Good morning,
A quick note about yesterday’s update: I made an error here:
This number was a bit of a surprise; the Wall Street Journal reported a month ago that the company made $566 million in 2012.
In fact, the Wall Street Journal was reporting the number for 2013 (which was my original assumption). Yesterday, while attempting to investigate the difference, I simply misread. I apologize.
As a whole, I don’t think it takes away from the broad thrust of my piece, which argued that Xiaomi is seeking to postpone profit in the hopes of building something more sustainable. At least, it doesn’t detract from the theory. The question is whether or not it reflects the reality. Xiaomi is claiming the financials reported by Reuters this week are not correct, but only time will tell. I apologize for the error.
Today’s update is a special treat: James Allworth, my co-host on Exponent is filling in for me today. I’ve given him a blank canvas, so James, on to you for the update:
Thinking Twice on Drones
by James Allworth
Late last month, a draft of the FAA’s proposed rules relating to the regulation of drones leaked to the press. Set to be finalized by the end of the year, a quite stringent set of restrictions look set to be introduced on the use of drones weighing less than 55 pounds. These restrictions include flying them only in daylight, keeping them within line of sight of the operator at all times, and requiring a pilots license to operate one in the first instance.
The nature of the proposed rules — and their timing — meant they flew into a perfect storm of criticism:
- The FAA seems to be entirely focused on drones less than 55lbs — not focusing on unmanned aircraft weighing more than that. At face value, it’s the equivalent of regulating bikes and cars, while ignoring semi-trailers and buses.
- The FAA isn’t distinguishing between any drone categories weighing less than 55 pounds — meaning that a 40 pound, 10 foot, gas-powered Scan Eagle would be subject to the same set of rules as a 3 pound, 1 foot, battery-powered Phantom.
- The rules would now extend to non-commercial uses of drones. This would impact the hobbyist community, which has previously been unregulated. This would happen right as the use of drones for recreational purposes explodes.
- And finally, it seems that every other country in the world is moving in exactly the opposite direction. Canada, for example, just announced a blanket approval for commercial drone flights involving drones weighing less than 4.4 pounds.
Stepping back, there’s little doubt that these drones will represent a massive disruptive force within a range of different industries.
How so? Well, one obvious example: shipping. It explains the interest of a rather well-known proponent of small UAVs. Amazon is fighting so hard to get drones approved because of the potential for them to deliver packages both quickly (flying) and cheaply (automated with no humans) — bypassing traditional delivery mechanisms such as UPS. Shipping costs for Amazon have gone up from 7.2% of sales in 2009, to 8.9% of sales last year. Finding ways of getting that under control would be a huge, scalable advantage.
This is but one of many potential use cases.
As someone who has been critical of the US regulatory environment for its stifling impact on disruptive innovation, this looks like just another example of America snatching defeat from the jaws of victory. Ben and I talked on Exponent 27 about how much the US has benefited from hosting wave after wave of disruptive innovation — but that recently, the attitude within the country seems to be shifting from encouraging disruption to protecting incumbents. Jeff Bezos certainly implied that the UAV industry is at risk in America as a result of the regulation, that Amazon might need to move their research and development overseas, and that overseas markets could have drone deliveries before the U.S.: “I think it is sad but possible that the U.S. could be late”. Frank LoBiondo (R-NJ) also took a similar tack at a recent hearing on drones: “I can’t help but wonder: If the Germans, French and Canadians can do some of these things today, why can’t we also be doing this? Are they smarter than us? I don’t think so.”
Given all this, it might surprise you that I think that the FAA slowing things down makes total sense. In fact, I think there’s a solid argument to be made that the risks these devices pose warrant a much, much more considered approach than the one that even the US is taking.
To explain why, I want to start by taking you back to Sydney, a little over a year ago.
If you ask most folks whether anything of particular interest happened in Sydney in October of 2013, you’d probably get a lot of blank stares and shrugging of shoulders. If you lived there, you might remember that the International Fleet Review was happening. Or, if you’re a particularly die-hard Rihanna fan, you might also have known that she was touring in Australia at the time.
It turns out that during this time, a member of Rihanna’s support crew lost control of a drone they had brought with them to film the tour. It crashed.
The reason I bring this up is where it crashed: on a set of train tracks. And not just any train tracks, either. But train tracks on one of Australia’s most iconic landmarks: the Sydney Harbour Bridge.
On the day before the International Fleet Review started.
You’ll probably get some sense of where I’m going with this. If not, the quote from the train driver who came across the drone might help:
“It’s an odd looking plane, it’s got a red light flashing, I don’t know whether it’s a bomb or not.”
Of course, it turned out this wasn’t a bomb at all, but rather a good drone gone bad. It was just an accident. But it doesn’t require much in the way of imagination to see how this could have been much more malicious.
The FAA seems to be very conscious of scenarios like the one that played out in Sydney: the possibility of unintentional cause of harm by these devices. There’s no doubt that the possibility of this continues to increase as drones proliferate. But what seems to be getting much less coverage is on the topic of drones being deliberately used in an illegal or harmful way — in other words, used to intentionally cause harm. To me, this has been surprising: because the scope for such activities is extraordinarily high, and the ability to both limit their use in such ways, and hold such actors accountable, is equally low.
