Robotics Software and Services is Where the True Value Lies

We recently published a six-part series on the future of robotics including a detailed outlook through 2025 on the five major robotics categories: IndustrialCommercialDomesticMilitary, and Social. Each part highlighted our thesis, outlook and market size for each category of robotics hardware, but we expect robotics software and services to be even larger.

In total, we believe the robotics hardware market will grow from $20.9B in 2016 to $73.0B in 2025, representing a 14.9% 10-year CAGR. However, our estimate only includes hardware sales, not software or other supporting services for robotics. When factoring in these additional markets, we believe the total robotics market value could be 3x larger including $73B in hardware plus $140B+ in software and services. We believe the hardware and components used for robotics will largely be commoditized over the next 10 years. Differentiated hardware will be the exception to the rule and unique value will be driven by software and services.

Advancements in software, including robot control software and data analytics platforms, will be key to improving robot functionalities and, in-turn, drive further adoption. For example, an unmanned traffic management platform to track robots that move autonomously in society will be crucial to large scale deployment of robotics. We view traffic management as one of the more attractive investment opportunities in the robotics space. We also believe robotics as a service (RaaS) will continue to gain momentum and we view this business approach as an attractive value proposition for business of all sizes. In the paragraphs below, we dive deeper into key robot software platforms, as well as robotic services driving growth across all five robot markets.

Robot Control Software

Programming a robot is one of the most challenging, costly and time-consuming tasks involved in creating an autonomous machine. Few companies that employ robotics will build proprietary control software from scratch. Most will lean on standardized, open-source robotics operating platforms to program robots. The Open Source Robotics Foundation has developed the Robot Operating System (ROS), which is a collection of tools to simplify the task of programming robots across a wide variety of platforms. ROS has become the preferred platform for programming and it has significantly accelerated the number of robotics companies coming to market. However, due to advancements in computer vision and artificial intelligence, companies are developing more efficient and cost effective ways to train robots. Because of lower costs and smaller form factors of 3D cameras, LIDAR and RADAR sensors, robots can better understand their surrounding environment. Coupled with machine learning mechanisms, these new technologies are allowing robots to learn on their own. A future in which robots are self-taught in real-time is still many years away, but we believe further advancements in artificial intelligence will significantly narrow this gab and allow robots to become more human-like.

Data Analytics Software

Due to the advanced sensors that robots carry, machines are gathering incredible amounts of valuable data every day. We believe one of the most attractive investment opportunities in the years to come will be companies capable of taking this data and turning it into actionable insights for businesses to improve efficiencies and productivity. Providing enterprises with affordable, real-time intelligence will be a game-changer for many and a driver of robot adoption. In robotics industries, such as the commercial drone market, early adopters have quickly focused less on the drone hardware and more on the data gathered by the drone. We believe that over time this data-focused shift will continue, and robots will be seen as automated data collectors in many industries. Today, it can take days to remotely process data from robots. Cloud computing is helping to process these large data sets, but leaders in the industry will need to be able to process the data in real-time onboard the robots and provide businesses with answers immediately.

Unmanned Traffic Management Software

For robots to be deployed at scale and operate autonomously within society, we believe an unmanned traffic management platform for air, ground and sea is required. In the near term, we believe the focus will be on implementing a drone traffic management system that provides situational awareness for other drone operators and manned aircraft pilots. Unmanned aerial vehicles are used in a growing variety of applications. By 2020, we expect over 400K commercial drones will be sold annually. For manned aircraft and drones to operate together, both will need to be able to communicate on a common platform, which will allow drones to fly regularly beyond visual line of sight. Amazon and Alphabet are both working on proprietary drone management systems, but we’ve seen a handful of smaller companies working on sophisticated software platforms and believe there will be many different services available to provide situational awareness to the aircraft community. Leaders in the space will be able to support management of drone operators, which will include flight planning, flight approval, tracking as well as remote identification. We believe similar tracking systems should also be in place for ground and marine robots, but a system that works for air, land and sea vehicles in conjunction may be the ultimate goal.

