Drones Grow-Up

Our industry has been growing up!  We should be glad that the authorities are finally starting to prosecute people on the basis of illegal drone flights.  We have finally arrived.  Our industry is now important enough that the authorities are taking action to remove bad operators from our ranks.

There have been two recent high-profile prosecutions of small unmanned systems operators.  First, Raphael Pirker of Team Black Sheep got at $10,000 fine from the FAA that he is vigorously contesting.  You can see the video that got him in trouble below.

http://www.suasnews.com/2013/10/25619/the-1st-faa-prosecution-of-a-civilian-drone-uav-we-are-change/

Then, the NYPD charged the drone pilot in Manhattan who crashed his drone with reckless endangerment.  He also made a video of his face before the drone took off.

Drone Arrest

http://abclocal.go.com/wabc/story?section=news/investigators&id=9292217

Both these incidents are are clearly inappropriate flights, well outside of FAA guidelines for hobbyists and rules for aircraft.  The authorities are doing their job in prosecuting and it is going to improve the industry.  We’ve had a “grey area” in aerial robotics for too long.  Yes, we need better rules and FAA rule making for UAS cannot come soon enough.  In the meantime though, our dislike of the current regulatory structure is not enough for us to substitute our judgement for the FAA’s.  In neither case, is the prosecution talking about destroying the life of the operator.  We are talking about fines and a misdemeanor charge.

These seem like appropriate punishments to remind everyone that there are rules about where we can fly and how.  Much, much more airspace will be open to robotic craft, eventually.  In the meantime, we as an industry have to address the concerns of the non-participating community.  They did not consent to have a quad-copter or any other aircraft falling on their heads.  The manned aviation community has built-up an elaborate system to persuaded the public that they can have some certainty of not killing people, particularly on the ground.

One of the points that is sometimes lost on the robotics community is how well our current regulatory structure actually works.  Most of the economic gains from aviation are being captured.  Commercial flights are cheap and safe–there have been two commercial fatalities in the last four years and it is cheaper in real terms than almost ever before.  All this success in commercial aviation has not precluded general aviation and RC hobbyists from pursing their interests.

We are certainly missing some gains from unmanned aircraft, but the largest applications for civilian use of drones remain undiscovered.  Technology spreads based on benefits, regaldless of the law.  If hobbyist style drones provided tangible benefits that had been discovered they would already be as widespread as, say, illegal file-sharing.  And on movie sets, quad-copters now common, but the movie helicopter shot market is not all that large at any price.  If this analysis is correct, since testing continues on drones of all classes, the FAA’s lethargic pace on the new rules has not had as much adverse impact as many in our industry like to imagine.

Given the only hypothetical benefit and the very real danger of unregulated drone flights it seems imprudent of authorities to let the industry go with no enforcement.  Non-enforcement discourages entry by law-abiding players and erodes the integrity of all firms involved in the industry.  If this is ever going to be more than a few guys out tinkering with electronic toys, the industry will have to show it is responsible enough to operate over people’s heads.  This is not going to happen if we resist and tolerate a disregard for regulation.  Many industries have used regulation to expand their reach, by necessity, the aerial robotic market will be one of them.

Is there an open-source / closed-source dichotomy in robotics?

Is there an open-source / closed-source dichotomy in robotics?

I just put up a new piece over at Robohub discussing how open-source and closed-source can live harmoniously in robotics–because all robots are services.

The right way to regulate drone privacy

On August 6th, I had the honor of testifying in front of the California State Assembly Public Safety Committee on regulation of drones, by the state of California.  The committee is considering several bills that have been introduced on the regulation of drones particularly with respect to privacy and law enforcement use.

The committee discussions, hopefully indicative of the general tone of legislators everywhere:

The committee seemed to be wrestling with several questions about where to start.  Several wondered what exactly is a drone (Good luck!  If anyone figures out a clear definition let me know) and what the capabilities of this class of technology are.  I hope that the message that came through from the witnesses was the “drones” are not distinct from other vehicle and sensing technologies, but are just a subset of the flying class of these technologies and that the capabilities are similar to manned platforms of the same class.   I was also very pleased to see that the committee was eager not to foreclose beneficial uses of the technology.  Some of the committee members specifically cited my company, TerrAvion, as an example of they type of application they wanted to avoid regulating.

