RUSSELL WALKER AND RAFIQUE JIWANI ’145-315-501 Reinventing E-Commerce: Amazon’s Bet on Unmanned Vehicle Delivery I would define Amazon by our big ideas, which are customer centricity, putting the customer at the center of everything we do, [and] invention. We like to pioneer; we like to explore; we like to go down dark alleys and see what’s on the other side . . . I know [drone technology] look[s] like science fiction—it’s not. It will work and it will happen. It’s going to be a lot of fun.1 —Jeff Bezos, CEO and founder, Amazon.com In a December 1, 2013, interview on American television program 60 Minutes, Amazon CEO Jeff Bezos announced that Amazon would soon change the future of online shopping by enabling customers to receive items within thirty minutes of ordering. This delivery service, Bezos said, would be powered by unmanned autonomous drones and could be offered as soon as 2015. The market reaction was instantaneous and positive. Still, Amazon needed some answers before it could launch autonomous delivery services: Were customers ready to embrace and pay for this type of delivery service? Would regulators allow it? Should Amazon make or buy its drones? Would it be too risky for Amazon to wait to launch this service? If it decided to go ahead, how should it launch, and to whom? The U.S. E-Commerce Industry The Early Days An English inventor named Michael Aldrich began developing the precursor to online shopping in 1979. Aldrich, frustrated with how long it took to shop for groceries (driving to the store, looking for items, waiting in line, and driving back home), tested a device that used videotex* to connect a television set to a transaction-processing computer with a telephone line. He decided to commercialize his concept in 1980, just when VCRs were beginning to gain massmarket traction in the United States. Aldrich envisioned that his product, coined the Teleputer, would enable a new form of information exchange between businesses and consumers; * Videotex, developed in the mid- to late 1970s, was a technology that incorporated a television with a computer interface, allowing users to send messages and content to each other. ©2015 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Russell Walker and Rafique Jiwani ’14. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 847.491.5400 or e-mail
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing. AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 additionally, he felt that firms could gain competitive advantages by externalizing labor costs and serving customers more efficiently.2 While finding short-lived success with B2B-focused customers (e.g., General Motors tested the system to sell spare truck parts), Aldrich was unable to make headway in the minds of consumers. They had just woken up to the idea of the VCR in their homes and the costs were extremely high, and there was no real online marketplace in use or laws regulating how firms could conduct business online.* Further, consumers were wary that these systems had no way of transacting orders securely. Aldrich later commented on his release of the Teleputer: It is also clear that moving a company [or consumer], for strategic reasons, from a low technology profile to a higher technology profile is not an overnight activity. Before using information technology strategically the goals, capabilities, positioning, and constraints on the enterprise must be established . . . If the first step in our guide was the management of change, the second step must be the business implications of change.3 Aldrich’s insight, though ahead of its time, gave way to evolving technologies such as the ATM, electronic payment through credit cards, and telephone banking during the 1980s. However, it was nearly fifteen years before his work would be remodeled for a consumer willing to accept the risk of shopping online. 