Apple Wearables Drafting on Tech’s Push into Healthcare

Healthcare is in the midst of a dramatic transformation. This may seem obvious, but the culmination of this week’s news – CVS buying Aetna to create a new healthcare platform and Apple partnering with Stanford to carry out a medical study on AFib using the Apple Watch – brought the pace of change into perspective. Healthcare is transforming before our eyes, and new players are moving into the space that accounts for 18% of U.S. GDP.

Taking a step back, healthcare 100 years ago was fundamentally the same as it is today. We go to the doctor for two reasons – we’re sick, or it’s time for an annual checkup. The effectiveness of this approach is dreadful, illustrated by the fact that about half of all Americans have one or more chronic condition, diabetes and heart disease are on the rise, almost 40% of us are obese, and 7 out of 10 deaths are attributed to chronic diseases. All the tech advancements we’ve made have not kept Humpty Dumpty together. The reason for this is that healthcare is generalized, impersonal, and reactive in nature. The individual must fight the day to day battle of preventative care, not the provider who the average American sees only 4 times per year.

Today, we see a shift toward two themes – personalization and prevention – and the future of healthcare will be grounded in the frequency of health monitoring. CVS and Aetna are coming together to create what CVS CEO calls the country’s “front door to healthcare,” because more doors means more frequent access to care. Apple and Stanford aim to collect data on more people more frequently. The concept of increasing health monitoring frequency holds the greatest promise of actually making people healthier and the easiest approach to increasing frequency is through wearables.

Today wearables are seen as a luxury gadget for geeks and health nuts. In the future (7-10 years from now), we will be inseparable from our wearables, similar to our current obsession with smartphones. Today, the smartwatch is the wearable of choice. Soon, however, that could include things like hearables (think AirPods), contact lenses, and connected fabrics.

Driving with your eyes closed. Healthcare monitoring today is comical. Nootrobox CEO Geoffrey Woo on an a16z podcast put it into perspective by saying “imagine that we’re driving cars and we only let ourselves open our eyes every minute. That’s essentially the snapshot of information we get when we go to the doctor.” We go in for a checkup, make a course correction, then drift back into our old habits until the next time we see the doctor. Continuous health measurement is the most effective approach to stay our course corrections. We now have biometric sensors in common devices and the computing power to make sense of that volume of data. The benefit of continuous health measurement is twofold – it allows for large-scale data collection from which AI algorithms can derive insights, and it keeps your health top of mind. And it appears to be working, studies show that 70% of Apple Watch users track their heart health, even weeks after purchasing the device.

Apple’s got a tiger by the tail. Investor opinions on the Apple Watch range from “it’s a rounding error” (4% of overall revenue), to “it’s a dud.” The reason is investors had been spoiled by Apple’s vertical growth in new product categories with the iPod, iPhone, and iPad. Apple Watch simply didn’t live up to its predecessors. While it has been a slow start for Apple Watch, we believe the Watch and future (7-10 years) wearables (notably hearables) will account for a material part of future Apple revenue. As the health advantages of wearables begin to resonate, we foresee Apple selling as many them (Apple Watch and hearables in the future) as they do iPhones. At a wearable ASP of $300 (below current Apple Watch ASP assumption of $450) and 250M units a year, that would equate to $75B in annual revenue (not in our model today).

Apple has been engaged with the concept of healthcare since it introduced the Apple Watch in 2015, releasing ResearchKit that year and CareKit in 2016. While their new Heart Study is technically their first true medical study, the Watch has been used in the past for similar crowdsourcing of biometric data (along with Fitbit and others). So this begs the question, why is Apple interested in healthcare? Their core competencies are well-aligned to benefit from the shift toward personalized and preventative care. They also have a platform in their device user base and software frameworks, the data and AI power to carry out large-scale operations, and the design expertise to integrate sensors into devices that consumers want to use.

A word on hearables. Apple has tipped their hand. Earlier this year, the company filed patents suggesting AirPods may have a future as in biometrics. The patents outlined the addition of a photoplethysmogram, or PPG sensor, that can measure heart rate, VO2, galvanic skin, EKG, impedance cardiography, and temperature. We don’t have enough details to guess when these features might be integrated into a product, but do see a future when these hearables are continuously worn, giving users volume control of the world, as well as next-level, real-time health monitoring.