Robotics as a Service

While advancements in software are improving robot functionalities, new services will also be a growth catalyst for the industry. Given certain robot-related costs remain high, many companies are starting to offer robotics as a service (RaaS) for more business to benefit from the advantages of robot technology. This model allows for customers to either lease robots and/or the RaaS provider will visit the customer to perform a specific task with a robot and provide the customer with the data gathered. For example, this service model is common within the commercial drone industry, where businesses may not have the pilot expertise to operate a drone and, in the end, the drone user is primarily after the data gathered. We believe robotics as a service (RaaS) is gaining momentum across multiple robotics domains and we view the offering as an attractive value proposition for business of all sizes.

Delivery Robots

Package delivery via drone or ground robot represents one of, if not the, largest opportunity for robotics services. While we do not see robot package delivery being deployed at scale for at least five years in the US due to current regulations in place, we believe package delivery is real and represents a multi-billion-dollar market opportunity.  While most package delivery will be by drone, we see a meaningful opportunity for ground robots to also participate. To allow packages to be delivered by a robot, we believe 2 things need to occur over the next couple years: First, the US and other countries need to implement favorable regulation to allow drones to fly over people and beyond visual line of sight. Second, we believe an unmanned traffic management system needs to be put in place allowing all stakeholders to track all robots in use. Both issues will eventually be resolved in the US, but due to more favorable regulation internationally, we believe robot deliveries could occur much sooner in foreign markets.

Bottom Line

We estimate that robot hardware will represent a $73.0B market opportunity by 2025; however, we believe many robots will be commoditized over time. Instead, the sustaining value add in robotics will come from software and supporting services. For that reason, we believe investing in companies with a software- or service-focused business model will be the more attractive way to play the growing robotics theme given these approaches are more scalable and, arguably, more defensible. We believe the largest software opportunities will be companies that improve the speed at which robots learn, as well as companies turning the data gathered from robots into actionable insights companies can use to improve efficiencies and productivity. In addition, we believe companies working on platforms for an unmanned traffic management system is crucial to accessing new multi-billion market opportunities; e.g., drone delivery. We believe advancements in robotics software platforms will be reliant on innovation in artificial intelligence, cloud computing and computer vision. With regards to services, we believe the RaaS model is gaining momentum, allowing more businesses to adopt robot technologies.

We believe a cultural shift is underway and robots are playing an increasingly crucial role in our everyday lives. Improvements in robot hardware, software and services will positively impact the industry and drive robot adoption globally.

Austin Bohlig contributed to this note. 

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.

Eric Schmidt is Wrong About Automation

At the Viva Tech conference in Paris, Google Chairman Eric Schmidt stated that he believes automation will create more jobs, not eliminate them. I think he’s wrong, and I hope he’s wrong. Disagreeing with the Chairman of the most advanced AI company in the world about automation is a dangerous game, but there are three things that can challenge his statement: timing, incentives, and economic realities. Let’s discuss his position through each of those lenses.

Timing. While Schmidt said he expects AI to create more jobs instead of eliminate them, it’s unclear what time frame he’s considering. When people talk about AI eliminating jobs, it’s almost always on how far out they’re looking into the future. Sometimes that’s five years, sometimes it’s 20, and sometimes it’s 50. At the same conference, GE CEO Jeff Immelt said the idea that robots would run factories in five years is “bullshit.” That I can agree with. The five-year picture of automation isn’t going to result in mass job loss, but the transition will start. Low-skill blue collar jobs will see continued automation. We should start to see autonomous vehicles and continued industrial automation.

Long term, automation isn’t bullshit. If we don’t have machines and software capable of performing most of the tasks we call labor in 30, 40, 50 years, then it will be a failure of Google and our technology ecosystem. We already have machines that can see and hear. We have machines that can roughly manipulate objects in the real world. We have machines that can “understand” enough at a base level to be useful at specialized tasks. Robots don’t get tired, they don’t need breaks, and they don’t get distracted. They will eventually be able to do things with greater precision and sophistication than humans, whether physical work or knowledge work. When robots get sick (broken), they’re much easier to fix or even replace. Robots don’t need to commute to jobs, which saves on energy costs. Robots don’t need paid vacation or catered lunches. For all these reasons, robots will eventually be the most competitive option for the majority of jobs. A few more decades of improvement on artificial intelligence and robotics should yield far more capable machines that can perform almost all work more effectively and more efficiently than humans.