1994 Resurgence As the 1980s continued, little notable advancement occurred in the online shopping industry, though there were signs of potential. The first mass-market online services, Prodigy and AOL, began advertising flowers on their welcome pages in the late 1980s, but the attempt was more of an advertisement than a platform to complete a transaction. Security was still seen as the major impediment to consumer adoption. It wasn’t until 1994, four years after the invention of the World Wide Web, that security protocols (SSL) and high-speed connections (DSL) were established, allowing users to confidently purchase goods online securely and quickly. The withdrawal of entry barriers enabled the emergence of hundreds of online retailers by 1995, including Amazon, eBay, and Dell. Offering goods at prices 10 to 20 percent below those at brick-and-mortar retail locations allowed online retailers to grow substantially through the latter part of the decade. By 1999, the U.S. online retail market reached over $15 billion in annual sales.4 Along with the exponential rise of Internet retail companies came a substantial amount of venture capital (VC) funding. VCs believed that the success of an online retailer would come after realizing net losses in order to gain market share, and were willing to back startup dot-coms based simply on an idea. Within a year, the NASDAQ fell 78 percent from its high in March 2000, and 52 percent of dot-com companies established between 1995 and 2000 disappeared. This left only a few pure-play online retailers, including Amazon, eBay, and Priceline. * By 1984, California was the only U.S. state that had passed an electronics commerce act that defined corporate and consumer rights online. 2 KELLOGG SCHOOL OF MANAGEMENT He also emphasized the need for Amazon to pursue areas within and outside online shopping from the beginning of its existence as a public company. and all other online retailers many times over. Amazon’s focus on winning with time and price in every aspect of its business was crucial.5 Amazon. 1B. distribution center capacity grew from 50.” Bezos enacted an unusual business plan (though not uncommon to Internet startups at the time) that focused on customer and revenue growth rather than profit. and hardware operations.000 to 285. identification of “white space. Employee headcount grew from 185 to 614.”* and diversification of risk became a major theme for dot-com companies that survived the bubble and the subsequent decade. * White space is a management term coined in 1991 by Geary Rummier and Alan Brache to identify areas of an organization where no one is in charge. By the end of 2013.5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY 2001–2013 Boom Continuous revitalization of goals. Amazon explored interests in B2B. Priceline. In a 1997 letter to shareholders.000 titles. Amazon had $74 billion in sales and had turned a profit for five consecutive years. Founded in Jeff Bezos’s garage in 1995 as a reseller of books. it outpaced eBay. Mark Johnson redefined the term in 2010 as an area in which businesses can create new business models. (See Exhibits 1A.000 square feet. Retail competitors had a difficult time transitioning from brick-and-mortar operations to ecommerce platforms. the company took advantage of the rapidly growing e-commerce space that followed the increased security measures enacted by Netscape founders.com History The story of Amazon is widely known. Even the ones who experienced some online success still had trouble competing with Amazon because of its sheer range of product offerings and logistical capabilities. the company—now public—had greatly expanded its reach.6 By 1997.) It occupied nearly 50 million square feet of distribution centers around the country and employed more workers than Google and Microsoft (Exhibit 2). and 1C for Amazon financials. reseller.7 Throughout the next fifteen years. With over $74 billion in revenue. and book inventories surpassed 200. and eBay drastically expanded its product lines. Priceline shifted its product focus from air travel to hotel and rental car travel. By 2013. Attempting to carry “every product from A to Z. Amazon was the clear and dominant leader in online retail. KELLOGG SCHOOL OF MANAGEMENT 3 . We see substantial opportunity in the markets we are targeting. Amazon soon found itself competing less on price with incumbent retailers and more on convenience and time to delivery. This strategy is not without risk: it requires serious investment and crisp execution. Bezos contended: Our goal is to move quickly to solidify and extend our current position while we begin to pursue opportunities in other areas. . the Amazon Kindle. (See Exhibit 3 for a complete list of Amazon acquisitions through 2009. and the company soon began adding digital services for Prime members.) Economist Mark W. the closer a supplier was to the customer.AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 Growth Strategies and Amazon Prime Though making every effort to grow Amazon organically. a service guaranteeing two-day shipping for certain products. Johnson elaborated: Amazon at its roots is built to transform. the