What about other tech companies. Don’t forget about Google and Amazon. One of Google’s other bets, Verily Life Sciences, is focused squarely on making healthcare more preventative and data-driven. Verily argues, “a new car has up to 400 different sensors. You know the oil pressure and how much air is in your tires, but we don’t do that with people.” They have undertaken an array of different projects from glucose monitors in contact lenses to eradicating vector-borne diseases by engineering and releasing fertile mosquitos. Verily’s efforts are largely complementary to Apple’s health ambitions, and their engagement in the space is confirmation that big tech companies have a place in healthcare. The opportunity here is substantial enough to accommodate more than a few entrants. While it is unlikely that Amazon will be a player in data or wearables, the company has the DNA to reinvent the logistics around how care is delivered.

It will take time to win over the “I don’t want to be monitored” segment. It’s going to take years for widespread adoption of health monitoring wearables, as defined by more than a billion daily users. As a point of reference, we’re at 40-50m today, with about 25-30m of those being Apple Watches. Some people resist continuous monitoring on the grounds of privacy, inconvenience, and anxiety around knowing their true health. That said, the resistance group will shrink over time (some due to poor health).

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Alexa First to Business but Google AI Close Behind

Bottom Line. Alexa has 70-80% smart speaker market share and is pedal to the metal in expanding the market beyond the consumer today, being the first company to target the business opportunity. While we expect Alexa will continue to be the market share leader, we believe Google will close the gap in the next 3-5 years as AI becomes foundational to the future of smart speakers.

News. Amazon announced Alexa for Business today. The basic idea is Amazon is building skills around everyday business activities like conference calls, scheduling meetings, keeping track of tasks and ordering supplies. This includes integrations with Salesforce, Concur, SuccessFactors, Polycom and Crestron to name a few. They are also selling a hardware starter bundle which includes 3 Echo’s, 2 Dots and 2 Echo Show’s.

Bravo Alexa. Today’s Alexa for Business announcement is further evidence Alexa is leading the smart speaker market. Alexa is the market share leader for good reason. First, Alexa is smart, and now has over 25k skills compared to 12k that we counted in April (Google does not have skills rather actions).  Second, Alexa 3rd party hardware integration is expanding and earlier this year we estimated there were about 100 manufactures with integrated Alexa IP.

AI, the elephant in the smart speaker room. While it may look like Alexa is running away with the smart speaker market, Google is gaining ground. In October at the Google Hardware Event, Google explained how hardware products will facilitate AI first computing. In 2017 CEO Sundar Pichai has opened each of his public remarks stating Google’s goal of becoming an AI first company. This has obvious implications for Google’s advertising, Maps, YouTube, cloud business and now hardware.

Google likely to gain smart speaker share in 3-5 years, but Alexa will still be a share leader. Google’s efforts in the next few years could yield a measurable increase in market share. As mentioned, today we estimate various forms of Alexa account for roughly 70-80% smart speaker share and we envision Google’s share increasing from about 25% today to greater than 35% in the next 3-5 years.

Why Google’s in a good position. While Google is lightyears behind Alexa’s install base, we believe Google has the best AI (see our comparison here), and their more robust product line could catch up quickly. Google is going toe-to-toe with Alexa in terms of hardware pricing (Echo Dot and Google Home Mini starting at $29). More importantly, we expect Google will weave their AI Assistant into the fabric of the device ecosystem. This is important because integrating an array of devices (i.e. the handoff between the home and the road) is what will push users toward the next generation of our interaction with machines.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

2017 Loup Ventures Holiday Gift Guide

Here are a few gift recommendations for the 2017 holiday season:

And here’s a look ahead to 2018 with some of the products we’re hoping for:

  • Apple HomePod | Apple’s foray into the smart speaker market.
  • Apple iPhone X Plus | We’d love a larger screen for our iPhone Xs.
  • Oculus Go | Oculus’ $199 standalone VR headset.
  • Magic Leap | Augmented Reality glasses.
  • Tesla Model 3 | Already on the market, we’re hoping to see shorter reservation times.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple Readies to Fight for Your Monthly Video Wallet Share

Conclusion. Get ready for another $10 a month drag on your credit card. It’s a rebranded, all in one Apple video and music offering in 2-3 years.