Incentives. Any discussion around job creation or loss is highly political, which means it’s also highly emotional. Many people get scared or even angry when confronted with the possibility of mass automation and human “unemployment”. Eric Schmidt is a savvy politician, and Google is the world’s leader in artificial intelligence development. He doesn’t want the world associating Google with job loss because it could negatively impact their business. He may also have other desires to serve in public office and is setting the stage for those ambitions. Either way, he’s incentivized to be an automation unemployment denier.

But the issue of incentives flows similarly to all executives and CEOs, Immelt included. They’re in an impossible political situation. If Immelt, or any CEO, were to embrace robots capable of eliminating human jobs, there would be backlash among their employees. No worker would be happy to be viewed as a stop gap to automation. There would also be massive PR backlash.

This psychological reality of having to avoid these negative incentives can have real impact on the progress of automation adoption. Decision makers who are caught between looking for improved productivity from automation and maintaining jobs may be forced to seek suboptimal solutions to keep humans employed. Over the past several decades, automation in factories hasn’t meaningfully improved productivity. One reason may be that robot installations approved by executives are done so with the goal of sustaining human jobs rather than maximizing total productivity.

Economic Realities. During his speech, Schmidt argued that not only could automation help create more jobs, but also raise wages. He said that if you “make people smarter” via computers, their wages should increase. In a vacuum this might be true, but in reality this seems to ignore supply and demand.

Let’s take an example in knowledge work automation. In the future, computers are going to be better accountants, financial advisors, actuaries, claims adjusters, etc. than humans. All of these are highly logical jobs driven by information. Per Schmidt’s argument, automating these functions should lead to more jobs, which may be true. Knowledge work jobs might still need a human front end to present the end results from the computer with a human touch (empathy); however, now you’re employing a good customer service operator, not an accountant. In fact, the human might not need to have much more than an entry level understanding of accounting and a positive demeanor to present the script that the computer provides them, which means that far more people are qualified to perform the job of presenting accounting results from a machine than are qualified to be an accountant. Given this great supply of potential workers, it’s hard to see how wages for workers replacing accountants would rival those of accountants today.

Knowledge work seems most sensitive to the economic realities of making humans smarter, but the same can apply to blue collar work. If autonomous trucking becomes a reality in the next decade, that might result in lower freight fees, which might result in increased demand for freight services, which might result in increased demand for dock workers or truck loaders; however, those skills are widely available and now there are a pool of unemployed truck drivers to fill those spots. Again, supply and demand would suggest businesses need not pay higher wages to attract workers to lower-skilled labor.

What We Can Agree On. Instead of debating whether automation will create jobs or eliminate them, we should instead start to set aside the modern dogma that humans must have jobs to survive and be productive. We should consider what a world would look like where humans don’t have to work. A world where all humans don’t need to worry about basic needs because of automation, freeing them to explore what it means to be human. Free to provide value through empathy, community, and creativity — the things robots cannot do.  Maybe we won’t agree on the outcome of automation, but one point we hopefully all agree on is that the future is bright because of automation, not in spite of it.

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.

Social and Entertainment: Robotics Outlook 2025

This is the sixth post in a six-part series we’ve published on the future of robotics. Every day this week, we’ve published a detailed outlook on a category within the robotics market including details on our thesis, outlook and market size for each category.

See previous notes in our Robotics Outlook 2025 series here: IntroIndustrialCommercialDomesticMilitary.

While we believe domestic robots (e.g., vacuums, mops and lawnmowers) will be the largest robotics market within the home, we see other home robot markets quickly emerging in the form of social and entertainment robots. Entertainment robots are simply characterized as robot toys, but due to advances in artificial intelligence and specifically voice recognition and natural language processing, robots are now capable of interacting directly with humans. We characterize these personal companion systems as social robots, and they can interact directly with people by performing many routine tasks such as reminding people of important events and answering a growing list of questions. Over the next 10 years social robots will get smarter and more capable, which will expand the ways they interact with people. At the same time, these robots will become more affordable.

