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Why Drones Are Not a Pie-in-the-Sky Investing Opportunity


Amazon's Prime Air delivery is just the beginning for commercial unmanned drones.

Some music fans at the Oppikoppi summer festival in South Africa last month quenched their thirst with cold beer dropped by parachute from a drone called, appropriately, Manna, as in the biblical "manna from heaven."

It was an experiment, and it worked. No parachute piracy or misdirection to teetotalers was reported. Nobody got an accidental beer soaking, even though it was delivered in plastic cups.

They ordered up their cold ones via smartphone, and it got delivered via unmanned drone, from 50 feet up.

This is just one good reason why the revelation from Amazon (NASDAQ:AMZN) founder Jeff Bezos, in a recent CBS News 60 Minutes interview, that his company plans to introduce 30-minute delivery by unmanned drone, is not some cockamamy scheme, as was widely reported.

Nor does Bezos deserve the many online video parodies his comments spawned, although the one titled My Sneaky Sausage from ad agency Red Pepper is pretty good.

It may be five years before Amazon gets its drones in the air, at least in the US. But it will happen. The development of the drone industry, now in its infancy, could have an enormous impact on both personal technology and business operations.

In fact, use of drones by civilians is already fairly common, although its applications are limited within the US until federal privacy and safety regulations are developed.

Farmers are using drones to monitor their crops from the air. Oil and gas firms use them to survey potential drilling sites. Photographers and movie-makers use them for aerial shots. Hobbyist groups like DIY Drones are popping up.

And even if Amazon can't deliver via drones yet, it can sell them online. A little four-pounder called the Parrot AR.Drone 2.0 Quadricopter can be yours for $267.99, marked down from $299.99. The controller for the device, made by Parrot Inc., is an app for Android or Apple (NASDAQ:AAPL) iOS devices.

A more workaday but still pint-sized drone might cost about $3,000 today.

And that price tag is the key to the drone's increasing popularity. The US military paid millions for the Predator drones that were designed to drop missiles on terrorists in remote locations.

The Predator has been in the air since 1995. Much of the technology that was new and expensive then is inside our smartphones now.

So, the price is plummeting, and a new industry is emerging.

But not quite yet in the US. The Federal Aviation Administration (FAA) is working to write regulations on privacy and safety related to civilian use of drones or, as the agency terms them, unmanned aircraft systems.

Meanwhile, some big companies besides Amazon are exploring their uses, though few details are being volunteered.

Delivery company United Parcel Service (NYSE:UPS) is said to be testing drone delivery, although it would not confirm or deny the report by

Frederick W. Smith, founder of UPS rival FedEx (NYSE:FDX), has expressed interest in using delivery drones-and impatience at the wait for regulations that would get the industry moving.

The shopping division at Google (NASDAQ:GOOG) is said to be testing drone delivery, too. Google even donated $5 million to the World Wildlife Fund to pay for use of drones to collect data on illegal poaching of endangered species in Africa.

Until new regulations are in place, it is illegal to sell or buy services using drones in the US, and has been since 2007. Private use on personal or business property is permitted.

Just last month, the FAA issued a "road map" for expansion of drone use. It is expected to allow six commercial test areas to be designated in 2014. These may be modest, using only small drones in less-populated areas.

Privacy, not safety, seems to be the primary concern, at least in Congress. Nobody seems to be imagining the potential collision of a large order of Chinese food and, say, a 30-pound box of cat litter in a densely-populated neighborhood.

If there are plenty of American companies eager to use drones, there are others just as eager to build them.

High on the list are what you might call the retoolers, the big military contractors who developed and built drone technology for the US Army.

The US military is likely to be using drones long after the winding down of the conflicts in Iraq and Afghanistan. But with our most visible presence there-our "boots on the ground"-leaving the scene, the political pressure to cut defense spending is likely to grow. The contractors are looking to adapt to peacetime applications.

Those names include Northrop Grumman (NYSE:NOC), the manufacturer of the Global Hawk drone, and Raytheon (NYSE:RTN), which built a Miniature Air Launched Decoy (MALD) drone.

There's also Textron (NYSE:TXT), which builds drones through its Textron Systems unit, although it's better known for its Cessna planes and Bell Helicopters. General Atomics, an old name in nuclear technologies, produced the Predator drones through its Aircraft Systems affiliate.

These venerable names will have competition from entrepreneurs like Chris Anderson, former editor of Wired magazine and founder of 3D Robotics, a maker of "personal drones."

The Mayfield Fund announced this week that it will invest $6 million in 3D Robotics, bringing its total funding to $35 million.

Anderson has said he expects to be able to sell a ready-to-fly personal drone model called IRIS for about $750. Higher-end models will be geared for commercial uses.

For now, the company has its holiday shopping site up. Drone-building kits are available for under $400.

See also:

Amazon Drones and Google Robots Are Cool, but What About the Humans?

10 Companies Whose Customers Do the Advertising for Them
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