#DigitalSkeptic: Bezos Will Get Lost in Drone Twilight Zone

NEW YORK (TheStreet) -- Jeff Bezos may spin golden media flights of fancy with flying drones. But Nelson Paez has made real money from them.

"'Drones' is not the best term for this sort of craft," said Paez, CEO of DreamHammer, a Santa Monica, Calif., drone control software firm. "What they really are, are remote asset management systems. And what you learn being in this business is to plan for the business to unfold in unexpected ways."

Paez and his chief technology officer, Chris Diebner, graciously spent 90-plus minutes with me on the phone this week trying to walk me through what on earth Amazon (AMZN) "air boss" Jeff Bezos was talking about with his so-called Amazon Prime Air, an unmanned flying drone home delivery technology set to go into service as early as 2015.

Paez and his 75-person firm have not only spent the past four years developing and operating a control system called Ballista, similar to what Amazon would theoretically need to fly Prime Air; the company actually got paid selling it to many of the world's biggest and most experienced manufacturers in the growing $7 billion unmanned aircraft industry.

"When the Navy tested their common control system for all their unmanned assets, including drones and satellites," he said, "ours is the control system they used."

Now certainly, Paez and Diebner are unabashed unmanned vehicle boosters. DreamHammer was founded in 2008 with the express purpose of commercializing exactly this kind of military unmanned aircraft technology for the private sector.

"Our software was built to be like Google Maps. Anybody can jump on the system, point and click and fly a drone," Paez said. "And investors need to understand the golden goose in all this. Just like mainframes in 1979, there is the well-understood path of efficiencies and privatization created by Steve Jobs and Bill Gates with PCs still ahead for unmanned transport."

But even so, spend any time talking with these two seasoned drone pros and it becomes clear that many, many gremlins need to be hammered out before drones -- even those from the geniuses at Amazon -- will be let loose in American skies.

"The supply chain logistics that Amazon is talking about is exciting, but it is really down the road," Paez said. "Where the near-term opportunity is, is in higher-value assets found in farming, oil and gas and the like."

Bumps on the drone road
DreamHammer's high-flying investor insight is exactly this: Bezos' hype aside, drones are as un-revolutionary as un-revolutionary gets. In fact, remote-controlled unmanned flight systems date from -- get ready, robot drone hipsters -- the early days of World War II! All the way back in 1939, Hitler's Luftwaffe commissioned something called the Argus As 292, a remote surveillance craft that saw live service by 1942. And go take a peek at the Fieseler Fi-103, known as the V-1 Flying Bomb. This unmanned craft, which saw service over London in 1945, bears a striking resemblance to today's RQ-1 Predator drone.

Both have single-jet engines, no place for a pilot and active remote control.

Unmanned aircraft use has continued since, or three times longer than the commercially deployed Internet. And military unmanned vehicles such as Northrop Grumman's (NOC) RQ-4 Global Hawk and X-47B flying jet and the Lockheed Martin (LMT) K-Max self-flying helicopter have seen essentially continuous duty worldwide for decades.

"These craft are extraordinarily autonomous and reliable," Diebner said. "Each has hundreds of thousands of hours of doing far more complex things than dropping off boxes on doorsteps."

It turns out, rather, that the challenges Amazon Prime Air will face lies in the minutiae of bringing the large-scale, unmanned aircraft market down into the retail sales channel. Here lies a veritable Twilight Zone of nickel-and-dime issues that will weigh down quickly Bezo's dream of getting into the itty-bitty airplane business.

"You will need a remarkable amount of redundancies in these systems to keep them safe," Diebner said. That implies the entire drone hardware equation, including material science, battery systems, communications infrastructure, autopilots, payload management and control systems, must be reinvented for small craft plying high-population areas.

Next, there will be significant software problems to overcome with drones. The unmanned plane market is so mature that Paez estimates there are thousands of flying drone makers worldwide, each of whom may -- or may not -- use common computer languages needed to host an active service such as Prime Air.

"We integrate all this software now," Paez said. "It's like the early days of the PC. There are a lot of DIY makers writing their own code. And that's a tough market to scale."

And all that complexity pales in front of what will be a massive regulatory restructuring within aerospace industry.

"We have made great strides in accommodating unmanned aircraft system operations," wrote Michael P. Huerta, FAA administrator, in his 75-page report on the future of drones, released last month. "But challenges remain in the safe, long-term integration of the both public and civil unmanned airspace systems into the National Airspace System."

Paez and Diebner, in fact, liken the current regulatory and business environment for unmanned vehicles to the cellphone industry circa 1980, when the long, bitter road needed to establish the wireless communications business, such as bandwidth rationing, common standards and proper service levels, was the stuff of policy meetings and hype.

"This industry still needs pressure from the commercial sector to drive Congress to focus the regulatory debate on unmanned vehicles," Paez said. "An entire ecosystem must be put in place."

Amazon still loses money
What really puts Prime Air into the investor Twilight Zone, of course, is that it's not like we haven't heard this kind of costly hype before. Bezos and company are on track to bleed red ink for a second full year after sinking what little profits it ever made into local shipping points-of-presence meant to crush big box operators such as Wal-Mart.

Already a similar air of futility is swirling around Prime Air. Is anybody really arguing that in a world where the Parrot AR Drone offers unmanned flight to kids, Amazon Prime Air will have the monopoly on robots in retail delivery?

Product makers tired of the Amazon black box will be getting their own drones and cutting Amazon out Bezos entirely.

"There is no reason we can't have five-pound flying drones in the retail supply chain," Paez said.

What drones will cost, when they will deploy and who gets paid with them is still very much up in the air.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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