An Emerging Area of Investment. It’s no secret that original content will be an emerging area of investment for Apple, given it will boost the increasingly important Services revenue line. The good news is the trend of more cord cutting is undeniable and consumers paying for multiple monthly streaming services. Multiple streaming services means there will be a handful of content provider winners. The bad news is Apple’s efforts in content have been limited to “learnings” (Carpool Karaoke and Planet of the Apps). We think that will change over the next 5 years as Apple ramps its original content investment from about $500m in 2017 to our estimate of $4.2B in 2022. It’s worth noting this will still lag our 2022 estimates for original content spend (excludes catalog spend) by Amazon at $8.3B which will likely surpass Netflix at $6.8B.

Fighting To Reach 75m Subs. We define a winning content platform as having 75m+ monthly subs. That’s a tall order given it’s a crowded field with more than 200 subscription video services in Sep-17 (Parks Associates). These video services are working to catch up to the creative achievements of existing players. In 2017, HBO won 29 Emmys, (most for the 17th straight year), Netflix won 20, NBC 15, and Hulu 10. Looking at monthly subs, today’s leaders are Netflix (estimated to end 2017 with 115m subs) and Amazon (~80m global Prime subs). Hulu is the 3rd largest with 12-15m U.S. subs, but that doesn’t clear our 75m hurdle. Apple should be able to quickly expand their sub base given they have a running start with just over 30m Apple Music subs that will have access to the video offering for the same $10 per month. Even though Apple employs the “iTunes Store” nomenclature to sell most of its video content, we expect an all in one offering (music and video) to take the form of a rebranded Apple Music sometime in the next 2-3 years.

This note puts Apple’s content ambitions in context with the other players.

Apple. With over 30m Apple Music subs, Apple aims to bundle the music offering with an expanded selection of original content video (essentially two shows today) and will steer clear of license catalog content. Apple cares about original content because it will grow Apple’s Services business. Services will account for about 14% of revenue in CY17, growing at a high-teens rate for the next several years, which is more than double the growth rate of Apple’s hardware business. Separately, Services carry a gross margin which is around 2x Apple’s overall GM of 38%. We note content margins are slightly higher than Apple’s current business based on other streaming services’ margins that are around 45%. As Apple continues to invest in original content over the next few years (we estimate it will be around $800m-$1B in 2017), Services gross margin could decline by 3-5%, which would pressure overall Apple gross margin (currently at 38%) by about 0.5%. We expect will generally have a positive view of this growth vs. margin trade off given this is an investment in a measurable revenue generating in addition to Apple’s core business.

Adding Talent & Shows. Apple announced in early November they are developing a new TV show for its streaming service starring Jennifer Aniston and Reese Witherspoon. They beat out bids from Netflix and Showtime for the rights and could possibly spend over $10 million an episode, according to WSJ. The show, which doesn’t have a script yet, will follow the lives of morning news talk show anchors (think Today Show or Good Morning America). This is the second major content announcement for Apple recently, after announcing it is teaming up with Steven Spielberg to reboot his Amazing Stories series. On top of these two upcoming shows, Apple has been filling the ranks of its programming team with experienced entertainment executives. In late October Apple hired Jay Hunt, a rock star in UK original content, and in June hired Jamie Erlicht and Zack Van Amburg from Sony. Separately, these hires tie back to the acquisition of Beats and Jimmy Iovine joining Apple. Iovine was instrumental in bringing Erlicht and Amburg to Apple and has been the point man for Apple’s push into the original programming. Iovine has deep knowledge and a wealth of experience in the music industry — we consider him a “tastemaker” — and will likely work to expand their video offering into original programming, alongside their existing audio offering.

Rebranding Apple Music & iTunes. Obviously, what is offered with ‘Apple Music’ and in the ‘iTunes Store’ is more than just music, and is another data point Apple lags behind on name changes. Looking back, they were ‘Apple Computer, Inc.’ until 2007 when Steve Jobs decided to ditch ‘Computer’ to better reflect the products the company sold (the first iPhone model was released in 2007). In 2016, they dropped ‘Store’ from their physical retail locations, indicating the stores are more of an experience than simply a place where you buy things (e.g. Apple Fifth Avenue, Apple Lincoln Park, or “I need to stop at Apple”).  With the rebranding and expansion of its content library Apple’s positioned to be a player in original programming.

