I just watched the first drone with FAA approval deliver food – this is what happened.

A few weeks ago, I had the chance to witness history being made at a remote test site in the Nevada desert.  Flirtey, the first drone company to obtain FAA approval, conducted an autonomous drone delivery of some tasty food to the front door of a home in a mocked up suburban neighborhood, successfully navigating power lines and trees and lowering the package to a waiting customer – in this case, a film crew doing a documentary on the company.  A big deal?  Maybe not the flight itself, but what it signals for the future of “last mile” delivery and drone services more broadly is profound.

A Harbinger of Things to Come

It took me a little while to jump on the drone bandwagon, but now I’m convinced that drones are serious business given the massive software innovations and improvements in components, compute power, cost, and battery life.  What was once considered an entertaining toy for kids (or your inner child), or a highly-specialized device for the military, now has viable use cases that could drastically improve the way we live and work. A drone flying point-to-point with a food delivery, for example, can increase the effective service radius by nearly 5x.  That’s a 25x increase in customers served.  The same is true for any modestly-sized package.  Almost 80% of packages delivered by UPS fall within the 5.5lb payload capacity of Flirtey’s drone, and the range and energy utilization will only get better.  The cost is also low.  Today on par with ground-based couriers, autonomous drones will eventually be the cheapest mode of delivery.

The use cases for drones go well beyond the delivery of goods.  Some of the obvious uses are those that replace manned aircraft in existing markets such as surveillance, and aerial photography.  But new service sectors are rapidly emerging, and this is where the money is.

What Flies, What Dies

Drone-enabled service companies can build high-margin businesses with low capital requirements by riding the declining commodity price curve of the underlying hardware.  This enables them to build recurring revenue models resembling SaaS software companies.  In the case of Flirtey, there are some customized parts of the drone that manipulate packages, but most of the value-add is in the specialized software for efficiently and autonomously flying delivery routes.   Other sectors that will be transformed by drone services include insurance claims, utility, construction, and agricultural inspection. Companies in these areas will be able to build value by customizing drones to their particular task and building a historical data asset from the video and other information that is captured.  One such company is BetterView, which performs commercial roof inspections using a network of drone operators and remote roof inspectors that analyze the video.  This is a better, faster, cheaper, and safer alternative to people climbing on ladders.

Although we like software investing, in the drone sector there are too many companies doing redundant work and building highly specialized capabilities, like collision avoidance, control, route planning, etc.  Although these are all necessary, its is doubtful that each of these areas can support an independent company, so consolidation will occur.  Airware’s leadership in the “platform software” sector is an example of technology that can be licensed to deploy, manage, and control drones for many different use cases.  Other companies, such as Drone Deploy are also vying for this part of the market, and there will be a handful of winners in the category that offer a suite of software tools and technology.

Similarly, the hardware market is likely to consolidate around a few large companies that have large scale and low costs.  DJI has a dominant position in this market, supporting both creative and commercial uses in a variety of areas including film, agriculture, search and rescue, energy infrastructure and more.  While there are interesting specialized drones in everything from photography to military surveillance, most of these are in niche markets and tough places to build a business.  Ultimately, service companies building custom drones today out of necessity will have lower costs and better product quality moving to commodity platforms in the future.

Flight Risks:

There are some unique issues and challenges in the emerging drone market.  Here are a few:

1) Malicious Drones

One of the biggest issues right now is unauthorized or criminal use of drones.  Drones are being flown next to buildings to get onto corporate WiFi networks, delivering drugs and weapons into prisons, and wreaking havoc at airports.  New technology is needed and being developed to track and inhibit malicious drones.   DeDrone, a Menlo portfolio company, uses a combination of microphones, cameras, and RF-sensors to fingerprint and locate threatening drones. Just as the public Internet has ushered in cybersecurity threats along with its incredible benefits, we are seeing the same with drone technology.

2) Regulations

Flirtey is the only company aside from Amazon and Google to currently have FAA approval to fly over populated areas.  This regulatory hurdle, which was originally thought to be the toughest one to overcome, now looks like it won’t pose an insurmountable problem.  Today, even autonomous flights have to be within operator line-of-sight, but this will change fast for firms with the flight hours and safety records for fully autonomous flight.  First movers will have the biggest advantage as the regulatory landscape changes.

3) Payload/Range

At CES 2016, the Chinese company Ehang wowed attendees with a drone for human transportation.  At the moment, this isn’t practical.  Battery life and the attendant weight are the limiting factors.  Even for multiple deliveries of pharmaceuticals or fast food, power is the key limitation.  Nevertheless, the technology is changing rapidly, as are prices.

We are at a major inflection point in the drone market, as companies innovate faster than ever. The sky is clearing up, and we may be flying around like the Jetsons sooner than we think.

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This post originally appeared in LinkedIn.