Updated from Dec. 2 to include comments from UPS about drones as well.
In an effort that could disrupt the very underpinnings of UPS (UPS) and FedEx (FDX), Amazon CEO Jeff Bezos unveiled Amazon PrimeAir on 60 Minutes Sunday, the company's new drone delivery service. Bezos says the service could allow packages to be delivered into the hands of customers in 30 minutes or less.
"I know this looks like science fiction," Bezos said during the interview, while unveiling the automated delivery drones. "It's not."
The normally secretive Amazon unveiled the drones to interviewer Charlie Rose, who promptly responded with "Oh my God!" when seeing the technology at work.
There's been a lot of early skepticism about the drones, with a parody Twitter account set up, and millions taking to other forms of social media to mock the new service. Bezos, however, appeared optimistic and excited about the new service. "It will work, and it will happen," Bezos said during the interview. "And it's going to be a lot of fun."
Bezos didn't disclose the cost of the drones, or how they would work, which are dissimilar to the drones that the U.S. military uses.
The idea behind the drones from the Seattle-based Amazon is to get packages and goods into the hands of customers with the drones originating from Amazon's many fulfillment centers. Amazon has said previously it intends to add a net seven fulfillment centers this year, with 89 as of 2012. Bezos noted during the interview Amazon is on its seventh generation of warehouses.
Currently, Amazon has Amazon Prime, which allows users to pay $79 per year to get free two-day shipping for goods. The service also allows users to watch movies and television shows, in an attempt to compete with Netflix (NFLX).
Amazon has never publicly disclosed how many customers have the Prime service, though it did say in its third-quarter earnings release it signed up "millions of new Prime members."
On Amazon's Web site, the company noted it expects to roll out the service by 2015, and is working with the Federal Aviation Administration to get the drones to be 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.
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.
In an article from The Verge, UPS said "[t]he commercial use of drones is an interesting technology." Sources close to the situation said UPS is also working on its own drone delivery service, while FedEx recently said the same thing. Neither company spoke about when the drones would be up and running, or whether it was economically feasible.
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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