Netflix. With 115m subs globally  (54m in the U.S) and expected to spend $7-8B in content in 2018, Netflix is the gold standard for over-the-top original programming. Over the years they have won 37 Emmy awards on 128 nominations, and hoping to increase that as they are expect to release 80 original films in 2018. Netflix’s strategy is to keep a steady stream of diverse content coming, as opposed to HBO for example with a few high-profile releases. They certainly have those prestige shows – Stranger Things, Narcos, The Crown, to name a few – but that is not the (sole) objective. Instead, Netflix focuses on offering a content library with a broad range of appeal to its diverse subscriber base, seeking overall commercial success ahead of critical successes here and there. They’re also rolling out this strategy internationally by continually entering new markets and even offering original shows in the local language for those international markets. Currently, native-language shows are available in Spain, Japan, Mexico, South Korea, Brazil, France, and Italy. Netflix has the largest library, budget, and geographic reach of the streaming services and will continue to be a formidable force for many years to come.

Hulu. Subs of 12-15m, U.S. only. Hulu will spend around $2.5 billion on content in 2017. While Amazon and Netflix will both spend more than twice that this year, it’s important to remember that Hulu is only available in the US, while Amazon and Netflix are both distributed internationally. Hulu also is not aiming to be a leader in original programming, instead using it to supplement their focus on licensing quality content from major TV networks. However, they have still had success with their original programs. The Handmaid’s Tale won an Emmy for Outstanding Drama Series, the first such award for a pure streaming service. They have begun bundling their service with others’, notably offering college students both Hulu and Spotify Premium for only $4.99/month. They have Cinemax and HBO add-ons to their service as well, though there are no discounts involved and are simply integrated into the Hulu app. Hulu’s approach is to offer as much quality content as possible, both originals and programming licensed from major networks (recently added 7,500 episodes in Q3).

Amazon. Subs of -90m Worldwide. We believe Amazon Studios’ content spend is budgeted at $4.5 billion for 2017, and they have recently communicated will increase in 2018. On the Sep-17 earnings call, Amazon said they were “bullish” on video given it helps drive more engagement and purchases on Amazon. Prime Video is only available to Amazon Prime members, and Prime members (as expected) spend about 3x more money than non-members. Amazon recently announced they’re expanding Amazon Studios, even after they’ve had management shakeups in the unit in the past month. Amazon Studios’ head resigned amid sexual harassment allegations, and they’ve added new heads of both scripted and unscripted content. Coupled with these management changes is a strategy change. CEO Jeff Bezos had indicated he’s looking to find a high-profile series with global appeal, and recently acquired the rights for a TV show based on J.R.R. Tolkien’s writings (i.e. The Lord of the Rings). Amazon paid $200-$250 million for the rights to the Tolkien IP (Bezos paid $250 million for The Washington Post in 2013), and will shoot two seasons for a reported $100 million each, bringing the financial commitment to nearly $500 million. This has the potential to legitimize their video entertainment ambitions in the eyes of non-Prime customers.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

UTM Deep Dive: A Multi-Billion Dollar Market You Can’t Ignore

Legislation and infrastructure are two of the biggest hurdles facing the unmanned aircraft industry. An Unmanned Traffic Management (UTM) system is an important solution. We recently had Jim Williams, who has deep expertise on the subject, guest author a piece about the importance of UTM (here). This post is a deep dive on the UTM opportunity that will identify the core UTM technologies, quantify the market opportunity, and discuss how UTM will facilitate the emergence of autonomous technologies. 

Quick Overview of UTM

Unmanned Aircraft Systems (UAS) Traffic Management (UTM) is a concept created by NASA to safely integrate manned and unmanned aircraft into low altitude airspace. In more basic terms, UTM is a system that allows drone operators to connect to a central coordinating service that manages unmanned operations at low altitudes (under 400 feet). This type of service is important for the future of unmanned aircraft because the FAA does not manage airspace below 400’, except near large airports, leaving the majority of the country’s low altitude airspace as uncontrolled.  UTM is a global initiative to offer an interoperable solution that will ultimately allow for routine beyond-visual-line-of-sight (BVLOS) flights and highly automated operations. The exhibit below highlights how information might flow between a UTM system and other airspace constituents:

Source: Loup Ventures

Key Technologies Enabling UTM

There are many technologies that are required to support the UTM concept. Each function will provide massive market opportunities for large individual companies as well as emerging startups. The 4 key technologies that will enable UTM include UAS Service Suppliers (USS), drone tracking and remote identification, vehicle-2-vehicle (V2V) communication, and detect and avoid (DAA) sensors.

