Bezos has been talking about looking 5 years down the road for profits for more than a decade.  Now they make $132 million on $70 billion in sales - still terrible ratios.  Eventually, they need to make big profits and return huge chunks to investors.

Dec 2, 2013 1:38PM
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Make it happen by 2015 and start selling the flex capacitor!  Then we can go back in time and buy the right stocks.  Remember, the Cubs win in 15 as well!
Dec 2, 2013 2:34PM
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Liability does not seem practical to me
Dec 3, 2013 5:56PM
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I don't think they've completely thought this through. What happens when a helicopter blade takes some kid's fingers off or kills the family dog? What happens when one breaks down mid-flight and crashes in a busy intersection? Cool idea but the public is going to want assurance that these things won't hurt anyone.
Dec 2, 2013 1:47PM
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Why does this article assume Bezos is taking aim at other businesses? I would think it more likely that it's just good business.
Dec 2, 2013 1:13PM
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The most ridiculous stuff I've ever heard of. Those things couldn't tote much more than a pack of cigs. I've done RC for years and your not gonna lift alot of stuff with an electric motor even if using 4 of them. This is some Jetson's day dreaming stuff. Best come up with a flying car and hover over to the front porch as it has about as much of a chance of becoming reality.

Dec 2, 2013 1:36PM
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I started LMAO at the concept...Now I had a chance to look into the eyes of a crazy man in the video.


We were giggling about the hunting type experience also...

Grandpa and Grandma, will panic when one lands in the driveway...Grandpa will "shotgun" it...


I just figure MasterCard will be renting them from Amazon for their "free delivery" scam.

It will also be fun watching them going through trees or power lines.....not !!

Me and the kids have even flown some of these type things years ago.

Dec 2, 2013 1:43PM
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I wonder what the shipping charge for the 30 minute delivery will cost.
Dec 4, 2013 1:59PM
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If one flies over my house it will be shot down.
Dec 2, 2013 6:21PM
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I seriously doubt this is going to happen even five years down the road. What exactly does the FAA have to say about all those robotic aircraft whizzing around in urban air space? Even at low altitudes there will have to be some kind of oversight  if only by local authorities. The legal liability issues are going to be a real monster to overcome. I keep thinking of all the hackers out and about planning on hacking into the radio frequencies used to control the drones. Add to that all the idiots with slingshots, pellet guns and shotguns salivating over the idea of all those aerial targets zooming over their heads.  Being viable  in five years is day dreaming at best. Flying the drone from a warehouse to your house may be easy to accomplish but there are just too many variables in between that will make this idea crash and burn.
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