The Path to Commodization Movie. We’ve all seen this movie before. A technological innovation becomes so cheap and ubiquitous that it’s a commodity. Everyone has it. Everyone needs it. And no one can remember a time when the world existed without it - or even when the technological innovation was so special that only a few could afford it.
First, what is “commodization”? Generally speaking, it’s when products from multiple manufacturers converge on the same look and feel and set of features and functionality - and most importantly the price drops dramatically to enable mass-market adoption.
Dozens of industries have followed this well-worn and predictable “path to commodization” - Computers, airlines, large-screen TVs to name a few.
The Four-Step Path to Commodization. So, what does this “path to commodization” look like? Let’s use the automotive industry as an example.
Step 1: Pioneer Stage. Ever hear of the Pope Manufacturing Company? How about Hupp Motor Car Company? What about Duesenberg? Baker Motor Vehicle Company? Stanley Steamer? Don’t worry. Few do. But these companies were pioneers in the car industry and there were dozens like them building what we would consider crazy designs and powertrains. Steam-powered cars. Diesel designs burning anything you can imagine. There were even battery-powered cars.
That’s what defines the pioneer stage. It’s a time when dozens (if not hundreds) of manufacturers all try and promote different product designs. Almost all fail. Why? Well, in the automotive industry the failing designs have two common traits: (1) expensive and (2) limited range. And those combined meant there couldn’t be mass-market adoption, which is a big part of the next stage.
Step 2: Adoption Stage. At this stage, two things happen: (1) the market starts selecting the standard designs and features that will define the product category for years to come and (2) a feature is developed that will drive costs down so that everyone can afford it. Two examples:
- Configuration (vs Customization). It seems super obvious now that a car is configured with a steering wheel operated by your hands, a gas pedal operated by your right foot, and a brake pedal located in the middle (and a clutch operated by your left foot). This configuration is ubiquitous today but that wasn’t always the case.
Many car designs in the early 20th century had hand levers for braking, dials for accelerating, and knobs for turning the wheels.
Cadillac changed all of this with its 1916 Types 53, the first car with the steering wheel, gas pedal, brake pedal configuration. It was so much easier to operate that within a few years it was adopted by all the car manufacturers and became, as we all know, the standard configuration.
- Powertrain. We all know that gas engines were the powertrain winners. But why did gas engines win? And why did electric and steam-powered cars lose? Well, if you were a betting person in the early 20th century, you wouldn’t have picked gas engines, especially since at that time electric and steam outsold gas-powered cars by a wide margin.
That’s because gas engines had many, many faults. They were noisy, smelly, and they were dangerous. You had to manually crank the engine and so, if the engine started while you were still holding the crank, your wrist had a seriously good chance of becoming broken.
Electric cars were far more user friendly - and quiet and less wrist-breaky. And steam-powered cars were quieter and super-efficient.
But once the electric starter motor was invented in 1912 (thanks again to Cadillac), this made gas-powered cars far safer. Then it quickly became all about range and cost. Gas engines were cheap and had excellent range. Stories abound at the time of early gas-powered cars crossing continents. Not bad influencer marketing.
Electric cars were way more expensive and had very limited range. And steam cars were extraordinarily expensive. (However, to be fair they arguably had the same range as gas-powered, but they were just ridiculous to maintain and operate. Just like a steam locomotive, it required fanatical attention to the boiler to keep it going.)
The net/net here is this: yes, electric and steam were better in many (maybe even most), but it didn’t matter because at the time neither of those technologies were cost effective enough for mass-market adoption.
Step 3: Consolidation Stage. In the Adoption Stage we see that in order to get mass-market adoption, there needs to be a design feature (or features) that inherently reduces the cost of the product. In the Consolidation Stage, mass production becomes a key focus. And this is when Henry Ford and the Model T enter the story.
We all know that mass production and the economics of scale result in an even more massive decrease in cost, which in turn results in more mass-market adoption, which in turn decreases costs as production volumes increase, etc. This is the virtuous loop of all mass production but Henry took it to another level.
The cost of a new Model T in 1910 was about $800 but was $300 in 1920. Think about that for a minute: a more than 50% reduction in cost in a 10-year period. That’s nothing short of staggering in its implications. The average annual income was $3,269 in 1920, so a new car only cost 10% of that income. That’s the equivalent to a brand-new car costing $5,000 today (n.b., the average new cost in 2024 is close to $50k).
There is another key component of the Consolidation Stage. The initial pioneer companies start dying off (or they are pushed into very small niche application markets) and a small number of companies dominate the market, which in the case of the automotive industry, were General Motors, Ford, and Chrysler.
Why the die off? The virtuous loop of increasing production leading to lower prices, etc. requires a lot of capital. If a company doesn’t scale fast enough, then they miss the virtuous loop and are priced well above market. They then lose sales which means that they can’t raise money to scale and then they lose more sales. It becomes a doom loop instead of virtuous loop.
To recap, the magic formula here is: (i) key feature (like the gas-powered engine) and mass production at scale drive costs down and (ii) range matters. A lot.