UAS Service Suppliers (USS) – The core functionality of a UTM system will be managed by a UAS Service Supplier (USS). The role of the USS is still evolving, but we know that USS will be commercial entities with approval and oversight by a government agency, such as the FAA.  The USS would be the central hub, where all other stakeholders (drone operators, hobbyists, air traffic control, law enforcement, and the public) come for situational awareness regarding unmanned aircrafts. USS will also provide crucial information for commercial drone operators, which include airspace authorization, UAS identification, real-time aircraft tracking, conflict advisors, and geo-fencing.

The ideal USS will provide an independent, highly automated and scalable system that will manage and monitor drone flights, as well as factor in inputs from external sources such as terrain, weather, air traffic control, making this data available to all commercial drone operators or service providers. In addition, the USS will send notifications to external stakeholders like public safety and state agencies.

Drone Tracking & Remote Identification – For a USS to provide real-time situational airiness, it will need to be capable of tracking and identifying drones in-flight, which is attainable through familiar commercial wireless broadband solutions. These communication channels include LTE, radio frequency, Automatic Dependent Surveillance – Broadcast (ADS-B), and wifi. While the industry is still exploring which of these technologies is the best solution, we anticipate UTM will lean on a combination of radio frequency transmission and cellular networks. ADS-B is currently used to track manned aircraft and this technology will be mandated in all manned aircraft by 2020. ADS-B modules have historically been too large to fit on commercial grade drones, but recently a few companies have brought drone-tailored ADS-B to market. Given ADS-B is already standard aviation equipment, we see this as a practical solution for tracking. However, when the manned ADS-B system was built, it was not meant to incorporate millions of drones on the same network. Due to spectrum bandwidth saturation, we do not believe ADS-B will be mandatory in every drone, but only for more advanced autonomous applications. Telecom providers such as Verizon and AT&T have built their LTE networks to handle this type of density, and while LTE is not standard aviation approved equipment, we see LTE as a viable complementary solution. In areas where LTE coverage is poor, some combination of ADS-B, RF and wifi can fill the gap.

Currently, there are no established requirements or voluntary standards for electrically broadcasting information to identify an unmanned aircraft while it’s in the air. To help protect the public and the National Airspace System from “rogue” drones, government agencies, such as the FAA, have set up a new Aviation Rulemaking Committee (ARC) that will help create standards for remotely identifying and tracking unmanned aircraft during operations. The ARC will identify, categorize, and recommend available and emerging technologies for the remote identification and tracking of UAS. Based on conversations with industry contacts, we believe the technologies previously discussed are all applicable solutions for remote ID.

V2V Communication – Not only will unmanned aircrafts need to be able to communicate with the USS, but drones will also need to be able to communicate with other drones, which is better known as vehicle-2-vehicle (V2V) communication. While the same technologies that enable drone tracking, such as LTE and ADS-B, will likely be used to communicate with other drones, we believe there will be additional solutions available for shorter reach communication like DSRC (dedicated short range communication). DSRC based on radio frequency that will likely be used by self-driving cars to communicate with other vehicles on the road. We believe it makes sense for UAS Service Suppliers to communicate with all drones as well as other autonomous technologies such as self-driving cars, marine vehicles, and other mobile robots. While enabling information transmission between vehicles is important, we view the crucial aspect of V2V as cyber-security — making sure drones, self-driving cars and other autonomous systems can communicate with each other on a secure network.

Detect and Avoid (DAA) – UAVs’ ability to talk with each other via LTE, ADS-B, and other communication technologies will allow for autonomous drones to avoid obstacles known to the USS – but what does a drone do if it loses all connectivity? Many drones are now coming equipped with sensors such as LIDAR, radar, and 3D imaging. These sensors, coupled with advanced machine learning capabilities, allow drones to sense and avoid other UAS and manned aircraft without the need to be connected to a network. Though the sense and avoid technologies brought to market thus far are impressive, there is still a large opportunity for startups to bring better DAA solutions to market.

