Category Archives: Technology

Amazon Prime Air Drone

The Economics Behind Amazon’s Drone Delivery Service

“Amazon will be disrupted one day…I don’t worry about it because I know it’s inevitable.” These were the words of Jeff Bezos as he talked about the eventual death of Amazon. He said it calmly, like it didn’t keep him up at night. But with the pace and the grandeur of innovations coming out of Amazon, you might think he is working with the frenzy of a man trying to avoid death.

Amazon’s latest idea is an autonomous flying drone that delivers packages within as little as one half hour. In other words, Amazon becomes more instant than a drive to and from the mall.  The drones look like rather normal octocopter drones fitted with a box-grabbing mechanism on the bottom and a covered area on top which holds the motor and presumably some complex computing hardware.

A quick look at Twitter and some other articles shows that after people get over the Jetsons factor a common question is, “well how much does it cost?”

 

 

I’d like to take a look at the cost of drone delivery versus human delivery using simple back-of-the-napkin calculations.

The cost of human delivery

To determine the cost of human delivery, we need to compute the cost per package. Let’s determine the daily cost of a UPS delivery person and divide that by the number of deliveries he makes per day, or:

Cost of human delivery

 

Rate of driver: According to Glass Door, a UPS driver makes about $26-$28/hour. Let’s round it down to $25. Then let’s factor in gas, tolls and parking tickets and bump that back up to $30/hour.

# of Packages Delivered: According to a UPS driver forum, a typical driver delivers up to 250 pieces per day. Seems like they also work about 10 hours per day. I won’t calculate overtime.

So then the cost of moving a package from UPS center to front door is about $1.20 per package:

Cost of human delivery is 1.2

 

This does not include the cost of getting the package to the UPS center or the cost of whatever sorting UPS has to do, or any other overhead. So I presume it is on the extremely low side of things.

The cost of drone delivery

To figure out the cost of drone delivery, we also need to determine the cost of delivery per package. Let’s determine the lifetime cost of the copter, and divide that number by how many deliveries a copter can make in a lifetime, or

Cost per package - Amazon Drone

 

Cost of drone: An octocopter on 3D Robotics with autopilot and GPS navigation costs $1,000.  Amazon’s drones must also include the grabbing mechanism and presumably a more intelligent computer that can avoid other drones or hitting people as they land. Let’s say that Amazon drones cost $3,000, and they last 5 years. After maintenance and electricity costs let’s bump that number to $4,000. I won’t include the cost of whatever infrastructure it takes to manage this fleet of drones.

# of Packages Delivered: The maximum range of the copter, according to Amazon, is 10 miles. We’ll set the average trip at 5 miles one-way, so 10 miles round trip. And we still need to calculate how many trips they can do in their lifetime.

There is an interesting site which measures top speeds achieved on multi-copter drones. It says that 10% of pilots achieved speeds of over 50 mph. This seems very fast for autonomous drones zipping around above urban areas, so let’s say that they travel 25 mph on average. Most helicopters on the site seem to reach these speeds, and this is also about how fast they would need to travel in order to complete a 10-mile delivery within 30 minutes.

At these speeds, with a 5 mile average trip and time given for loading/unloading, a drone can make 2 trips per hour.

Drones are not confined by human working hours or working days, so I presume they would deliver during all times that a person might normally order a package. Let’s say 14 hours per day and 6 days  per week (a day off for maintenance). So in 5 years a drone can make 43,680 trips

Screen Shot 2013-12-03 at 6.37.59 PM

 

Our final calculation becomes the cost of the drone divided by the number of packages delivered:

Cost of Amazon Drone per trip is 9 cents

The estimate cost of drone delivery is 9 cents per delivery. Human delivery was $1.20 per delivery.

There could be errors in the numbers above. I put in no costs for additional infrastructure. I didn’t consider the cost of skilled employees who need to maintain and manage the fleet of drones. I don’t know if there are things like airspace fees, etc. But what I do know is that the lifetime cost of the drone would have to be greater than $50,000 to even be on par with the cost of human delivery. And the difference between drones and humans is that the cost of drones goes down over time…

The Conclusion

There are still a lot of questions here. Foremost in my mind is how many customers it will reach. With a 10-mile range and 14 Amazon Fulfillment centers, the drones can reach 0.14% of the land in the United States. Given that these fulfillment centers are not in urban areas, I presume that means that very few customers are in range. It sounds like Amazon will still need to leverage UPS or USPS to make this work, at least as “drone headquarters”.

Nonetheless, just back-of-the-napkin numbers make a strong case that this is a shrewd cost-saving move by Amazon. It is also a stark example of the lengths that organizations will go to in order to minimize high labor costs.  The lesson here is that if we are not constantly improving our skills, then our job will be outsourced or automated, because it just makes sense in a competitive free market. The consolation prize though, is that at least you can get those new sunglasses you ordered within 30 minutes, without even leaving your computer.