The Drone Industry Isn't As Healthy As It Seems

Many market research firms argue that the drone industry appears poised for growth over the coming years, but taking a closer look at some of the leading companies in the space paints a different picture.

According to Gadfly's Leila Abboud, the "once-hyped" drone industry is experiencing a "chill."

For instance, Parrot SA, the France-based maker of non-military drones, said it needs to fire one-third of its entire staff because the margins it is recording on drone sales isn't large enough to support profitable growth.

Parrot is the second-largest maker of non-military drones and is losing the battle to global leader China-based SZ DJI Technology Co, which makes higher-end drones. The Chinese company has a distinct advantage, as it controls the entire manufacturing process from design to completion, giving it more flexibility to slash prices by as much as 70 percent in less than one year.

Even GoPro Inc GPRO's drone Karma was briefly introduced to consumers before the company was forced to issue a mass recall of all 2,500 units it sold.

Meanwhile, cookie-cutter drone makers across Asia are introducing products to the market at even cheaper prices, forcing the larger players to lower their own prices to remain competitive.

What's Going On?

Abboud suggested the drone market is similar to the hardware market.

"Commoditization comes fast, even when a segment is growing rapidly," she argued. "Scale becomes more important than brand. Profit margins can be thin: just ask makers of flat-screen TVs or smartphone makers other than Apple Inc. AAPL and Samsung."

Finally, venture capital firms appear to be shying away from the drone space. Funding to drone startups slowed throughout 2016 after peaking in the third quarter of 2015. Among the drone startups that do secure venture capital funding are those that also offer a service attached to the drone.

"That seems a rational way of trying to avoid a profit-less, as well as a pilot-less, future," Abboud concluded.