Regulation (Not Tech) Remains Biggest Hurdle For UTM

While innovation is still needed on the technology side to support the UTM concept, we believe the largest hurdle to full drone deployment in most countries remains regulation. In the US, commercial drone operations are limited to applications that are within visual line of sight, not over people that are not directly related with the drone operation (i.e. over crowds), and flights during the day. While the FAA allows for drone operators to file for waivers to perform these more advanced drone applications, this process is not efficient. Allowing for beyond-visual-line-of-sight (BVLOS) flights is the most important potential regulatory change. The US and other countries are working on bringing more favorable drone regulation to market; however, due to the time it takes to enact a policy, we don’t expect any meaningful regulatory changes to occur in the US until 2018 at the earliest.

UTM Key to Enabling BVLOS Applications

Implementation of UTM will positively impact the aircraft community in many ways; most importantly, UTM will enable new and larger market opportunities. Specifically, it will allow for routine aforementioned beyond-visual-line-of-sight (BVLOS) flights. Flying BVLOS, for example, is required for companies like Amazon to deliver packages via drones. That said, once a UTM system and favorable regulations are in place, it does not mean all drones will be able to fly BVLOS. Drones will likely need to be Type Certified with the FAA or other regulating bodies to perform BVLOS applications. While the current Type Certification (TC) process is costly (~$2M) and takes 2+ years to finish, we believe there is a new process currently being reviewed internally by legislative leaders that will significantly lower the cost and speed up the process. While this could be an important change, we do not believe the new process will be in place for at least two years, which gives current companies progressing through the traditional Type Certification process a near-term competitive advantage.

Industry Coming Together to Create a Global UTM

Due to the number of drones that will be operating in any given locale, the industry is going to need several UAS Service Suppliers for a single country, as well as hundreds across the globe to support the situational awareness needed for manned and unmanned aircrafts to operate together. While each nation will regulate drone use as it chooses, the industry needs to collaborate to set standards and protocols for drones to communicate with USS in different countries. The Convention on International Civil Aviation, also known as the Chicago Convention, established the International Civil Aviation Organization (ICAO), which is a specialized agency of the UN charged with coordinating and regulating international air travel. All countries that comply with the Chicago Convention have access to routinely fly into and out of other countries that comply. While this convention currently centers around manned aircraft, we anticipate certified drones will be treated the same way. The Global UTM Association (GUTMA) is a non-profit consortium of worldwide Unmanned Aircraft Systems Traffic Management (UTM) stakeholders, and is an example of an important industry collaboration to help bring safe, secure, and efficient integration of drones to national airspace systems across the globe.

Drone Registry Is A Key First Step To UTM

While it will take time until we have a global connected UTM system, we believe the first step will be creating a global registry for unmanned aircraft. At the 2017 Drone Enable ICAO’s UAS Industry Symposium, the ICAO suggested a compelling solution. Given the ICAO currently operates the Aircraft Registration System, which is used to register all manned aircraft across the global, ICAO recommend they also host an international drone registry system. This will allow all drone registry systems to connect with each other, as well as create a plug-and-play solution for countries that don’t have registration system in place. In the exhibit below, we demonstrate how we see an international drone registry connecting into the UTM.

Drone registration has been a significant topic of debate within the U.S. drone community after the U.S. Court of Appeals barred the FAA from requiring hobbyists to register their unmanned aircrafts. Until May 2017, when this decision was made, the FAA required all drone users to register their drone online, which cost $5 and only took minutes to complete. The registry was designed to help law enforcement identify rogue drones, but looking longer term, a registry establishes an early solution to remote identification. While we believe the U.S. will implement new regulations requiring all drones to be registered, it would be a headwind to UTM development if registration requirements were delayed.