  • Entertainment Robots: We characterize entertainment robots as machines in the form of toys, such as drones and remote control cars. The entertainment robot category continues to grow due to the lower costs of robot technologies. Today, robot toys can range from $50 to as high as $1,000, but over the next 10 years we expect the average price for toys to come down significantly, making robot toys affordable for more households.
  • Social Robots: Best characterized as personal companions, social robots are systems capable of interacting directly with people. While the primary form of interaction is via voice control, advances in computer vision are allowing social robots to sense human movement, gestures and even emotions. Driven by innovation in artificial intelligence, social robots can also answer a growing list of questions. Today, the most common form of social robots includes the Amazon Echo and Google Home, but we anticipate newer and more niche platforms to be introduced that will go beyond these technologies capabilities.

Social and Entertainment Robot Market to Grow to $2.0B By 2025

According to the International Federation of Robotics, 1.7M social and entertainment robots were delivered in 2015, representing a $1.0B market opportunity. We believe the number of social and entertainment robots sold in 2016 increased 25.0% y/y to 2.1M. Due to lower robot costs, we believe the market value only increased 10.0% y/y to $1.1M.  Looking ahead, we anticipate social and entertainment robots to see heathy growth, but due to lower robot costs from increased competition, we only anticipate the market to grow at a high-single digit market CAGR through 2025. While we believe there will be specific sub-markets within these categories to experience much higher growth, over time social and entertainment platforms will be commoditized and the value-add will come from application development. That said, by 2025 we believe over 7.4M social and entertainment robots will be shipped, representing a $2.0B market.

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Military: Robotics Outlook 2025

This is the fifth in a six-part series we’re publishing on the future of robotics. Every day this week, we’re publishing a detailed outlook on a category within the robotics market including details on our thesis, outlook and market size for each category.

See previous notes in our Robotics Outlook 2025 series here: IntroIndustrialCommercial, Domestic.

While robots have been deployed in military applications for years, the number of unmanned systems used by domestic and international defense agencies continues to grow. Thanks in large part to improvements in computer vision and robotic functionalities, unmanned systems are now capable of accomplishing tasks better than traditional manned systems. Today, military robots consist of unmanned systems that operate in the air, ground, and sea. While unmanned aerial vehicles are the most common form of robots used by militaries, unmanned ground systems and marine robots are playing a bigger role in tactical missions. Given that these unmanned systems improve situational awareness, reduce a soldier’s workload and minimize overall risk to military personnel, we believe robots of all kinds will play a growing role in military operations over the next 10 years.

  • Unmanned Aerial Vehicles (UAV): Military UAVs take many forms, from drones small enough to hold in your hand to UAVs the size of manned fighter jets. Most of these drones can carry a wide variety of sensor payloads. Surveillance is primary UAV application in order to gather aerial intelligence. Military UAVs are typically more expansive than commercial drones, with pricing ranging from $50K – $1M+; however, due to technological advancements seen in commercial drones we anticipate pricing to decline steadily.
  • Unmanned Ground Vehicles (UGV): Similar to UAVs, there are different classes of military UGVs varying in size and payload capacity. Some UGVs are small enough for a person to carry, while others are the size of a tank. UGV applications include intelligence, surveillance, and reconnaissance (ISR) functions, as well as cargo transport. Compared to other unmanned systems, UGVs are superior when direct action needs be taken on the ground. For example, an attached robotic arm could inspect or deactivate a potentially hazardous material. Pricing for UGVs vary based on size and range from $10K per unit to as much as $100K+ for larger models.
  • Unmanned Marine Vehicle (UMV): UMVs include unmanned marine surface vehicles and underwater robots. While most UMVs in use today are cable of operating for multiple hours at a time, new UMVs can remain submerged for weeks at a time. UMVs are primarily used for marine surveillance, sweeping for mines, securing critical water passages, and serving as navel targets. UMVs are among the most expensive military robots in use today, with prices ranging from $200K for the low-end models to as high as $10M for high-end UMVs.