quicker it could ship the product. including Prime Instant Video. Many Prime members claimed they would pay over $100 for annual services. Its heavy investment in more than sixty distribution centers (compared to two or three for the average retailer) across the United States paid off annually as more and more products that consumers traditionally bought in-store were being purchased online.11 (See Exhibit 4 for a map of Amazon’s fulfillment centers.200 per year versus $600 per year). When it finds opportunities to serve new customers. Amazon has the unique ability to launch and run entirely new types of businesses while simultaneously extracting value from existing businesses. Initially. 120 million products in Amazon’s catalog qualified for Prime. as it continues to pursue its vision unafraid of white space. or existing customers in new ways. it conceives and builds new business models to exploit them. Bezos acquired a diverse group of companies beginning in 1998. Amazon’s journey forward will likely be marked by a series of transformations.) Customers expected to receive products as soon as possible. .10 Fulfillment and Distribution Amazon’s efficiencies in fulfillment and distribution were critical to its success. they scrambled every link in the supply chain.8 As Amazon grew over the next decade. Instant access became a major competitive advantage for Amazon. it leveraged the Amazon brand as it introduced cloud computing services (Amazon Web Services) and its first hardware product. along the way. Reports indicated that the number of Amazon Prime members could reach 25 million by 2017. Customers saved time on everything from watching movies to downloading books to ordering groceries. and viewed Amazon as their premier online shopping destination. or renewal. Amazon invested heavily again in serving customers as quickly as possible with Amazon Prime. and they spent nearly double at Amazon than regular customers ($1. In an article in the Harvard Business Review. business model innovation. The $79-per-year subscription service became a huge profit machine for Amazon. Accenture partners Larry Downes and Paul Nunes described the Amazon Kindle: Amazon’s real innovation was waiting just until the right combination of technologies was ready for mainstream use and then leveraging its powerful brand and customer network to launch Kindle with easy access to a huge catalog of books on day one . By 2014.9 While the Kindle grew. The costs associated with its 4 KELLOGG SCHOOL OF MANAGEMENT . particularly its ability to serve online customers more quickly than its competitors. 1 million products were targeted for Prime at its launch in 2004.) Amazon’s reliance on shipping companies increased in tandem with its expansion in fulfillment centers and need to rapidly service its customers. (See Exhibit 5 for a diagram of Amazon’s shipping and receiving process. its highest spending year since its inception. Whenever a customer buys something from Amazon or logs in without buying something. (Amazon threatened to leave the state of Texas when it asked to collect taxes from the company’s shipments. It was estimated that fuel for the long-haul fleets that UPS and FedEx employed accounted for nearly 40 percent of their operating expenses. In his 60 Minutes interview.12 Amazon heavily relied on delivery services such as UPS and FedEx.5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY arrangements with these companies were beginning to become a major concern for Bezos and Amazon.14) Amazon spent $3.) Customer Data Amazon considered the data it captured from its customers one of its most important assets. The data allowed the company to foster a relationship with customers that it claimed is superior to that of a traditional retailer. such as tax breaks on large distribution centers and of course the ability to sell without charging customers sales tax. (See Exhibit 7 for Amazon lobbying spending. what they abandon. transportation safety. data protection. the company fought hard at the state level to ensure that it could retain multiple competitive advantages. Bezos discussed the necessity to reduce fulfillment and delivery service costs in order to maintain the health of Amazon’s business: We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. however. A special report in Time magazine investigated the data that Amazon collected: While brick-and-mortar stores are black boxes—customer behavior inside the store is effectively invisible to managers—Amazon is able to collect