Source: Loup Ventures

USS An Investable UTM Opportunity

Although we believe there are going to be many significant opportunities related to UTM, we view the UAS Service Suppliers as the most investable and sustainable theme. There are currently no companies that have stepped forward to take on the role of a USS, but several drone software companies have partnered with NASA and the FAA to support the development of the concept. These companies that are helping create the UTM solution and contributing to writing drone regulation have a large competitive advantage once UTM goes live. While there are many early stage startups that have the technology to make USS and UTM a reality, we anticipate companies like Amazon and Google will also have proprietary USS systems for their own vehicle networks. It is likely there are multiple USS providers, thus multiple winners in the space longer term.

How Big Can USS Be?

The pieces that will make up the UTM will represent a multi-billion-dollar market opportunity, but we anticipate the UAS Service Supplier market to represent one of the largest components of the system. We believe a USS would charge for their services as a monthly/annual subscription-type fee with providers charging businesses per drone connection. While early, a reasonable fee maybe anywhere from $100 – 300 per drone connection on an annual basis. We expect over 414k commercial drones will be sold globally in 2020, at which time we expect most UTM systems to go live. Over the following 10 years, we believe commercial units sold will increase on a 12.5% CAGR, and by 2030 we expect the industry to ship over 1.6M units annually. Based on our 14.6% CAGR assumption for commercial units leaving the base, we believe over 10.8M commercial drone units will be in the national airspace by 2030. A USS will also coordinate with manned aircraft, and based on FAA, as well as proprietary forecast we believe their will be ~280K manned aircraft regularly flying.

Based on a $200 and per connection fee USS will charge drone operators, we believe the commercial market opportunity is ~$261M in 2020. However, over the next 10 years as the install base grows we believe the USS market will generate $1.7B in revenue by 2030, representing a 20% CAGR over that time frame. That said, this estimate only factors in commercial drone units.  USS providers could charge as much as 2x more for manned aircraft to connect to the USS. When incorporating manned aircraft, the market opportunity expands in excess of $2B annually. However, we believe the USS will provide many other services but given the infancy of this market it is hard to quantify the exact dollar amount.

UTM Will Manage Much More Than Drones

Although UTM’s primary focus will be managing drone traffic, we believe these platforms will eventually manage other autonomous technologies, such as flying-cars and self-driving vehicles. Uber is working closely with NASA and FAA because they plan to operate their urban mobility aircraft without a pilot on board.  Their business model is to have their taxi aircraft operate autonomously similar to the way Amazon plans to operate their delivery aircraft.  In our Auto Outlook, we estimated that 95% of all new vehicles sold will be fully autonomous by 2040. For the auto industry to move to full autonomy, a similar UTM-like hub will need to be in place that monitors known environmental data, V2V communication, and detect and avoid, just like the UAV solution. It seems to make logical sense that there could be a centralized UTM that communicates with both unmanned aircraft as well as self-driving vehicles and other autonomous systems to maximize traffic efficiency. Factoring in the autonomous vehicle market leads us to believe the UTM and USS opportunity has significant upside optionality.

Where UTM is Today

Over the past two years since NASA launched its UTM project, the organization has conducted two technology demonstrations and plans two more to test the concepts described here. The third demonstration is planned for early 2018 and will focus on testing technologies that maintain safe spacing between cooperative aircraft (equipped with transponders or ADS-B) and non-cooperative aircraft (only detectable by primary radar) over moderately populated areas.  The final demonstration has not been scheduled, but should be close to an actual commercial application of the technology.  The plan is for the FAA to take over the program in 2019 to establish the policy needed to approve operations.

Many other countries are also testing UTM concepts. Europe seems to be the furthest along. They refer to their UTM project as U-Space, which is a set of new services and specific procedures designed to support safe, efficient, and secure access to airspace for large numbers of drones. While initial U-space services are expected to be operational by 2019, initial test partners suggest that half of the U-space services could be deployed today. For a deeper dive into U-Space see here.

Bottom Line

While the industry has advanced UTM in meaningful ways, there is still a lot that industry and government constituents need to do in order to make this concept a reality. Improvements are needed on the technology front, but the biggest challenge remains regulation. We believe the autonomous vehicle industry and governments across the globe see the benefits of UTM, and we anticipate favorable regulation will eventually be put in place. Based on NASA’s progress and the effort those participants are investing in their technical demonstrations, we believe the first implementations of UTM will go live around 2020. The time is now to invest in core technologies that will enable UTM, because it will play a major part in our automated future.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.