Is the Commercial Drone Market Ready for Takeoff?

October 17, 2016

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In this episode of TechTalk, we discuss the commercial drone market, including potential markets, barriers to entry and where capital investment is headed.


Transcript

Dave Plaskow: Hello and welcome to EisnerAmper’s Technology Podcast Series. With more than 500 hundred technology clients, we’re always interested in the latest industry trends and developments, as well as any related business and accounting opportunities and challenges. Today’s topic is the commercial drone market. You know, pretty soon you can’t look up in the sky and not see a drone. I’m your host Dave Plaskow and with us today is Dave Katz, Senior Audit Manager in EisnerAmper’s Technology and Life Sciences Practice. We like to call this TechTalk. Dave, welcome and thanks for being here.

Dave Katz: Thanks for having me.

DP: So just how big a deal is the commercial unmanned aerial vehicle – AKA, the drone market.

DK: It’s a big deal Dave. Commercial drone sales for 2016 should be in the neighborhood of 600,000 units and climb to about 2.7 million units by 2020 according to the Association for Unmanned Vehicle Systems International – that’s right, somehow drones already have their own association. The drone sector will create 100,000 jobs and add $82 billion to the economy by 2025.

DP: Nice. Now aside from the hobbyists who are just doing this for fun, what are some of the business uses for drones?

DK:So one of the major ones comes to mind is Amazon.com. Its Amazon Prime Air hopes to take your packages to the skies by 2020. That certainly presents some unique challenges with respect to privacy and liability, and it’s still being worked out. Some other commercial uses include real estate, entertainment, engineering, mining, agriculture, military, public safety, and that’s just to name a few. Just recently, CNN used drones to cover the flooding in Louisiana, and there’s also some ancillary commercial markets such as drone maintenance, security, insurance, and drone pilot certification programs. I’m sure as we continue to see this grow we’ll see it get into more areas.

DP: Now you were telling me an interesting story about how drones impacted you.

DK: Yeah, so I mentioned the real estate industry before. When I was looking for houses a couple years ago, real estate agents are now using the drone technology to give you an aerial shot of the property in the neighborhood. So it was great to see the bird’s-eye-view of the property of the house before I was able to see it in person.

DP: That’s great. Are there any barriers to entry, any challenges for getting into the commercial drone market?

DK: Yeah, at times it seems like the Wild West out there with respect to market entry, but there are several regulatory issues to consider. According to the most recent FAA regulations, which were as of August 29, 2016, those applying for a remote airman certificate will need to 1), pass an aeronautical exam; and 2) register their drone to the FAA; and 3) undergo the applicable TSA vetting, and the FAA also requires registration numbers on each drone. It’s certainly worth noting that a company’s owners do not need the certificate, just the person who’s actually flying the drone itself. And some other regulations – you must be at least 16 years old, cannot fly above 400 feet, use drones that are less than 55 pounds, you must fly them during daylight hours and not near airports or national parks, and you must be in line-of-sight of their drones at all times. And certain pilots can apply for a waiver for some of these restrictions, but certainly there’s a lot out there that you need to be aware of in order to fly these. And thus far, more than 3,300 people have signed up to take this exam.

DP: It’s starting to build some critical mass. Now you were telling me David, about your attendance at this year’s Propeller Fest in Hoboken, a technology event, and some pretty cool drone demonstrations that they had. Why don’t you share that with our listeners?

DK:Yeah, so I like to call it BYOD – Bring Your Own Drone – so I personally didn’t have a chance to fly one, but there were some skilled pilots who did bring their own, and they put on a show for the rest of us – racing through obstacles, and racing against each other, and the tech community really seems to be enamored with the drone sector. And the possibilities here, judging by the massive turnout, should continue to generate significant interest.

DP: Ok. Dave, you sent me an article the other day that gave an interesting glimpse of where drones are headed and how people will be able to monetize the drone market.

DK: Yeah, I was on ESPN.com checking out my fancy football team and saw an interesting article. So the Drone Racing League will now be televised on ESPN starting in October and November this year. So you have competitors, they’ll pilot the drones through obstacle courses in various cities against each other, and the league announced it had closed an investment of more than $12 million led by RSE Ventures and Lux Capital.

DP: Amazing. Now, who’s a big player in the drone market? Who’s a company that we should keep our eyes on?

DK:So in China, a company called DJI owns approximately 70% of the drone manufacturing market, and they generated about a $1 billion in revenue in 2015. It’s a unicorn startup and it raised $575 million in VC funding last year.

DP: You bring up a good point. Where is the money going?

DK:Venture capital has flowed into the drone sector. We’ve seen upwards of $855 million in VC funding last year. We expect the lion’s share of this to go, not to hardware or software companies, but to those companies providing the solution-based services we mentioned earlier. Now IPO activity unfortunately right now is nonexistent, but I’d say that’s certainly just for the moment and is ever evolving. Interestingly, there’s a successful publicly traded company, Ambarella, that makes the chips for the cameras in commercial drones. And as for those companies interested in pursuing an M&A strategy, they seem to be waiting for the dust to settle on all these regulatory requirements and liability issues that I went into detail before. So, for individual investors, there’s the Purefunds Drone Economy Strategy Exchange Traded Fund, and that includes more than 40 companies involved in the drone industry, so you can get invested in the space if you want to. And the good news is the commercial drone market is essentially in its infancy, we see a lot of growth, and with that certainly comes opportunities for investors, companies and the public.

DP: Well, Dave, thanks for this expertise and this great insight.

DK:You got it.

DP: And thank you for listening to TechTalk, as part of the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics, and join us for our next EisnerAmper podcast when we get down to business.

About John Pennett

john Pennett is the Partner-in-Charge of the National Technology and Life Sciences Group, and is a member of the Special Purpose Acquisition Company (SPAC) services team. H


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