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TheStreet Open House

Jeff Bezos' Drone Plans Are Bigger Than Anyone Imagined

Stocks in this article: AMZN UPS FDX

Updated from 9:38 a.m. to include additional analysis on UPS in the ninth paragraph.

NEW YORK (TheStreet) In yesterday's letter to shareholders, Amazon (AMZN - Get Report) CEO Jeff Bezos touched on a number of initiatives, but perhaps the biggest is the company's plan for faster delivery. Not only is the Internet retailer really serious about providing a better experience for customers, its drone plans are bigger than anyone imagined.

This particular passage from the letter to shareholders was beyond startling, revealing the ambitious scale of Amazon's plans for drones, which were initially revealed just a few months ago:

Also See: Amazon's Grand Ambitions

"In partnership with the United States Postal Service, we've begun for the first time to offer Sunday delivery to select cities. Sunday delivery is a win for Amazon customers, and we plan to roll it out to a large portion of the U.S. population throughout 2014. We've created our own fast, last-mile delivery networks in the UK where commercial carriers couldn't support our peak volumes. In India and China, where delivery infrastructure isn't yet mature, you can see Amazon bike couriers delivering packages throughout the major cities. And there is more invention to come. The Prime Air team is already flight testing our 5th and 6th generation aerial vehicles, and we are in the design phase on generations 7 and 8."

The fact that Amazon and its Prime Air team are testing 5th and 6th generation aerial vehicles (read: drones), and working on gens. 7 and 8, despite the fact they aren't even ready for prime time yet is beyond amazing. We first heard about Amazon's plans for aerial delivery vehicles in December, when Bezos appeared on CBS' 60 Minutes, and showed off the technology to interviewer Charlie Rose. Rose promptly responded with "Oh my God!" when seeing the technology at work.

In December, Amazon said it expects to roll out the service by 2015, and is working with the Federal Aviation Administration to get the drones regulated. "Putting Prime Air into commercial use will take some number of years as we advance the technology and wait for the necessary FAA rules and regulations," Amazon said on its Web site. So far, there have been no changes to that plan, and it looks as if Prime Air is still on track for a 2015 roll out, assuming it complies with FAA law.

Prime Air is a clear shot at the business models of UPS (UPS - Get Report) and FedEx (FDX - Get Report), as Amazon seeks to take delivery of its packages into its own hands. 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 fourth-quarter, it had worldwide shipping costs of $2.344 billion, and $1.21 billion in net shipping costs. Net shipping costs accounted for 4.7% of of all worldwide sales.

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. 2013 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.

Also See: Amazon's Drones Set to Take Out UPS, FedEx

During the 60 Minutes 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. If Amazon is already working on the seventh and eighth generation versions of these drones, it's not unreasonable to think that, by the time they roll out to the public, they could carry packages larger than 5 pounds, at a distance of longer than 10 miles.

Following the interview in December, UPS also said it was researching drones for delivery. "The commercial use of drones is an interesting technology, and we'll continue to evaluate it. UPS invests more in technology than any other company in the delivery business, and we're always planning for the future," UPS told ABC News in a statement.

Call this a pipe dream all you want, but Amazon is spending research and development dollars on building out these drones, so it's obvious the company is serious about this initiative. Whether it succeeds or fails, is anyone's guess, but Bezos and team are building upon a moon shoot, much bigger than anyone, including you or I, imagined.

--Written by Chris Ciaccia in New York

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