endlessly useful information about shoppers and use it to sell more stuff by targeting customers through e-mail and the website itself.4 million on lobbying in 2013. respectively.) Lobbying Amazon began heavily lobbying the U. It partnered with the CIA in a $600 million cloud-computing contract in 2012.S. In a 2013 statement to shareholders. Amazon rarely discussed how much it did or did not use it. In addition. There’s a lot of data that can be mined about how they peruse the website. and how the customer actually goes about searching for a product. Bezos claimed that Amazon conducted a significant amount of lobbying in 2013 for the legalization of unmanned autonomous drones. Aside from promising its customers that their data was kept secret.15 KELLOGG SCHOOL OF MANAGEMENT 5 .13 (See Exhibit 6 for financial highlights for UPS and FedEx. though customers highly valued the product recommendations that Amazon provided based on the customer data. Amazon is collecting all kinds of information about that person. it could negatively impact our operating results and customer experience. and intellectual property. Both UPS and FedEx announced in 2014 average price increases of 4. and over $200. government in 2010 on issues such as taxes on online sales.9 percent.9 percent and 3. If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties.000 on political donations. on delivery costs due to increased fuel prices. what they put in the cart. or flying AVs. as robotic functions in the vehicle could theoretically perform automotive tasks in a safer. Peloton Technology.gov/Publications/motor_vehicle_guide.* particularly for those involving freight activity. such as automatic braking.) At the highest level of autonomy. Drivers might not even be needed on a large scale. Level 2: Different controls of a vehicle working together autonomously.) (See Exhibit 8 for a detailed description of the NHTSA classification schedule. the development of autonomous vehicles (AVs) had been underway for quite some time. and status would be communicated between vehicles so that each could operate more * In 2014. there were clear benefits for corporations that delivered goods within an industry’s value chain. Velocity. Level 1: Individual features of autonomy. full control by driver. (Amazon focused on using this level of autonomy.AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 By 2014.pdf (accessed September 14. allowing for the possibility that retailers could use a fleet of both drones and autonomous cars and trucks. an autonomous trucking company. Twitter. 2015).16 Shoppers trusted Amazon more than Google. more consistent manner than a human could. Level 3: Near autonomy.or air-based vehicle: Level 0: No features of autonomy.17 Autonomous Vehicles Background By 2014. a driver is present only for critical control of the vehicle. however. Bezos suggested that Amazon would deliver goods by drones.000. mimicking a human’s processing of information when driving their vehicles. direction. only 7 percent of American consumers viewed Amazon as a threat. † The cost for a vehicle crash on the job can cost an employer up to $74. By that time.” https://www. (See Exhibit 9 for a breakdown of the value of commercial freight activity and predicted savings. “Guidelines for Employers to Reduce Motor Vehicle Crashes. and Apple when it came to consumer privacy. estimated that AVs could save $6 billion per year for the trucking industry. Level 4: Full autonomy. location. In his 60 Minutes interview. providing it a clear advantage over other leading digital firms. thereby virtually eliminating a portion of labor costs and insurance claims associated with on-the-job accidents. the National Highway Traffic Safety Administration (NHTSA) had classified “autonomy” into five different levels when associated with a land. See OSHA. vehicles could travel at higher speeds by communicating with each other. In fact. Facebook.osha. a driver is not needed to be present for control of the vehicle and it runs solely on data it collects from surrounding vehicles. advances in autonomous cars and trucks were being made. Amazon enjoyed tremendous customer trust in the management and use of customer data. 6 KELLOGG SCHOOL OF MANAGEMENT .