What’s driving this possibility is the relentless pace of improvement and lowering of cost of devices in the space. It wasn’t that long ago that drone use was limited to very niche activities due to how much the devices cost, and the technical limitations involved. The past few years have seen that change completely. You can trace it back to a number of different points, but the Parrot AR.Drone really captured the public’s imagination; simple, easy to pilot, had a live camera, and was relatively affordable. Now, it seems like every week there is a new drone popping up on Kickstarter, and the power and sophistication of such devices continue to increase (this looks like it’s been sped up) almost as dramatically as their prices continue to drop.
There are many wonderful uses — commercial, recreational, scientific, and artistic, that have opened up as a result of this. But the simple fact of the matter is, these drones are also a physical device that can be remote controlled or programmed, can fly, and can’t easily be traced back to their operator. In effect, they are a manifestation of a person — even able to do things that a person could never do — but without the person actually needing to being there. Another term for this is an avatar — except that, rather than a digital one in the online realm — this is an actual physical one, one that can interact with the real world.
Unfortunately, malicious use cases abound. Paparazzi immediately come to mind: right now, they stalk their prey with telephoto lenses, or even helicopters. As bad as these might be, imagine what it would be like in a world in which drones are ubiquitous. With photos of celebrities capable of earning photographers hundreds of thousands of dollars… how many people do you think are going to be willing to risk the loss of a few $1000 drones in order to secure a great shot? And while you can force down a helicopter, or arrest a photographer hiding in the bushes, what are you going to do about a swarm of 2 foot device flying overhead, and which ultimately, are cheap to the point of being disposable anyway?
And even this scenario is relatively benign in terms of misuse. Sydney has, unfortunately, been in the news for a pretty tragic event this week. Traditionally, in order to do what Man Haron Monis did, you’d need a human on the ground. There aren’t too many people out there willing to do this — in the case of using a firearm, they’re clearly risking their lives; and in the case of an explosive device, they either have to give up their life, or have to plant a device in advance, and quite probably be captured on surveillance footage as a result.
Drones change this dynamic entirely.
And in fact, it appears they already are. A drone has flown a flag into a racially charged football match between Serbia and Albania. Earlier this year, there were drones flying over nuclear power plants in France. Their increasing sophistication means that they will be, if not already are, abie to penetrate what were conventionally secure areas. Swarms of devices of this like this — cheap, self-directing, and incredibly manuevarble — will prove to be difficult to stop. If I was responsible for protecting a high value target or individual, I’d be increasingly concerned about how I would manage such a threat. In sufficient numbers, they could be completely overwhelming. And it’s happening while one of the big things traditionally in my favor — that anyone willing to try to doing something like this risked loss of life, capture, or at the very least, revealing their identity — is being taken away.
Going back to the examples above, what is clear is that in both scenarios, things could have played out very, very differently. These stories at face value are examples of drones intentionally misused… but in relatively benign ways.
Unfortunately, it seems like only a matter of time before that changes.
There is a broader context to this — the US has pioneered the use of larger drones in a military context, and they have been disrupting traditional military aircraft for some time now. The US is increasingly relying on them as part of its military strategy (as a fun aside — one of my favorite Clay stories is the time he was invited to the White House to talk about disruption — only to arrive, and find he was briefing the full Joint Chiefs of Staff). The advantages of UAVs are obvious: not only a greatly reduced cost, but the possibility of pilot casualties are reduced to zero.
And while the initial emergence of drones has played strategically to the US — developing technology like the Predator is expensive, and only a few are able to afford it — as the technology improves and becomes cheaper, it becomes more broardly accessible. And suddenly, all the reasons why they’re attractive to the US military — reduced cost, reduced risk of casualities — makes them attractive to those people who have been on the receiving end of the new technology, too — people who are probably looking for ways to get even.
What’s scariest to me: it’s not entirely obvious how you actually stop them. What the FAA is doing is going to at least limit the potential for unintentional harm, and I don’t think that’s a bad thing. At some point, though, someone is going to try to use a small drone to do something malicious.
And, as they stand, these rules are going to do little to stop them.
An outright ban might make it harder to get your hands on one. But I’m not sure that would stop a determined actor. In fact, it might only draw more attention to drones’ potential for ill. Furthermore, there are now enough of these devices floating around out there that if someone really wanted to get one, it wouldn’t be that hard. A licensing system? Perhaps. But how to police it? You can pull over a car. What do you do about a drone? An army of “police” drones, quite literally shooting down UFOs?
And that’s the thing about disruption — whether in business, or in the other contexts in which it applies — the advantage often plays to the low-end disruptor, rather than to the incumbent.
With thanks to Andrew Nunnelly for his thoughts on an early draft of this.
Please note this piece is the sole opinion of James Allworth. I certainly find it interesting, and I suspect we’ll have a strong debate about this on this week’s Exponent — Ben