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[video] Amazon's Drones Set to Take Out UPS, FedEx (Update 2)


This new service is a clear shot at the business models of UPS and FedEx, of which Amazon is a large customer. Amazon does not break out how much in operating expenses it incurs by shipping with UPS and FedEx, but it's clearly a significant portion of expenses. In Amazon's third-quarter, it had worldwide shipping costs of $1.53 billion, and $811 million in net shipping costs. Net shipping costs accounted for 4.7% of of all worldwide sales.

During the third quarter, fulfillment expenses totaled $1.96 billion, or 11.5% of Amazon's $17.09 billion in quarterly revenue.

By contrast, UPS generated $13.52 billion in revenue during the third-quarter, up 3.4% year-over-year, with $8.3 billion of that revenue coming from domestic operations. UPS recently announced it was raising 2014 shipping prices by 4.9% for "UPS Ground, Air and International, and Air Freight rates within and between the U.S., Canada, and Puerto Rico," according to a press release.

Similarly, FedEx announced in Sept. that FedEx Express package and freight rates would go up an average of 3.9%.

To curb those costs in part, Amazon recently announced a deal with the United States Postal Service to deliver packages on Sunday.

With the latest initiative, Amazon has continued to push the boundaries of industries it can disrupt, a fact that's not lost on Wall Street. Goldman Sachs raised its price target on Amazon to $450 from $400, citing the company's disruptive nature. "We believe Amazon, as the ecommerce leader, is the largest beneficiary of accelerating ecommerce growth and is well positioned to continue to outpace the growth of ecommerce by taking share in new verticals and geographies, leveraging its scale, infrastructure, technology investments, existing customer base, and considerable expertise," Goldman wrote in the note. 

During the interview, Bezos said the drones can carry packages up to 5 pounds for as much as 10 miles, with the drones originating from Amazon's vast fulfillment centers. Thought Amazon has never publicly disclosed how many fulfillment centers it has around the United States, Bezos did confirm during the interview the Seattle-based company is on its seventh generation of distribution centers.

Below is a video of what the service looks like.

Amazon has over 225 million customers around the world, according to the interview. Though drones (Bezos' phrase) are not coming tomorrow, it's clear Amazon is working on disrupting yet another industry. One drone at a time.

--Written by Chris Ciaccia in New York

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