† With advanced convergence technologies.) Trucks could complete overnight deliveries (those that took longer than twelve hours) without having to take rest breaks due to driver fatigue. At the same time. if necessary.18 Scale was important. Once customers could hail a driverless car to go where they needed. Without adoption. Partnering with automobile manufacturer Lexus.5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY efficiently and without the error introduced by drivers. its commercialization plan involved partnering with retailers. only 12 percent claimed they would actually feel safe purchasing an AV or being on the road with one (though this number was highly skewed toward urban dwellers). it was the large amounts of consumer data that vehicles could collect and use that would make them truly valuable. who could use the autonomous technology to serve customers KELLOGG SCHOOL OF MANAGEMENT 7 . to the unlikely (blowing through it).S.000 miles in testing by May 2014 and were designed to take humans completely out of the transportation equation. As we’ve encountered thousands of situations.) Competitive Landscape The 2010s saw many different parties investing meaningful capital in the production of AVs. (See Exhibit 11 for a timeline of recent U. Following on the heels of advancement in AV technology was a rise in legislation associated with it. . a major impediment for the mainstream introduction of AVs would eventually be consumer adoption for the emerging technology. Promoted as its “self-driving project. director of the Google Self-Driving Project. the data collected about the trip would not only provide operational efficiencies.) GOOGLE’S SELF-DRIVING PROJECT Google seemed to be the most aggressive proponent of commercializing AVs. although consumers were excited about the prospect of autonomous features in their vehicles. from the likely (car stopping at a red light).) Political support for Level 4 autonomy would also be crucial for consumer adoption. But there were concerns with investing in AV technology as well. First.19 Google did not plan to sell the car but the technology behind it. and without convergence the limitations for scale are real. AVs could use less fuel and become more efficient in operation and ownership. but would also provide a view on what individuals elected to do and where they went. Second. We still have lots of problems to solve and we are still waiting for some follow up regulation in California . though humans would still be expected to ride in the initial test models using a stop/go emergency button. consumers would need assurance that data would be secure in the hands of whichever company controlled it. . such as which route to take. particularly because of the reliance of AVs on big data.” Google’s autonomous cars had logged over 700. we’ve built software models of what to expect. Chris Urmson. For critical adoption. elaborated on the progress of the project: As it turns out. In fact. state legislation involving AVs. Google focused more on the technology behind the vehicles than the vehicle itself. Wide-scale use of AVs in society would provide data that could be used to determine not only how customers travel and where they shop. but also when and where they work and other elements of their lives. but thousands of situations on city streets that would have stumped us two years ago can now be navigated autonomously. Without drivers. what looks chaotic and random on a city street to the human eye is actually fairly predictable to a computer. Predictions about when consumers would embrace the new technology widely varied. (See Exhibit 10 for predictions of full Level 4 AV adoption. (See Exhibit 12 for renderings of AVs for some of these firms. there is no convergence. By 2013. in densely populated areas. which sponsored the study. By 2014. Today.20 Ted Scott. The automation replaced four drivers per truck per 24-hour period. which would allow for greater fuel efficiencies. such as UberRush. similar to advancements developed by Peloton Technology. the self-driving truck had been developed and tested. Safety features like automatic braking will be commercially available over the next decade. Each truck had 2. but they will be quickly superseded by autonomous trucks after that. autonomous trucks are close to inevitable. to advance throttles. 