The committee and the witnesses all recognized that air safety is regulated by the FAA, but that the states can impose additional regulations on privacy, particularly in law enforcement.  If we are to live in a democracy, there have to be limits on the government’s ability to collect information on citizens.  However, I think that the thoughtful testimony of Sheriff Geoff Dean of Ventura County pointed to the fact that law enforcement agencies are ready for the challenge of using new technology under the supervision of the courts and elected officials in a way that is focused on creating real community benefits and is not generally invasive–even to people who might be kind of sort of breaking the law, like speeding or possessing marijuana here in California.

Modular Information Cycle

 Principles for regulating drones:

Uniformity:  I believe that greater regulation of surveillance by the government is required.  Some of the things western intelligence agencies are doing are terrifying.  As a patriot and a veteran, I am dismayed at how our government relates to collecting data on its own citizens.  As a drone operations leader, who has participated at the pointy end of the intelligence spear in Afghanistan, I can tell you that cellphone and e-mail monitoring represents an exponentially greater threat to democracy than having a whole fleet of drones at the government’s beck and call.  When we make privacy regulations, let’s regulate what, not how, individuals and the government can collect information.  The platform that is used to collect the information should not matter.  If I can’t collect information with a plane, then I shouldn’t be allowed to collect it with a cellphone camera either.

Moreover, private individuals ought to have the same right to collect information that the government does.  In practice this might mean that if the government can fly a drone, I as a private citizen should be able to fly a drone.  If the government can issue a subpoena (or national security letter), I as a private citizen should be able to discover those same records in litigation for things that have nothing to do with national security.  There should be uniformity, no institution should be sitting in privileged position, if there are extra steps for government uses of data, I’m okay with that.

Regulate Late in the Information Cycle:  A corollary to  the idea of regulating uniformly, is to regulate late in the information cycle.  One of the key ideas of modern information networks is the idea that the information cycle is being modularized.  This modularization means that instead of a single organization that delivers “the answer” through all the steps, a decision maker can change one part of the process at time to deliver better results.  The implication of this, is that collection is likely to be used in many unanticipated ways.  Regulations that are targeted “upstream” in the data cycle are likely to become obsolete and have unintended effects very quickly.  If legislators are looking curtail specific negative effects of data collection, they should target them later in the information cycle, most importantly at taking actions.

____

I love the United States’ robust take on personal freedom.  Taking our cherished rights and freedoms into the digital age is going to require hard, thoughtful work from legislators, voters, and public and private officials.   I hope the robotics community wakes up to the fact that data collection and privacy are not just drone issues, but issues that we share across domains and with other data-rich technology sectors.  I am heartened by my participation thus far in our democratic process, it seems like people are really working to accommodate each other’s concerns and arrive at future that we will all be happy to live in.

Hizook 2012 VC in Robotics is out!

Friends, take a look and see what needs to be added.  The definitive list of private funding in robotics for 2012 is out, help make it complete by adding a comment if you know of private funding for a robotics company that isn’t included.

http://www.hizook.com/blog/2013/06/10/venture-capital-vc-funding-robotics-2012

Intuitive Surgical, a manufacturer with almost no tangible assets?

Intuitive Surgical (NASDAQ:ISRG) is a prime example of how robotics is similar to other IP intensive industries like software, biotech, and entertainment.

In December my colleagues and I produced a valuation of Intuitive Surgical.  Below is a representation of our model of the asset structure of Intuitive Surgical in our forecast.  Whether you agree with our estimate of a 31% return on economic assets or not (though the stock market roughly seems to), this chart is very instructive to look at what the economic assets of a successful robotics firm are.

And hey, guess what?!  Intuitive looks more like a software company than a traditional manufacturer.  Strike another blow for the case that robotics companies–at least successful ones–are capital efficient!

Moreover, if I was critiquing the model in the valuation I would say that we hadn’t adequately valued the intangible assets of Intuitive Surgical.  The intangible assets of the firm probably have a market value of 2-8 times what we estimate.  Even with our conservatism, look at what you’re buying into when you buy a share of Intuitive:  A $2Bn stack of cash, a multi-billion dollar IP portfolio, and a smallish medical device manufacturing company.

Assumptions of FCF forecast through an economic view
[How to read this chart:  Black is our estimate of “R&D assets” in $K so starting balance is just shy of $2Bn.  Red is GAAP non-financial assets, otherwise know as real stuff, like buildings, inventory, and accounts receivable.  Grey is our estimate of financial assets with the current dividend policy–this model posits that Intuitive will be sitting on $4Bn in cash or the like in 2016 and an IP portfolio equally as large and valuable.
Return on economic assets was estimated using our income forecast over capitalized R&D spending in the R&D account plus assets less cash and securities.  The model has a depreciation factor for R&D each year to account for obsolescence and expiration.  We went back several years to estimate an appropriate R&D account starting balance for the projection.]

