Drones: Losing Altitude or Gaining Control

A recent episode of CBS 60-minutes highlighted the U.S. military’s research and development around drone swarms and mission-centric self-converging fleets. Seeing these futuristic maneuvers of tiny drones, many of us might wonder about the future of commercial drones in year 2017 and beyond.

If we look at the investment landscape, the picture might not seem as glamorous as it once did. As per the venture data reported by CB Insights, 2016 was yet another record-breaking year for the number of deals in the drone segment. However, upon closer look many smaller deals are happening instead of few larger ones.

The number of deals in 2016 skyrocketed.

Average deal size is on a downward trajectory.

Do these charts mean that the commercial drone industry is losing its altitude? A recent Bloomberg article titled “The Drone Industry Crashes to Earth” certainly seems to indicate that. Plus, there are data points around layoffs at Parrot SA and a pivot of 3D Robotics away from the drone hardware business. Also, there’s no doubt in the industry about DJI’s supremacy in the consumer drone market, forcing many other players (CyPhy Works LVL1, GoPro Karma and others) out of the market before even entering.

Should we take these factual data points at their face value? Absolutely NOT.

How the drone market is analyzed is characterized by two crucial flaws. First, there’s very little, if any, distinction between commercial drone operations as opposed to mostly recreational use of drones. Second, and even more critical, is overlooking the software and platform pieces of the puzzle.

Hardware-Centric Analysis is Flawed

The first phenomenon about hardware-centric and mostly-recreational use drones is very easy to understand as we have seen a race to the bottom played out in consumer TVs, smartphones, and many other industries. Most of the drone segment investment analysis is inadvertently including either hardware or a monolithic end-to-end solution, including both software and hardware in the mix.

If the common component in the mix is pivoting in one way, naturally the entire analysis is going to be flawed. And we’re already seeing hardware getting increasingly commoditized over the past decade or so. Winning purely or primarily based on hardware is becoming a far-fetched dream.

Is a Platform Approach the Answer?

The second phenomenon of software, and more importantly the platform-oriented view, is a bit debatable for consumer industry pundits. For many years in the VC industry, “platform” has been generally considered a dreaded word and rightfully so, given the fact it’s extremely difficult to monetize platforms without the support of applications riding on top of them. However, without having a powerful platform in existence in the first place, applications won’t come forward. The result is the classic chicken-or-egg problem. Well, not always.

Although there are many more failures to quote on the platform approach, there are many success stories as well. Think Apple, Google, Facebook, LinkedIn, and Visa. Looking specifically at the drone industry, the conceptual alignment with the platform approach is much greater than the alignment without the platform approach. If we think of drones as mobile IoT devices mounted with various kinds of sensors for data collection, all the benefits of IoT platforms suddenly jump out in front of us.

Beware of a big trap, though! A lot of times, we make the blunder of calling our rigid, monolithic implementation of hardware and software a “platform” just to capitalize on the positive sentiments. Unless key attributes of a platform—openness, API-capabilities, loose coupling, and security—are present, it’s unfair to call anything a real platform.

So what’s the answer? The Commercial UAV Expo team, in their report 7 Commercial Drone Predictions for 2017 has brought forward a pragmatic perspective on where the commercial drone industry is headed in 2017.

Irrespective of the terminology debate, it reports that companies planning to focus on business-value and ROI-centric opportunities in the drone ecosystem—offering platform capabilities without fanatically binding themselves with commoditizing hardware—might have higher chances of success. Until then, we’re going to see more victims falling apart and more convergence among like-minded players—all signs of gaining better control and direction of the overall ecosystem.

Let’s navigate these uncertainties together. Are you ready for the wild ride?

PS: Macro influence factors of aviation regulations, compliance, safety, etc. are deliberately kept out of this post to focus primarily on the platform topic.