Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

(Corrected )

Attendees at the Consumer Electronics Show in Las Vegas last week could play around with a dizzying array of unmanned aerial vehicles. Drones that take selfies. Drones equipped with thermal imaging cameras to see at night. Drones that help fishermen chase their prey.

No use is too niche as drone-makers chase a market that's forecast to grow an average 32 percent annually over the next decade to reach $30 billion, according to ABI Research. But away from the showroom floor, a chill has settled on a once-hyped market.

France's Parrot SA, the second-largest maker of non-military drones, is laying off a third of its staff because margins on its consumer drones were "insufficient to deliver profitable growth". That's a remarkable statement from the company that pioneered cheap consumer drones in 2009 and now focuses on those priced between $100 and $500. You may have seen them on shelves of Apple Inc. stores in the U.S. and Europe. Almost 60 percent of Parrot's revenue is from drones.

Repeat After Me
Parrot is struggling to cope with competition in the drone market
Source: Bloomberg

There are two reasons for Parrot's woes. First, it's withering under the competitive onslaught from China's SZ DJI Technology Co., the undisputed king of non-military drones. DJI makes higher-end models pitched at hobbyists and businesses, which use them for everything from crop inspection to construction. The venture-backed company controls the entire process from design to manufacturing, making it more efficient than outsourcing rivals, and with better products. Lately DJI has gotten more aggressive on price, competitors say.

Dozens of cookie-cutter drone-makers have also popped up in Asia, further driving prices down. Even camera-makers such as U.S.-based GoPro Inc. tried their hand only to find the business harder than it looked. GoPro's Karma drone suffered power outages that made some fall out of the sky.

The sector's following a familiar script for hardware. Commoditization comes fast, even when a segment is growing rapidly. Scale becomes more important than brand. Profit margins can be thin: just ask makers of flat-screen TVs or smartphone makers other than Apple and Samsung.

The shake-out is just coming quicker than investors expected. As recently as 2015, venture capitalists were throwing money at startups. Now layoffs are more common than big fund-raising rounds. 

Losing Altitude
Venture capital funding to drone start-ups slowed last year
Source: CB Insights

Smaller Chinese player Zerotech fired a quarter of its workers in December. Third-placed 3D Robotics Inc. laid people off and decided to stop making drones altogether last year, citing DJI price cuts of 70 percent. It's now focusing on making software to power drones and offering services to companies.

This rough patch might not be such a bad thing. Drones have the potential to improve many industries when they're deployed to the real world. But if they're to be more than a fad, we don't need dozens of makers of whizzy drones that delight consumer geeks, but don't really improve the usefulness and safety of the tech.

VCs are switching their affections to companies more attuned to the enterprise market, including those such as Airware of the U.S. which offer services. That seems a rational way of trying to avoid a profit-less, as well as a pilot-less, future.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(An earlier version of this story incorrectly identified the company named in the last paragraph. It is Airware,  not Airwave.)

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net