The stock market assigns a $20Bn valuation to Intuitive.  It recognizes that Intuitive’s control of  intangible assets is very valuable. The graph of the model here only scratches the surface of intangible assets.  We assumed that the only off balance sheet economic asset was an R&D account.  Clearly, this is not the case as Intuitive Surgical also has unique and valuable organizational processes, sales relationships, and employment relationships with talented employees but those are much harder to find information about in SEC disclosures.    Similarly, we also marked R&D at cost–with a portfolio as valuable as Intuitive’s the market is probably going to value the R&D output at more than Intuitive paid to develop the R&D assets.

Even with all this, Intuitive Surgical looks like lean, mean, capital efficient, IP intensive, knowledge economy company.  Can anyone tell me why we let people talk about robotics like it is capital intensive?

I’d like to gratefully acknowledge my co-authors of this report who have given me permission to publish it: Avinash Belur, Naohiro Furuta, Masayuki Minato, Kohei Mutoh, & Dashampreet Sidhu.  Analysis available by request.

 

I missed this one in Foreign Policy…

Last September featured and excellent article in Foreign Policy magazine running down most of the nonsensical arguments commonly used against drone warfare.  I too have concerns about how both the current and the previous administration conduct wars, but I’m a firm believer in our country using the most humane and effective means if we are going to conduct war.

http://www.foreignpolicy.com/articles/2012/09/05/whats_not_wrong_with_drones?page=0,0

The article features an excellent rundown of the evidence on civilian casualties in particular.  The improvement in discrimination through the Obama administration’s first term is quite remarkable.  I’m surprised that the administration has not discussed the program more.

VLAB: Drones – the commercial era takes off, but breaking the law is going to blow-up in our faces

Last Tuesday, I had the pleasure of attending VLAB: Drones – The Commercial Era Takes Off at Stanford GSB.   The event was truly fantastic and the panel was amazing.  The moderator was Chris Anderson, former editor at Wired and CEO of 3D robotics.  I’m really struck by how much he has become the face of the commercial drone industry.  From his appearances on NPR and print media, he’s probably the most recognized drone advocate.  He makes some very powerful points.  Fueled by Moore’s Law and the cellphone industry supply chain, unmanned aircraft technology is coming and we’ve got to prepare for it.  Like it or not, the drone/robotic era is coming–it doesn’t have to be scary–all kinds of things are possible.

VLAB Drones Panel at Stanford GSB March 19th, 2013

VLAB Drones Panel from left to right: Chris Anderson, 3D Robotics; Helen Greiner, Cyphy Works; Zach Schildhorn, Lux Capital; Jonathan Downey, Airware; Matthew Pobloske, BAE

The one theme that deserves the attention of our industry at large, promoted by Chris Anderson, was that many people in our industry are operating in a “legal gray area” (read: violating regulations because they think the regulations are stupid and won’t be enforced) and that operating in the “gray area” is a good thing that will force regulatory movement.  Anderson gave two examples of this “gray area.” He talked about how ridiculous it was to be violating export controls by turning Lego Mindstorms into what could be considered a cruise missile guidance system.  Later he talked about flying drones in contravention to the FAA regulations governing the use of unmanned aircraft.

The FAA regulations are pretty clear, and let’s stipulate that they are stupid.  However they are the rules, and they have worked pretty well for the FAA’s primary goal of keeping people from getting killed by aircraft.  Technologists in general and Silicon Valley in particular take a dim view of regulations promulgated under the old order (e.g. Lyft, Uber, AirBnB).  I’m not completely outraged when technologists facilitate contract formation between consenting adults, even if local regulation contravene some of the particulars of the contracts.  However, let’s be clear that is absolutely not what we’re talking about when it comes to aircraft.

When it comes to aircraft–manned or unmanned–one of the main beneficiaries of regulation is the people on the ground.  This isn’t renting your room to some strangers who choose to be there; it is hurtling a heavy object over the heads of people who haven’t consented to be part of an experiment.  Our society rightly asks the government to ensure that activities that impose risk on others, especially those that did not consent, be minimized.  We need to update our regulations, but aircraft operators need to respect the letter and spirit of the law as it stands.  What standards do we have if not the law?   If we follow the path of breaking all the rules, someone is going to accidentally kill a  sympathetic bystander.  Beyond the personal tragedy that will create, that accident will set back our industry and the benefits we can provide to society by a decade.