Military Robot Market to Grow to $2.8B By 2025

We believe a total of 12,336 military robots were delivered in 2016, which is up 8.8% from the prior year, and the total market value grew 6.7% y/y to $1.2B. We believe the vast majority of units were UAVs; we estimate that 10,330 military drones were sold in 2016. Over the next 10 years we anticipate UAVs will be a key focus within robotics for most militaries around the world. By 2025, we estimate that over 41K military drones will be delivered globally, representing a 16.2% CAGR and $2.1B market opportunity. We believe that the number of UGVs sold will increase from 1.9K in 2016 to over 5.9K in 2025, representing a $450M market opportunity. While we believe demand will be driven by all UGV classes, we anticipate faster growth among larger and more advanced systems.  While the category remains small from a unit standpoint today, we believe the UMV market will see healthy growth over the next 10-years and represent a lucrative market opportunity by 2025. We believe the industry shipped 131 UMVs in 2016 but expect 330 units will be delivered in 2025, representing a $260M market. UMV growth will be driven by further applications and use case development. In the exhibit below, we highlight our domestic robot forecast through 2025.

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Domestic: Robotics Outlook 2025

This is the fourth in a six-part series we’re publishing on the future of robotics. Every day this week, we’re publishing a detailed outlook on a category within the robotics market including details on our thesis, outlook and market size for each category.

See previous notes in our Robotics Outlook 2025 series here: Intro, Industrial, Commercial.

Due to advancements in computer vision, robot functionalities and, most importantly, lower component costs, adoption of robots is accelerating in both commercial and domestic markets. Domestic robots are systems used to perform household chores such as vacuuming, mowing the lawn and mopping. While home robot adoption has accelerated in recent years, we believe penetration rates remain low and foresee even higher growth in the future. Although we anticipate improvements in robotics functionalities and lower robot costs to accelerate growth, increasing consumer awareness of these technologies will be the primary growth driver. Currently, robotic vacuums lead the market in units sold, but with consumers becoming more comfortable with robotics, other technologies such as robotic lawnmowers and mops are starting to gain meaningful traction.

  • Vacuum: Robotic vacuums, or robovacs, were the first mass market robots to enter the home. Today, the robotic vacuum market accounts for the highest percentage of domestic robots in terms of spend and units shipped. Robovacs retail between $200 and $1,000, with the higher-end models offering longer battery life and WIFI-connectivity. Assuming robot vacuums only accounts for ~20.0% of global vacuum spend, we believe strong growth lies ahead for this domestic sub-market.
  • Lawnmower: We believe the robotic lawn mowing market is the second largest domestic robot market in the world. Today, robotic lawn mowers are most common in European countries due to the smaller average lawn size. Robotic lawnmowers are the most expensive domestic robots on the market today with prices ranging from $1,000 to $5,000. We believe the biggest growth catalysts include lower unit costs and improved battery endurance, especially in North America where lawns are much larger.
  • Wet Floor: The wet floor robotics market, which includes robots used for mopping and sweeping non-carpeted floors, is the third largest domestic robot market. Although small today, this domestic market has recently started to gain strong momentum across the globe. Specifically, wet floor robots are seeing strong adoption within Asian countries where carpeting is not the norm in most households. These robots are one of the least expensive of all domestic robots and retail from $150 to $300.

Domestic Robot Market to Grow to $4.4B By 2025

We believe a total of 5.1M domestic robots were delivered in 2016, which is up 25.5% from the prior year, and the total market value grew 25.7% y/y to $1.4B. We believe 4.1M robotic vacuums were sold in 2016. Over the next 10 years we anticipate the industry to see double-digit unit growth annually. By 2025, we estimate that 15.5M robot vacuums will be sold, which will equate to a $2.6B market opportunity. Meanwhile, we believe the number of robotic lawnmowers sold will increase from 340K in 2016 to over 1.4M in 2025, representing a 21.0% 10-year CAGR. Although we anticipate robotic lawnmower pricing to come down significantly from where it is today, we believe the market opportunity will exceed $1.0B in the next 10 years. While small today, we believe the wet floor market will see the highest unit and market growth over the next 10-years. We believe the industry shipped 570K wet floor robots in 2016. By 2025, we estimate that over 6.0M wet floor units will be delivered, representing a 33.9% 10-year CAGR. In the exhibit below, we highlight our domestic robot forecast through 2025.

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