In the following opinion piece Edmond M. Hennessy at PMGResults draws parallels between the evolution of the commercial off-the-shelf (COTS) industry and the emerging drone industry.
Summary: The COTS Industry in the late 80’s struggled to gain acceptance and adoption, until the Perry Memo* turned the industry on its head and COTS was then given first right of consideration. There are parallels between the COTS evolution and the state of the emerging drone industry.
We recently completed an assignment for one of our drone clients with an updated Competitive Landscape Report, given the rapid changes taking shape within the industry. It occurred to us, after reviewing the data and completing the analysis/interpretation phase that some of the dynamics had a familiar ring – common to COTS Market Development. This was highlighted at the early stages by a long and arduous acceptance/adoption curve and did not take hold until the Perry initiative turned the industry on its head – giving COTS first right of consideration, by Law. The rest is history. Of course, with our dedication to the Aerospace and Defense target segments – we lived through this experience and the technology companies that we were associated with – gained big dividends through the Perry Memo.
Now, let’s turn our focus on the emerging drone industry, which is a hotbed of activity. Our methodology was to take a cut at key target sectors/applications and map various drone providers and specialists onto our competitive landscape grid (with full detail about each company profiled). The grid was 3-dimensional with emphasis on industry focus, key initiatives and target applications.
An example: Industry >> Defense & Military, Initiative >> Counter-UAS and Target Application >> Enemy Drone Threat Detection and Neutralization.
The grid was comprehensive and demonstrated the versatility of drones – with a cross-section of six industries, eight initiatives and seventeen applications.
From this effort, we were able to gain insight and understanding to the rapidly-changing dynamics evident within the drone industry – again – many corresponding to what we experienced in the COTS movement and evolution (historically).
Our study did not put emphasis on majors – like Lockheed Martin, Raytheon Systems, Northrop Grumman, General Atomics, AeroVironment, L3Harris, Kratos Defense, etc. Rather it focused on drone start-ups, early-stage providers and mid-sized, established drone specialists.
Here’s a breakdown of some of the findings:
Start-ups and early-stage drone providers are gravitating towards SBIR/STTR and other vehicles to secure government research funding/grants and participate in initiatives and projects that fit the needs of organizations like DIU, AFWERX, AAL, DARPA, NSA and many others (including OTAs). This not only allows these companies to realize a flow of funds or early-stage revenue, it also provides traction, demonstration of capability, and can build a path to multi-phase awards (resulting in securing large funding allocations). Conversely, no commercial drone company should expect to build their core business solely on these types of projects.
The drone industry is rapidly moving from a general-purpose to special-purpose state – with companies becoming specialists in a particular Initiative, like counter-UAS, surveillance, border and perimeter control, etc. and target applications, like troop movement and evacuation, disaster relief monitoring, medical & supply transport, etc. This is being accomplished by leveraged relationships and strategic alliances with other hardware, software and service providers that are integrating their unique technology solutions into target platforms or are extending their services to round-out the business. It’s clear that those drone providers that do not see the signposts for change – will be left in the dust.
Many of the “enabling technology” providers are gaining access and aligning themselves with major drone platform builders and manufacturers. That includes defense contractors and system integrators. Typically, the majors reach-out for capabilities that they prefer not investing in-house resources into or the nature of the 3rd party solution is sophisticated/complex and it is preferred to buy vs. make. In this scenario – several drone companies expressed a concern about being manipulated by large defense contractors – taking their secret sauce and internalizing this to support in-house development. We did not uncover any evidence to substantiate this.
The message: Defense Contractors and System Integrators are not the “enemy,” rather they are a vital source to gain access to deployable/production contracts and programs.
Distribution capability and reach are important considerations to start-up and early-stage drone providers, particularly considering that they do not have the financial means to build effective marketing and business development teams in-house. The emphasis is seeking relationships with distribution partners that have corporate strength, breadth of market coverage and customer recognition (and following) that can be useful to the drone provider – many of which are unknown quantities within the target market. Many of these partners have contracting vehicles in-place that can be leveraged by drone providers, like the GSA Schedule and access to useful systems like SAM.GOV and others. This also includes alignment with drone training and service organizations.
Not considering the substantial investments to providers like Archer, Joby Aviation, BETA Technologies and others (which represent billions of invested dollars) – there has been an increasing intensity for drone providers and support organizations to reach-out to investment sources, primarily to fuel their growth plans and further extend their market position. This is occurring cross-industry, although most drone providers are realizing that this is not an “easy road.” The mystique and idle promises that the drone industry expressed, in terms of market readiness/demand, opportunity potential and return-on-investment (ROI), have not materialized across-the-board.
Investors recognize that (with rare exception) – the drone industry is emerging – early-stage – with more positioning and posturing than actual revenue generation. This is to be expected and an element of market evolution. There is a harsh translation to this – those enlightened drone providers that realize that their growth has dependency on outside funding vs. relying solely on their own resources – have the potential to breakthrough and build sustainable businesses. Those that don’t – will either be survivors or casualties.
Mergers/Acquisitions abound in the US drone industry (cross-market). Examples include: Drone-Up acquiring Air Map (drone deliveries), Sierra Nevada acquiring Volansi (VTOL drones), Blue Halo acquiring Citadel Defense (C-UAS platforms), SHIELD AI acquiring Martin UAV (V-BAT family of VTOL unmanned vehicles), etc. The activity level for these transactions is up 44%, as compared to baseline 2020.
Pricing threshold is difficult to quantify by drone provider including gaining insight into business models, volume discount policies and other tactics and practices, although the trend line shows that the market has become fiercely competitive over the last 18-24 months. Pricing pressures will prevail and like any other market – drone providers will be faced with a tough balancing act between continuous cost-reduction and added value. Both are required to compete in this market jungle.
Drone providers are resourceful and have created a range of incentive/inducement programs to support their businesses. This includes:
- Free consultations – which includes mapping prospect applications onto drone/platform capabilities and configurations,
- Try & Buy programs (for certain classes of prospects),
- Fleet procurement programs (supporting multiple drone/ volume customers),
- Specialized Training Workshops (ramping-up customers before they buy),
- User Groups (encouraging Membership and exchange),
- Financial programs (Leasing, Rental and Extended Payment), etc.
These programs will continue to evolve and play a role in rounding-out and distinguishing one drone provider’s offerings from another.
Although this is not an element of the Competitive Landscape Report – there’s no question that the drone industry is maturing and formalizing – fast. In addition, the impact of regulations taking shape from the FAA, EASA and other gatekeeping organizations (worldwide in-scope), DIU’s BLUE sUAS 2.0 Initiative (and pre-certification program with AUVSI), DOD Group Classification (guidelines) and other measures are visible and taking shape.
Although there is push-back from drone providers – this will become a highly-regulated industry.
Similar to the COTS history and evolution – the drone industry (certain segments) will transition from its roots as a cottage industry to a structured industry operating similarly to the automotive and aviation/transport industries. With this will come standards that will breed “commoditization.” The rest of the story can be derived from history – that of the evolution of the COTS industry.
*(Issued in 1994 by former U.S. Secretary of Defense William Perry, the ‘Perry Memo’ directed the DoD to use COTS products whenever possible.)