In Afghanistan, one of my planes almost smacked into a helicopter–but it was the helicopter, not the drone–who had come, without clearance or radio calls, into an active artillery firing ROZ (restricted operating zone–an airspace control measure to make sure that aircraft don’t run into artillery fire).  Similarly, the first full sized drone and manned aircraft collision had the C-130 violating airspace control measures around the airfield.  Pilots are not infallible and often break the rules.   The best drone operators have a different safety culture.  Military drone safety culture is one where there is proper approval for everything, because every move will be recorded and second guessed.  I hope this culture will permeate the civilian unmanned aircraft community as well.

Although breaking the rules might move us toward our unmanned enabled future a little bit faster, this is an incredibly dangerous path for our industry and our bystanders.  The closing thought of VLAB Drones was that unmanned aircraft will eventually make the airspace safer for all users.  The panel wondered if this was hyperbole, but it is inevitable when drones have a strong safety culture.  Conversely, as long as we are the irresponsible jerks of the air, safety conscious regulators–like the FAA –will be unsupportive of us flying.    When we, as a civilian unmanned aircraft industry, can be counted on as strong safety partner, and when general aviation and commercial aviation are learning safety lessons from us, there will be no more foot dragging.  We will get our airspace and the drone revolution will finally be here.

In the meantime, seriously, don’t do anything that could kill anyone, please–especially if it is illegal.  You will ruin it for the rest of us.

Let’s hear more about the Drone as an urban legend

Security Camera

Gizmodo has an article about drones in popular fiction.  I’d like to hear more about how the drone became the vehicle for our society’s deepest fears.  As a former drone unit leader, it doesn’t seem all that different from artillery or security cameras.  In fact, while I was in theater we had rocket artillery with a longer range than the drones my unit used and security towers with better cameras.  Unmanned aircraft are not nearly as capable as the people who are scared of them would have you believe.

I understand that new weapons generally scare people, but if we want to be scared of a horrible weapon that can truly alter society perhaps we could go back to worrying about nuclear weapons.  I guess it would be too much to think we do something that would promote nuclear disarmament and nuclear energy.

And if we want to worry about our civil liberties, we should be most concerned about cell phones.  I realize those don’t seem threatening because they are in our pockets right now, but if you’re reading this blog, you’re being monitored by half a dozen organizations–none of them are using a drone.  Chew on that one…

Military Robots: No Reason to Freak Out

As a robotic warfare veteran, there are three common misperceptions about the use of robots in warfare that I’d like to address.

Misperception #1: There is some sort of ethical quandary or challenge in using robotic weapons.

There is no controversy about the legality or ethics of current and contemplated robotic weapons. The controversy is manufactured.   There are legitimate concerns about the ethics of the campaigns these weapons are used in.  Western law and ethics tell us that necessity (a true and ethical need to attack a target), proportionality (minimizing unnecessary destruction), and discrimination (minimizing the destruction targets that are prohibited or non-combatant) are all required for legal and moral use of force.  Despite the ceaseless talk of civilian casualties, robots and drones enable unprecedented proportionality and discrimination.  The statistical record of even the most controversial program shows that these systems are among the most precise and humane weapons in history.

An RQ-7B "Shadow" unmanned aircraft from the author's unit exhibiting icing from operations in Afghanistan.

An RQ-7B “Shadow” unmanned aircraft from the author’s unit exhibiting icing from operations in Afghanistan.

Having seen the war in Afghanistan, I am sympathetic to the idea that the United States has gone too far in the Global War on Terror.  However, resorting to debate over the means obscures the real question we face as a democracy: Should we be engaged in this war at all?  If we decide that we should be engaged in war, robotic weapons represent a huge improvement in almost all ways over 19 year olds with automatic weapons.

I saw first-hand how horrible this path is.  When troops of the 82nd Airborne Division (one of the most elite in the U.S. Army) came to relieve my brigade, the first thing they did was shoot a farmer because he was “armed” with a shovel.  I could go on about the pregnant women, families, and the doctors shot at by convoys and check points, the botched raids by uber-elite units… Let us not delude ourselves: no matter how it is conducted, war is a horrible, disgusting business.  If the alternative to war is so horrible that a war is justified, our values demand that we conduct war with most proportionality and discrimination that we muster.  With a drone strike, the decisions are being made with better intelligence, certainty of review, in places removed from the fear and chaos of a firefight, and in accordance with procedures.  So much so that lawyers literally stand with the commanders ordering a drone strike to review it before it happens.

Misperception #2: Drones and robots will change the way that militaries relate to societies.

