Game of Drones. A Winner is Coming.
Is this another drone hype or could it be finally taking off? The drone ecosystem is developing fast and showing signs of finally hitting out. Drones are best known for their military and hobbyist or recreational use, but that’s about to change. We are now seeing increasing commercial adoption of the technology driven by strong cases for ROIs. Drones are already providing cost reductions, time saving and improved quality of data in industries like telcos, construction, energy, agriculture, security and emergency services. Complicated or dangerous inspections, surveying, surveillance and manual tasks, such as cleaning wind turbine blades, are the kind of tasks drones are impacting. They can achieve in hours what humans may take days or weeks to do, with higher precision and efficiency, at a fraction of the cost and without risk to human life.
Historically various sectors were struggling to find a use case for drones and required education about the drones space. The conversation’s now changed from, can drones be useful for our business, to where and how can we best leverage drones to drive ROI for our business? Increasing numbers of large enterprises have set up drone departments and have invested in pilots and hardware – now high quality and widely available at affordable price points. We see this in infrastructure and construction, agriculture and insurance, where the ROIs are particularly strong. A US (Blue Research) survey revealed that one in ten companies with revenue over $50 million use drones, with the highest adoption in construction and engineering (35%).
Another promising sign is the increasing number of exemptions being granted and a change in attitude and practice by aerospace regulatory bodies such as the FAA and CAA. Historically known to be sluggish, the regulators are now moving faster to match the pace of technological developments. They’re also responding in more measured tones to nefarious drone mis-use cases like the recent drone sighting at Gatwick Airport, the swarm attack on a Russian military base, and cases of drug trafficking into prisons. Off the shelf drones are also becoming an issue in war zones.
DJI is currently the undisputed market leader in the hardware space with only two or three other incumbents sharing the market. We anticipate further US or European competitors appearing soon in the space given the boom expected in the commercial segment. We see a gap in military drones and the less sophisticated hobbyist drones but expect DJI to fill this to serve the growing commercial segment. Due to this gap, some industries are either modifying DJI drones or custom-building drone hardware for their specific needs. Additionally, we think that there is room for technological improvement in battery performance (currently less than one hour), integrated air traffic management and detect-and-avoid technologies. These are integrated into current drones on the market but they are relatively unsophisticated. Recovery systems still use conventional parachutes and location technologies reliant on GPS, which is limited in certain areas. Landing facilities and charging stations are also ripe for development.
“It’s possible that the data collected from drones will be more valuable than drones themselves”
Hardware is Hard!
Given that drone hardware is mostly commoditised, with DJI China dominating the market, we feel that software is where a lot of opportunity lies. This can be split into: control, mission planning and data capture, image processing and analytics. The different industries define their needs, so for example, insurance will be different to agriculture. AI will play an important role in these platforms, particularly where repetitive automation is a feature. Digitisation of field assets through drone data collection and analysis can provide companies with useful insights that can help drive cost and time efficiency to gain competitive edge within their market. Therefore, it’s possible that ultimately the data collected from drones will be more valuable than drones themselves.
We also expect to see developments in swarming and counter drone technologies. Swarming has gained a lot of military attention, but we have seen other use demonstrations – the Intel drone firework display being a colourful example. Governments and regulatory bodies are rightfully concerned about the adverse effects of the anticipated widespread adoption of drones. Currently there is threat from careless and malicious misuse, but we may start seeing criminal use of drones in drug trafficking or even military-style aggression. Currently, there is a lag in the counter-drone space and present solutions are not sophisticated enough; we know of only one counter-swarm solution for example. Regulation is still heavy in this area and only defence departments can currently employ counter-drone technologies. Private and public use is illegal so the only customer base for companies developing these technologies is government and defence. Drone guns, lasers and flight jamming equipment are the form this counter-drone technology is taking, so it’s perhaps not surprising that it is still so tightly regulated. Drone taxis, drone flight insurance and micro/nano UAVs are other, less sinister areas of development we expect to see in the near future.
Drones in the UK?
The UK is expected to account for 10% of drone spending between 2017 and 2021, making it a market leader alongside the US, China, Russia and Australia. Drones are set to contribute around £42 bn to the UK economy by 2030 through automation of repetitive workplace tasks and de-manning of dangerous processes. The most likely areas of growth will be in the electricity, oil and gas, mining and agriculture sectors. PwC recently established a team of six drone specialists in the UK to help clients take advantage of the technology. Alongside this, there are to be major changes in the way air traffic is regulated and controlled. The UK’s busy skies will hopefully become more, not less drone-friendly.
Proof of Excitement: Notable Investments and M&A
The value of the top ten largest investments in the drone industry during 2018 exceeds more than £170m, according to exclusive research carried out by Commercial Drone Professional. The scale of funds injected into the industry demonstrates private investors’ growing appetite for the sector and sets a benchmark that will likely be exceeded in 2019. Due to investments in hardware being unfruitful, with start-ups like Airware crashing a few months ago post $118M investment (Parrot and 3D Robotics are also heading that way), we are seeing investors become reluctant to touch the space. DJI is a threat to any drone business due to their saturated market presence and rapid development pace. Although they have historically been in the hardware space, DJI has been known to move into partner spaces so this is a key risk.
Some Notable Recent Investments:
-Seraphim Capital’s investment into QuadSAT (£700k, 2019)
-Energize Ventures led investment into Drone Deploy ($25M, 2018)
-Third Point Ventures led investment into PrecisionHawk ($75M, 2018)
-Mosaic Ventures investment into Auterion (2018)
-ETF investment into Flyability
-Anthemis investment into FlockCover (£2.25M, 2018)
-Pavilion Capital investment into Airobotics ($30M, 2018)
-Verizon’s acquisition of Skyward, Boeing’s of Aurora and Snapchat’s of XCTRL (all 2017)
-Intel has acquired two German-based drone businesses, MAVinci and Ascending Technologies
-Ctrl Me Robotics acquired by Snap
-Liquid Robotics acquired by Boeing
As you read this, drones are already up there, inspecting, scanning, cleaning and racing. Whatever happens next, things are definitely looking up.
With Thanks to all Contributors to this Deep Dive:
Koby Tanzer – Imperial Capital (Since 2017, Imperial Capital’s dedicated UAV/UAS coverage team have been providing capital raising and M&A advisory services to companies and investors in the industry. In addition, the firm has been writing independent research on topics highlighting the leading trends in the market today (latest report linked here). For more information, please contact Koby Tanzer at [email protected])
Daniel Carew – Seraphim Capital
Conor O’Sullivan – Seraphim Capital
Rupert Dent – Bridgeway Aerial / ARPAS – the UK Drone Association
Michael Blades – Frost Sullivan
Gretchen West – Hogan Lovell
Jaspreet Makkar – We Do Sky
Elaine Whyte – PwC
And companies including:
vHive, Marble, FlyLogix, AgroFly, HEMAV, We Do Sky, Bridgeway Aerial, WeCorps.