Step 4: Disrupter Stage. As the Consolidation Stage takes hold, true innovation generally declines because there isn’t a huge incentive to do so. Once investments have been made in factories and in developing the processes to design and build something, the cost of change to adopt radical innovation is just too high. Instead of innovating, the dominant companies enter a bucolic stupor focused on incremental feature improvements.
And by the 1970s, those dominant companies (i.e., GM, Ford, and Chrysler) had entered into that bucolic stupor, at which point they were quasi-disrupted by Japanese and German car firms, but GM, Ford, and Chrysler managed to stay the course (i.e., continue their bucolic stupor) because of import restrictions and a market preference for large truck-like things called Sport Utility Vehicles (SUVs). Today, the bestselling car in the U.S. is the Ford F-150 pickup truck.
But then enter Tesla and other EV manufacturers, which have a truly new business model and product. Will the disrupter prevail? As of now, it looks like yes. GM and Ford are tripping over themselves with electric car design and production. The Ford 150 Lightning EV truck is now finally being promoted and Chrysler is barely trying.
Where are Drones in the Path to Commodization? This really depends on the category of drone. We see two distinct categories.
Category #1: Personal and Light Commercial Use. This category of drone has clearly entered at least the late Adoption Stage and arguably has entered the Consolidation Stage. We’re talking about drones like the DJI Mavic and Autel EVO that can perform real estate photography, weddings, and smaller commercial inspection jobs.
Convergence of Features. The spec sheets for Category #1 are very redundant across manufacturers and drone designs are essentially the same (rectangle center and four retractable arms with propellers) – a sure sign that there has been a convergence of features that the market expects (which proves that Category #1 is at the Adoption Stage). The feature-convergence now is mostly focused on the camera: a 4k is a base configuration and 6k or 8k are becoming standard plus a suite of software to improve the quality of the imaging and assist in post processing. While flight time is meager at about 40 minutes max, it’s more than adequate for the vast majority of jobs.
Emergence of Dominant Firms. While data on the product-level market share of the DJI Mavic and Autel EVO are not available, we think that it’s safe to make the presumption that the overall drone market share numbers of DJI, at about 70% and Autel at about 10% probably translate favorably to the DJI Mavic and Autel EVO models. This means that there are two dominant firms with the majority of the market share. That’s another solid data point that Category #1 is in the Consolidation Stage.
No Financial Benefit to Incremental Improvements. Just like the car industry at the Consolidation Stage, the overall drone design has been standardized and big-time innovation has largely stopped. The focus now is instead on incremental technology improvements. For example, the DJI Mavic 3 and the Mavic 4 are essentially the same drone. Sure, the Mavic 4 is a better drone (because it has discernable improvements over Mavic 3), but it is not an innovative leap. The Mavic 3 is an iPhone 15, and the Mavic 4 is an iPhone 16.
There is another aspect of the Consolidation Stage that we didn’t touch on above in the car example: there are no real financial benefits (or competitive advantages) to DJI or Autel for incremental improvements in the technology. These dominant firms need to do just enough to stay at relative parity with each other and keep costs low.
Let’s look at smartphones (an industry that is deep in the Consolidation Stage) to see why.
As is typical for any industry in the Consolidation Stage, there are two dominant firms, Apple and Google, and there have been no major breakthroughs in innovation for over a decade. Just small incremental improvements – mostly in camera technologies. Sound familiar?
The last big “innovation” was Apple’s cinematic mode that debuted in Q3 of 2023 in the iPhone 15 Pro. Yes, it’s an impressive technology but it’s still just an incremental improvement over previous camera technologies.
The result? Other than perhaps maintaining market share, there is no financial benefit in developing cinematic mode. The iPhone global market share was about 27% before and after cinematic mode’s release.
Why is that? Well, Apple and Google are developing features that are more and more narrowly focused on smaller segments of the smartphone market. For example, cinematic mode is only going to appeal to a small number of people because most users of a smartphone just don’t need a camera that has the professional quality of cinematic mode. So, consumers aren’t going to pay for it and it’s not enough for an Android user to justify switching.
The unfortunate bottom line here is: an additional $1 spent in R&D in creating more and more advanced features doesn’t yield an additional $1 in market growth.
The same is certainly true with drones. Just like with smartphones, the camera technologies have been incrementally advanced. But will market share shift just because Autel creates a slightly more advanced 8K camera? No.
Sure, these are important technologies but, just like cinematic mode in the iPhone 15, these aren’t technologies that apply to all drone users. These are incremental improvements more and more narrowly focused on smaller segments of the market.
What about advanced autonomy and obstacle avoidance? Will these technologies take the same path?
As of right now, just like the early camera technologies in smart phones, these technologies are relevant for most if not all drone users. For example, everyone needs a RTH. We’ve all been there as drone pilots. Your drone takes an unexpected path home and perhaps wasn't set at a sufficient height. obstacle avoidance literally saves the drone.
But nearly every drone manufacturer will have obstacle avoidance as a feature in the near future (i.e., on the path to commoditization) and pilots will become accustomed to having it and might forget that the impetus is on them to avoid obstacles if flying a drone that doesn't have it.