8 KELLOGG SCHOOL OF MANAGEMENT . speeding up the delivery process from business to customer. After the interview aired. Additionally. but there’s no reason a computer can’t do that. UPS trucks could bring packages quickly from an airport to a major distribution center in more remote locations. “UPS invests more in technology than any other company in the delivery business. It’s just a matter of getting the laws into place so companies can begin building to those specifications and doing some real field testing.”22 FedEx founder Fred Smith spoke more about his eager desire to get into the “unmanned aerial vehicle game” than UPS. pilots drive the planes on the ground. as they still needed technicians to monitor and sometimes guide several trucks at once. full Level 4 autonomy might not be a realistic goal.650 horsepower from combustible engines and was “driven” by over 25 million lines of software code. FedEx’s goal was to have an aircraft that had no one on board and that could carry a significant amount of cargo. said: Ubiquitous. though both had expressed a desire to significantly decrease labor costs. Its driver-assisted truck platooning (DATP) model was working with the Federal Aviation Administration for a 2015 launch.* Most experts believed that even at its nearterm technological peak. They let the pilots touch the controls for about 20 seconds. demonstrating the ability to carry 240 tons of iron ore in a single trip. and we’re always planning for the future. self-driving trucks because there will be money in it. Particularly. CATERPILLAR AND THE ROBOTICS INSTITUTE In 2010 Carnegie Mellon University’s Robotics Institute conducted a study with Caterpillar to develop an autonomous truck to be tested in a barren terrain of Central Australia. Caterpillar had six fully functional mining trucks. Exhibit 13 shows an illustration of the technology. director of engineering and safety policy for the American Trucking Association. These trucks operated without drivers and could work day and night. Eventually we are going to have wireless.23 * Peloton Technology was at the forefront of Level 3 autonomous innovation. and car service companies. and then the plane takes over.21 Caterpillar’s trucks were considered connected vehicles (at Level 3 autonomy). UPS AND FEDEX UPS and FedEx had kept fairly quiet about their potential use of AVs until Bezos’s appearance on 60 Minutes. a UPS spokesman mentioned that the company might have many uses for drones. The spokesman said. the vehicles could be given routes via mobile devices.AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 quickly. Smith continued: A modern 777 is already capable of being an unmanned vehicle. Senator Ed Markey (D-Mass) commented on the FAA approval with regard to Amazon’s press event on 60 Minutes: Before drones start delivering packages.000–$30.73 billion. He knew that Amazon needed to continuously innovate to provide the level of service its customers were accustomed to having. Estimates put the cost of owning and operating air drones at $20. KELLOGG SCHOOL OF MANAGEMENT 9 . an all-time high. the information he needed to answer these questions would not be available for months—or even years. He also needed to wait for official approval from the Federal Aviation Administration (FAA) to begin the service. he also needed to consider how to use the data collected from customers to better serve them through autonomous delivery.000.24 Although Amazon did not release figures for the portion of R&D spent on Prime Air.S. The team planned to start aerial-drone delivery service to areas in the immediate vicinity of Amazon’s many U. what risks would Amazon take on if it waited for another competitor to enter the market first? How would the retail landscape change and could Amazon change with it? The problem was. Amazon decided to pursue an aerial approach to autonomy. but in addition to perfecting the technology.5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY AMAZON PRIME AIR Focusing on its major competitive advantage of speedy delivery to customers. Prime Air promised to deliver packages of up to five pounds—which comprised 86 percent of Amazon shipments—to any address within ten miles of its fulfillment centers. By the end of 2013. My Drone Aircraft Privacy Act requires transparency on the domestic use of drones and adds privacy protections that ensure that this technology cannot and will not be used to spy on Americans. Convenience should never trump constitutional protections. But what risks would be associated with venturing into autonomous delivery before consumers fully adopted the technology? Moreover. we need the FAA to provide privacy protections for the American public. Conclusion Though Prime Air would not be ready for deployment for at least another year. fulfillment centers. the Amazon Prime Air team was in its sixth generation of drone testing. Bezos told 60 Minutes he hoped that Prime Air would be ready for launch by 2015. Bezos had many questions before it could launch. in 2013 total R&D expenses reached $1. com Consolidated Statement of Operations Source: Amazon 2013 Annual Report. 