Key Takeaways from 2018 for the Drone Industry

Everyone knows that DJI dominates the drone market and that competitors are struggling on the platform front. It is also well known that software service providers for drones took a hit in 2018 with the closure of Airware. Why has the drone market evolved in such a way?

It begins with the macroeconomics behind DJI’s remarkable rise. In 2015, when the hype about consumer drones was at its nadir, DJI’s profile was comparable to that of American drone manufacturers like 3D Robotics (3DR). Due to a number of factors, DJI experienced transformative growth while others floundered. 3DR had to cease the production of their drone platform due to technical issues and poor sales, while more established platform manufacturers like France-based Parrot continue to post disappointing financial returns.

What makes DJI preferable? It is not its price point, for one thing. Its drones have consistently received better customer feedback than its equivalents in the U.S. market. In the case of GoPro’s defunct Karma drone, problems with delays were confounded by technical issues while 3DR’s Solo received bad feedback from consumers. DJI’s success can largely be attributed to its in-house resources and its ability to design, manufacture, and market its products in one city (Shenzhen), with one research and development team being localized next to the factory, thereby shortening its product design cycle as a result. This is in stark contrast to the way Silicon Valley has operated—where charismatic tech evangelists build their manufacturing offshore to less developed countries with competitive wages, incurring time delays and slower research cycles as a result.

This was certainly the case with 3D Robotics. Their response was to prioritize software (primarily focused around analytics), and eventually they partnered with DJI. A well-received notion within the industry was that DJI would be the dominant hardware producer (where value was decreasing) while the real of value of software and analytics-related services would be provided from startups.

The problem with this dynamic is that DJI, as the only significant manufacturer of drones en masse (that is, in millions of units), has all the bargaining power to pick among the different software-as-a-service providers, as they are very likely to be operating on DJI platforms. 3DR, now offering analytics services, partnered with DJI in early 2018 but that relationship has since ceased.  As the sole supplier of most platforms, DJI can partner with a wide range of analytics firms, develop in-house capability, acquire those who are offering unique services, and interchange partners at their leisure. After working with software provider AirMap since 2015 to improve geofencing, DJI split that partnership to work with PrecisionHawk to access their geospatial data. Instead of software firms challenging DJI, they reinforced it by becoming peripheral actors within the Chinese giant’s ecosystem.

For another example, Kespry is a drone company focused on the construction sector. It has combined a unique drone platform with a dedicated software service. Considered to be one of the more promising service providers, Kespry has developed a working relationship with DJI and is increasingly sidelining its own hardware for DJI equipment.

While most commentary suggests that the platform represented the rudimentary part of the drone market, it is in the software services market where we are seeing consolidation through mergers and acquisitions. One of the software-specific companies that has succeeded in 2018 has been PrecisionHawk, who has managed to acquire five companies— including Uplift Data Partners, Hazon Solutions, InspecTools, AirVid, and Drones.io—in 2018. These acquisitions are primarily focusing on expanding the breadth and market penetration of PrecisionHawk and on expanding the network of pilots trained under PrecisionHawk’s service.

The value of the consumer drone market is gradually depreciating relative to the commercial space where regulatory reform is increasingly being tailored to commercial applications.

The year 2018 was considered a bad year for many drone hobbyists. The same community that had done a lot to popularize the technology felt rather sidelined with the U.S. Federal Aviation Administration (FAA)'s FAA Reauthorization Act of 2018 and its revocation of Section 336, a law that was written to safeguard the use of consumer drones in U.S. airspace under the guise of remote-control toys. With that section revoked, the FAA will tailor regulation toward commercial operators and away from the hobbyist community. Among the new regulations affecting consumers are:

• Flying for hobby or recreation only
• Registering one’s model aircraft
• Flying within visual line of sight
• Following community-based safety guidelines and flying within the programming of a nationwide community-based organization
• Flying drones under 55 pounds unless certified by a community-based organization
• Never flying near other aircraft
• Never flying near emergency response efforts

Up to this point, hobbyists only had to register themselves as pilots. Requiring each drone to be registered—as commercial pilots must do—allows for the implementation of remote ID tracking and the possibility of creating a system such as an Unmanned Traffic Management (UTM) for tracking which drone is flying what item where.

The Gatwick incident, where one single drone disrupted one the U.K.’s premier transport hub for days and angered tens of thousands of commuters, will result in further regulation that enforces strict procedure related to the flying of drones for recreational purposes in the United Kingdom.

As showcased by Vodafone’s research, the deployment of 4G Long-Term Evolution (LTE) Subscriber Identification Module (SIM) cards within drones represents an opportunity for telcos and lawmakers to develop more full-proof UTM systems that can track drones and identify their operator and source. Also, 5G will provide further capacity for regulators and telco providers to track and manage drones. However, despite the development of Low Altitude Authorization and Notification Capability (LAANC) by the industry and the fact that the FAA that allows for automated and streamlined approval of access to restricted airspace, a more comprehensive integration of UTM architectures remains a way off.

For budding market entrants, the service business appears to be consolidating; DJI still dominates the hardware market. Areas of significant growth potential will be in finding niche applications where there is a desire not to use DJI (e.g., in public, civil, and security areas) and in improving the aerodynamics, flight time, and hardware of drones.

Impossible Aerospace is a new market entrant that has advertised itself as a drone made solely in the United States (very much in line with the gradual reorientation of the economy). It is targeting civic markets such as fire departments, police forces, and first responders. In most cases, off-the-shelf drones are inadequate for these use cases because they have limited flight times centering around 30 minutes. The DJI Inspire II has a flight time of around 38 minutes while the US-1 (Impossible’s first offering) has a declared flight time of 120 minutes—making it viable for surveillance of disaster zones and extended operations. Both 3DR and GoPro were criticized for seemingly outsourcing the design of their drones to companies that were not well experienced in developing innovative aerospace systems. The emphasis instead was on building software, but as is becoming clear, the limitations of modern drone hardware leaves ample room for innovation, particularly relating to flight time, remote charging, and the development of hybrid and vertical takeoff and landing systems. Such a system could take off and land like a traditional multirotor but have the range and payload capacity of fixed wing and be resilient. These systems are likely to be expensive in the short term and will have applications primarily in the military or in long-range commercial inspection (such as pipelines and offshore assets).

On the consumer front, Skydio’s 1—priced at about US$2,000, housing 13 cameras, and utilizing Nvidia’s Jetson technology for localization, mapping, and navigation—is being touted as an alternative to DJI’s offering and is a realization of the promises that were made by Lily Robotics regarding facial recognition and autonomous following. While it received good customer feedback, DJI’s lower price point (at about US$400 for a Spark) will make success in the consumer market very challenging.