Asset inspections truly benefit from advanced autonomy, particularly with edge processing to update programmed autonomous flight plans when they see a signature of typical wear in the asset they are inspecting. The drone can fly closer and gather more diagnostic information (higher resolution data, more of it) where it detects those signatures.
There are many routines now in the commodity phase. Lawnmower patterns and point-of-interest missions can now be done easily with every drone and it’s hard to even see where there is room for even incremental improvements in those applications outside of the edge processing mentioned above.
Category #2: Heavy-Duty Commercial Uses. For many commercial and military applications, the drone industry is still in the Pioneer Stage. Just like in the early 20th century when there were dozens of car companies producing dozens of different designs, there are dozens of drone companies likewise producing dozens of different designs, some with more success than others, but no clear winners yet. Let’s look at two verticals.
- Agriculture. Crop-spraying drones are starting to become more widely used across the country. But farmers and drone operators will tell you that drones are a far from ideal solution for crop spraying. They’re cumbersome. They’re relatively expensive. And the flight time is just atrocious – often less than 10 minutes.
This means that drones can’t replace the large tractor spray units for general application spraying.
Recall our car example earlier in the article where we found that the magic formula (for there to be mass market adoption) two things needed to happen: the gas-powered engine (which was a key feature that reduced cost and also increased range) and Henry Ford’s mass production (also reducing cost).
For drone crop-spraying that magic formula hasn’t happened yet. No one has figured out the “gas-powered engine” feature or the mass production technique, clear signs that we’re in the Pioneer Stage.
So, what might the future look like to get to the Adoption Stage for agriculture? What will be the “gas-powered engine” feature that will unlock (just like in early cars): (1) way longer flight time (range) and (2) a feature that will dramatically reduce cost?
There is another factor here though. For environmental and cost reasons, farmers want to move away from general application spraying and move to targeted spraying. For example, suppose there is a nutrition deficiency has been identified in part of the field and so, instead of spraying the entire field, drones are used to target that area.
And that may well be the future: instead of trying to replicate general application spraying, using drones to identify that problematic area and then applying the spray only to that area. That’s not going to be easy but the technologies to solve the identification problem are in development and in some cases are being deployed.
That will certainly lessen the need for a radical “gas-powered engine” feature but not eliminate it. The drone that can deliver on long flight time and low cost will win.
- Delivery. The delivery vertical is a little schizophrenic because in some ways it’s in the Pioneer Stage and in other ways it's in the Adoption Stage.
Evidence of Pioneer Stage. Drone delivery is still very much in its infancy. There are only a handful of areas in the U.S. that have it (so very Pioneer). And it’s not clear what business model, software, and other technologies are going to win here. The cost per drone delivery is somewhere near $50 (so too expensive, also very Pioneer) and no one believes anyone can be profitable for anything over $10 per delivery.
Evidence of Adoption Stage. Yet despite that lack of clarity on what it will take to win, the nascent drone delivery industry has converged on a VTOL design (as if it is in the Adoption Stage) with pretty much the same set of features: it has two horizontal booms with motor / propellers bolted on top for hovering and then a wing with motor / propellers for flight.
On some level this makes sense. It is a simple design that, despite its clear aerodynamic tradeoffs, ostensibly has decent flight range in horizontal flight. But it’s an odd Frankenstein because the very act of hovering kills its flight time. That’s not a recipe for success if you need to drive down the per delivery cost.
What is the future specific to what customers want (and will pay for?)? Again, recall the car example and the magic formula. It’s all about range and cost (i.e., delivery cost).
Imagine if FedEx could only do just one delivery per FedEx van and that when the FedEx van was parked for a delivery, it was idling at a rate that consumed most of the gas in the tank. It doesn’t work or make any sense, but this is the current drone delivery model.
A drone flies all the way from the distribution center (often several miles), makes one delivery and consumes most of its battery capacity while hovering, and then flies back.
The answer is clear. There needs to be a platform that can efficiently hover, do multiple trips on one charge, and make more than one delivery per flight.
Conclusions. It’s easy to say that the drone industry will experience commoditization. It’s really a question of predicting the timing of it - and that’s the key. In some industries like cars, it took decades to run through the first three steps and then decades more to get to the fourth step - well over a century in total. In other industries, it has taken mere years. What about drones? We think that for some verticals like agriculture it’s about 10 years away and for delivery and other BVLOS verticals it's about 5 years away. Let’s calendar that and check in then to see how far off that prediction was!
About the Author: Justin Call is the CEO of Modovolo, a start-up that's launched the Lift, an endlessly configurable modular drone platform of Lift Pods and Utility Pods that are clicked together like Legos to build the right drone for every application, with hours of flight time, and at a price orders of magnitude less than anything on the market. You’ll want to see it for yourself.
About Modovolo: Modovolo is a start-up that's launched the Lift, an endlessly configurable modular drone platform of Lift Pods and Utility Pods that are clicked together like Legos to build the right drone for every application, with hours of flight time, and at a price orders of magnitude less than anything on the market. You’ll want to see it for yourself.
For inquiries, please contact: Justin Call, [email protected]
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