10 KELLOGG SCHOOL OF MANAGEMENT .AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 Exhibit 1A: Amazon. com Consolidated Balance Sheet Source: Amazon 2013 Annual Report.5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY Exhibit 1B: Amazon. KELLOGG SCHOOL OF MANAGEMENT 11 . AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 Exhibit 1C: Amazon.com Consolidated Statement of Cash Flows Source: Amazon 2013 Annual Report. 12 KELLOGG SCHOOL OF MANAGEMENT . “Amazon Soars to Nearly 110.” GeekWire.000 Employees. Surpasses Microsoft for First Time. KELLOGG SCHOOL OF MANAGEMENT 13 .5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY Exhibit 2: Amazon. Microsoft. and Google Labor Comparisons Source: Blair Hanley Frank. 2013. October 24. 14 KELLOGG SCHOOL OF MANAGEMENT . July 27. 2009. 1998–2009 Source: Nicholas Carlson. “Visualizing Amazon’s Acquisition History.” Business Insider.AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 Exhibit 3: Visual Breakout of Acquisitions by Amazon. http://auctionsitenews.5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY Exhibit 4: Map of Amazon’s Fulfillment Centers Source: “Amazon Fulfillment and Distribution Center Locations Map. January 26. KELLOGG SCHOOL OF MANAGEMENT 15 .com/amazon-fulfillment-center-locations.” E-Commerce and Auction Site News. 2014. 16 KELLOGG SCHOOL OF MANAGEMENT .AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 Exhibit 5: Amazon’s Fulfillment Process Source: Company documents. 784 4.032 Net income Source: UPS and FedEx company documents.5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY Exhibit 6: Financial Highlights for UPS and FedEx UPS ($ IN MILLIONS): 2013 2012 Revenues 55.372 807 Net income FEDEX ($ IN MILLIONS): 2013 2012 Revenues 44. Exhibit 7: Amazon’s Annual Spend on Lobbying Source: Center for Responsive Politics.494 1.127 Operating expenses 48.561 2.287 42.404 52.opensecrets.736 39.php?id=D000023883 (accessed May 1. KELLOGG SCHOOL OF MANAGEMENT 17 .438 54.680 Operating expenses 41.org/lobby/clientsum. 2014). http://www. An example of combined functions enabling a Level 2 system is adaptive cruise control in combination with lane centering. Limited Self-Driving Automation (Level 3): Vehicles at this level of automation enable the driver to cede full control of all safety-critical functions under certain traffic or environmental conditions and in those conditions to rely heavily on the vehicle to monitor for changes in those conditions requiring transition back to driver control. Such a design anticipates that the driver will provide destination or navigation input.S. The driver is expected to be available for occasional control. steering. This includes both occupied and unoccupied vehicles. but with sufficiently comfortable transition time.” NHTSA 14-13. Full Self-Driving Automation (Level 4): The vehicle is designed to perform all safetycritical driving functions and monitor roadway conditions for an entire trip. throttle. 18 KELLOGG SCHOOL OF MANAGEMENT . where the vehicle automatically assists with braking to enable the driver to regain control of the vehicle or stop faster than possible by acting alone. 2013. and motive power—at all times. Combined Function Automation (Level 2): This level involves automation of at least two primary control functions designed to work in unison to relieve the driver of control of those functions. press release. Function-Specific Automation (Level 1): Automation at this level involves one or more specific control functions. but is not expected to be available for control at any time during the trip.AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 Exhibit 8: Detailed AV Definitions from the National Highway Traffic Safety Administration NHTSA defines vehicle automation as having five levels: No Automation (Level 0): The driver is in complete and sole control of the primary vehicle controls—brake. Source: “U. Examples include electronic stability control or pre-charged brakes. The Google car is an example of limited self-driving automation. May 30. Department of Transportation Releases Policy on Automated Vehicle Development. 