How to profit as drones take over our skies

This week, Paris has been gripped by the mysterious appearance of several drones hovering over key landmarks.

Meanwhile, over in the US, a small drone caused a major scare when it crashed inside the grounds of the White House.

At the moment, such incidents are so rare that they lead to headlines. However, these sights could become a lot more common. The industry is aggressively lobbying the authorities to relax restrictions on commercial drone flights.

Eventually, we could see drones used for everything from routine law enforcement to parcel deliveries.

And smart investors could profit by getting in now.

The new rules on drones aren’t as restrictive as they look

This month, America’s Federal Aviation Authority (FAA) published a list of proposed changes to the rules governing the use of drones in the US. While it’s far from the free-for-all some may have wanted, it will expand the range of tasks they can carry out.

At the moment, any non-military use is effectively banned. While companies can be given special permission, it’s not automatic – only 28 requests have been granted so far.

However, the new rules would replace this blanket ban and allow daytime flights at heights of up to 500ft. Of course, drones would still be banned from flying near airports or directly over people, and would have to remain in the sight of the operator at all times. While these restrictions aren’t trivial, they will allow a legal drone industry to emerge for the first time.

In any case, the new rules are only provisional. They have prompted a firestorm of criticism from the industry. The biggest complaint – as you might imagine – is the need for constant visual contact between the operator and the drone. Companies argue that this is unnecessary, as drones can be remotely monitored. They also question the need for restrictions around airports, arguing that the chances of a plane-drone collision are remote.

This is an industry that spends nearly $190m a year on lobbying. It has the ear of politicians eager to boost an emerging sector, and a potential source of high-quality jobs. So it is safe to say that further change in the favour of drone operators is almost certain.

But aren’t people opposed to this? Never mind the risk of crashes, what about privacy?

You might be surprised. The public (in the US at least) is pretty open to the idea. A recent survey by Ipsos found that two-thirds of people think the police should be allowed to use drones to fight crime. And nearly half are happy for parents to use them to spy on their children.

I’d bet that once drones become more common, these numbers would start to shift further in favour of wider use – particularly if there’s a clear benefit in terms of convenience, or reduced crime. After all, we’re prepared to post large amount of detail about our private lives on the Internet in ways that would have been unimaginable in the past.

And only five years ago there were concerns that Google’s Street View mapping technology was breaching privacy laws by taking photos of people in the street, capturing their car licence plates and even views of their gardens. Yet despite a lot of complaints, almost every country around the world now allows it.

The market for drone technology is huge

Even without any changes to the current rules, drones are increasingly big business. Market research firm Teal Group thinks that current global spending on unmanned aerial vehicles is around $6.4bn. This could rise to $11.5bn within a decade.

Most of this is currently related to the armed forces. However, there is growing demand from agriculture. More and more farmers around the world are using drones to monitor their fields more efficiently. This ‘precision agriculture’ allows them to alter irrigation and fertiliser use to boost yields and operate more efficiently.

Meanwhile, many enthusiasts and small companies are ignoring the law and building their own systems, or buying off-the-shelf kits. The Consumers Electronics Association estimates that sales of commercial drones in the US alone will increase from $130m this year to $1bn by 2018.

Amazon has hinted at plans to start a drone delivery service that could deliver parcels from warehouses to a customer’s door within minutes. And Google is creating a fleet of drones that could provide internet connections to African countries that lack the infrastructure.

The drones themselves are also rapidly evolving. For instance, several companies are developing small-scale drones that would reduce safety concerns. Others are focusing on computer-run systems that could guide themselves with minimal human input.

You may already have invested in drones

At the moment the drone market is broadly split into large companies that cater to the military side of the business, and smaller firms that have a large role in the civilian side. So if you own any defence stocks, you probably already have some exposure to the theme. The problem is that the defence contractors are hardly a pure play, while the smaller firms are mostly private.

However, I’ll be looking at some purer plays on the sector in a future issue of MoneyWeek magazine. If you’re not already a subscriber, you can get your first four issues free here.

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