The Economics of Commercialization

I recently enjoyed a not very well attended talk on the economic benefits of AUVSI_Economic_Report_2013_covercommercialization. Not for a lack of interest or potential economic boom associated with UAS was it sparsely appreciated, but the belief that of course there is wealth to be gained… in 2015. Those who wish to seek the benefits of UAS integration, however, should look to the commercialization component of integration not as a determined factor for the pathway to the 2015 deadline, but as a a highly-dynamic, evolving route that is best described as fluid.
This presentation by Darryl Jenkins addressed a March 2015 Economic Impact Study published by the most significant lobbying group for Unmanned Aircraft Systems AUVSI. While this study had its flaws, both addressed and not addressed, this presentation hit on some interesting thoughts that should be understood in moving through the integration process for anyone seeking to be involved commercially.

Purpose

As described by Jenkings, the Purpose of the Economic Impact Study was to determine what the commercial components of UAS industry will look like in the near future and what must be done along the way to ensure market vibrancy and participation at many levels. Size of the industry,Where the industry will be located geographically, Who will participate the most, and What the market segments will be as unique from manned aviation, were all incorporated into this report from an early stage. The most important component, though, was “not the numbers, but the necessary conditions” for developing the commercial space and markets. Remember, this is a report conducted and published by AUVSI – the leading proponent of commercial UAS in the National Airspace – and therefore the motive is clear; to convince the reader and guide the integration process. As Jenkins put it, the Study was very much geared to “kick regulators in the butt.”

Necessary Conditions and Mistaken Assumptions

I have to applaud Darryl in presenting the study.  He did address some failings of the report and offered insight as to how it should be changed alongside the conditions necessary for developing an open marketplace for UAS. Among these outdated assumptions were that the UAS industry will be “much bigger and more diverse than previously thought” and that “precision agriculture will not be the largest market segment.” This alone is insightful as agriculture has quickly become the most touted UAS economic story of the year – though this is probably due to the easy manner by which drones can be incorporated into agriculture, the locations that such operations take place, and the lack of oversight in the middle of the country from FAA.

drone The most important “necessary condition is insurance… required in all foreign countries that have commercial UAS.. and the US will be no exception.” Insurance, will “be the 800 pound gorilla and will determine which segments grow and which die.” I have been saying this now for months and believe that insurance is the key to identifying who operates where. The size and likeliness of payouts in coverages for UAS will be very high and the risk associated in operating in largely populated areas will be extreme. This is an interesting thought – it may be that the insurance companies lead the way to where and when operations take place. It may be the insurance companies that in fact limit operations more so than the FAA classification and access systems as a pizza delivery company cannot gain adequate coverage for it’s high risk nature but a power line company can as their areas are remote, with few people and with little likelihood of causing damage. Further, commercial sales often require finance and the lender will demand insurance to protect their investment. Governments may pay in cash, but in most commercial transactions on larger scales, financing is involved and therefore again, insurance will be required. dominos

The notion of insurance as a necessary condition will develop entire ranges of infrastructure including UAS appraisers, maintenance shops that are recognized by insurance companies, VIN numbers to identify a companies particular vehicle, specialized safety training and operational and business organization training, and registry within a larger system. None of this exists now. Who will fill the gap? Will it be traditional Aviation Insurance organizations? Will it be government agencies? Will it be you?

Currently only three small insurance firms specialize in drone insurance – this number is sure to grow.

Yet to be Studied (I Forgot Syndrome)

The impact study is highly deficient in identifying all the required fields moving forward. This, however, cannot be attributed to Darryl Jenkins or the AUVSI team. They have done a pretty good job outlining many systematic needs beyond FAA approval. The industry will take time to develop and may go a route that is completely unforeseen. Question raised by Darryl in this presentation, and by myself in reaction to the presentation include:

  • Will manufacturers also be operators?
  • What are the differences in operations between large UAS and small UAS? Will this difference require differing infrastructure? At what level?
  • Will manufacturers be involved in safety training or data analysis of accident and incidents? Will the “off-the-shelf” nature of the UAS industry continue or discontinue moving forward?
  • Will registry be voluntary or mandatory? At what level?
  • Who is responsible for the data acquisition or data deletion? 179459_453181268105541_556741267_n

Of course privacy was also addressed – because we can’t write anything about drones without addressing privacy – and I really don’t want to get into it as it is a rather stale take on privacy. So, since this is my article, I won’t.

 

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