600 — Coffee 0.020 2 3.600 25 90 Component AV Savings (%) Driver’s salary 0.004 — Total 1.com/infographics/cost-of-trucking (accessed May 1.200 20 Truck cab and trailer depreciation (based on 5-year straight line) 0.000 — Permit.380 Source: “The Real Cost of Trucking—Per Mile Operating Cost of a Commercial http://www.5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY Exhibit 9: Estimate of Average Trucking Operating Costs and AV Savings Per Mile ($) Percentage of Total (%) Annual Total ($) Fuel 0.800 Repairs and maintenance 0.000 — Insurance 0.240 17 30.540 39 70.030 3 4. licenses 0.” KPMG Trucker’s Report.120 10 15.thetruckersreport.050 4 6.000 39 Truck.360 26 46.2 billion private cars on the road will be autonomous IDC 2040 Too many regulatory/trust barriers to be mainstream before 2040 IEEE 2040 75% of cars on the road will be autonomous by 2040 Source: Company documents for all above. Exhibit 10: Predictions of Introduction of AVs to the Mass Consumer Source Year Google 2016–2018 Summary Plans to release Google-car technology Nissan 2020 Available in showrooms GM 2020 Fully autonomous cars available BMW 2025 Fully autonomous cars available Ford 2025 AVs will be “a common sight” on roads in the United States McKinsey 2025 10–20% of 1. KELLOGG SCHOOL OF MANAGEMENT 19 . 2014).500 80 Tires 0. 600 — 180. ” Texas A&M Law Review 1. State AV Regulation June 2011: The Nevada legislature passes a law authorizing the use of AVs. May 2012: The Nevada Department of Motor Vehicles issues the first license to a selfdriven car to a Toyota Prius using Google’s technology. January 2014: Michigan allows the testing of AVs with a human being inside the vehicle. September 2012: California signs a law allowing the legalization of driverless cars in the state. “Automated Vehicles Are Probably Legal in the United States. 411 (2014).AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 Exhibit 11: Milestones in U. July 2012: Florida becomes the second state to authorize AVs. 20 KELLOGG SCHOOL OF MANAGEMENT . A mandate for the California Department of Motor Vehicles to draft full regulations by 2015 is issued. no. Source: Bryant Walker Smith.S. 5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY Exhibit 12: Images of Autonomous Vehicles GOOGLE CATERPILLAR AMAZON Source: Company documents. KELLOGG SCHOOL OF MANAGEMENT 21 . AMAZON’S UNMANNED VEHICLE DELIVERY 5-315-501 Exhibit 13: Peloton Technology Level 3 Autonomous DATP Model Source: Company documents. 22 KELLOGG SCHOOL OF MANAGEMENT . 17 Nadia Tuma and Laura Simpson. August 6. “Why Amazon’s Data Store Doesn’t Scare People—But Facebook’s Does.” Google blog. “E-Stats Report on E-Commerce for 1999.” white paper. Nunes.” McKinsey Quarterly. 24 “Americans Debate Amazon’s Intent to Deliver Packages by Drones.” Washington Post. “Management Guide to IT. “The Latest Chapter for the Self-Driving Car: Mastering City Street Driving. Spring 2012. January 23. in interview with 60 Minutes.” DIY Drones.” Business Standard. 16 Timothy Morey. 20 Dennis K. Berman. “Will Amazon Take Over the World?” Time. 21 Ibid. “Big Bang Disruption. 22 Christina Chaey. July 16.” Harvard Business Review.5-315-501 AMAZON’S UNMANNED VEHICLE DELIVERY Endnotes 1 Jeff Bezos.. 8 Mark W. 2013. “Fred Smith: FedEx Wants UAV’s. 13 David J. Massachusetts Institute of Technology.” 2012. 10 Brad Tuttle. “Amazon Prime: Bigger. March 18. September 2012). “The Future of Retail Supply Chains. 2013. “Everything You Need to Know about Amazon’s Delivery Drones. 2012. What Was a Truck Driver?” Wall Street Journal. 2013.com/2014/04/the-latest-chapter-for-self-driving-car.html. March 2013.” Harvard Business Review. and Allison Schoop. May 2015. Theodore “Theo” Forbath. December 3. 19 Chris Urmson.blogspot. 2013. 9 Larry Downes and Paul F. “Customer Data: Designing for Transparency and Trust. More Profitable Than Anyone Imagined.” March 7.” Advertising Age. Michael Aldrich. 2014. 3 Ibid. July 12. 2010. “Self-Driving Cars: The Next Revolution. Too. “Amazon’s Smart Innovation Strategy. January 1982. 4 U. April 12. 2013. “UPS Is Researching Drone Deliveries. and Priceline Group 2013 Annual Report. 23 Chris Anderson. 2013. 6 Amazon 2013 Annual Report. “Evolution of US Air Cargo Productivity ” (master’s thesis. Department of Commerce. 2009.” Washington Post. December 2. 18 KPMG and Center for Automotive Research.S. 2014. 11 Nitin Chaturverdi et al. 7 Brian Fung. February 12. 5 Revenue data from Amazon 2013 Annual Report. More Powerful.C. Donatelli. eBay 2013 Annual Report. December 3. http://googleblog.” Fast Company. April 28.. December 1. “Daddy. Johnson. 15 Christopher Matthews. 2 KELLOGG SCHOOL OF MANAGEMENT 23 .” Time. 14 Brad Plumer.” Bloomberg BusinessWeek. 2013. 12 Amazon 2012 Annual Report. 2001. “Here’s What Amazon Lobbies for in D.