Some inventions change the way that militaries and societies relate by changing who is in charge and how society will be managed.  For example, the Phalanx allowed the first rise of democratic society, the mounted knight enforced feudalism, and electronic and atomic weapons required the creation of the bureaucratic state.   Other inventions change warfare for soldiers but do not affect how the military relates to society.  Britannia ruled the seas under both sail and steam, and the flintlock was replaced by the percussion cap, but societies didn’t have to evolve as a result.  The entry of robotics into warfare will likely not change the relation of militaries to societies.  Robotics are a natural growth of and response to precision weapons. The same classes of people and similar organizations are needed for both robotic and precision weapons systems.  Military robotics are the next stage of development for weapons we’ve had for the whole electronic age.  If the surveillance state becomes a reality, it will be cellphones – not drones – that bring it about.

Misperception #3: Military organizations will continue on as before with robotic weapons

Lost in the sound and fury about drones is an understanding of their true nature for the military.  The value of a military drone is not in weapons, hours of endurance, or even keeping pilots out of harm’s way.  The value is in giving the commander and his staff the most information-privileged position on the battlefield.  Especially on the fast-moving, post-WWI, mechanized battlefield, commanders had to be close to the main effort to make the best decisions.  Forces were positioned and organized to support the maneuver of the main effort.

Contemporary technology, particularly networks and robotics, pushes the military in other directions.  Information is most available at network hubs where information from multiple sources can be fused by a staff.  Forces are spread out to guard and support dispersed operations.  Smaller groups and smaller platforms are more capable when used in conjunction with supporting networks.  Even services that have used drones and robots extensively have not found the optimum model for organizing and supervising the systems they will need on the battlefield of the future.  The political and budgetary systems that oversee the military have not grasped how resources need to be allocated to make the forces of the future.

ExOne IPO Successful: Shareholders Contribute Random Passers-by

Before I start bashing bankers, I’d like to congratulate the ExOne Company on a successful initial public offering (IPO).  I haven’t seen much about ExOne [NASDAQ:XONE] on the robotics sites, but if we’re calling Stratasys [NASDAQ:SSYS] a robotics company, we should call ExOne a robotics company as well.  It is really good to see another public company in our sector.  Hopefully, this will encourage more investment of both capital and entrepreneurial energy in our industry.

Last time I checked 26 is a lot more than 18.

Last time I checked 26 is a lot more than 18.

By the criteria of the market commentators, the ExOne IPO was a huge success.  You can Google things like “3D printing red hot.”  The IPO was priced at the top of the range $16-18, it opened around $26 before shooting up over $33.  Almost a week later it is trading roughly at its opening price.

Now this is all fine and dandy as far as it goes, unless you were an ExOne shareholder.  Who, by the way were the ones selling in the IPO.  One shareholder sold 300,000 shares in the IPO.  This means that this one shareholder transferred a gain of $2.4M to some connections of the underwriters.  This shareholder is taking $5.4M, less fees and discounts, call it $5M from of the IPO, so $2.4 is not exactly a rounding error.  Presumably, this shareholder is also more inclined to build companies with the capital than whatever speculators are hovering over the IPO.  Similarly, the company lost out on $40M of capital that could be invested in projects.  Think about that.  The company is worth less than $350M and the IPO mis-pricing cost it $40M of cash.  Cash!  Cash that could be sitting on the balance sheet scaring off competition and waiting for the next expansion opportunity.

It is hard to explain an IPO price that is so far below the fair market value of the company.  I know that there are a lot reasons why bankers try to justify under pricing an IPO, but giving-up over 10% of the firm’s market value in a single transaction seems really hard to justify no matter what.  I’m not sure what part of the economic gains from listing publicly should be given to financial intermediaries and incoming investors to get a deal done, but over 10% of the company seems quite excessive.  These new shareholders have no restrictions on ownership and quite likely to flip their shares instead of taking an active roll in growing the company, which seems to further erode any claim they might have to extraordinary gains.

I’m not familiar with the track records of FBR, BB&T, and Stephens, the underwriters for the ExOne IPO, but I’d think twice or three times about hiring them if I was going to do an IPO.  They seem to have not only underpriced the IPO, but also floated too much of the company, almost 40%.  Underpricing the IPO might be tolerable if the bankers had only floated 5-10% of the company.  The company could have done a secondary offering later once the offering had an established market price, instead of getting ripped off during the IPO.  The large offering certainly did do one good thing for the bankers: it increased the underwriting fee.

If my company ever goes public, I hope I’ll have the good sense to hire Morgan Stanley–unless an underwriter is involved in litigation for overpricing an IPO, how can you be sure they’re any good?  Heck, they even give discounts–what’s not to like!