Amazon (NASDAQ:AMZN) has unveiled its latest working prototype of an unmanned package delivery drone. In a video featuring Top Gear’s Jeremy Clarkson, the company shows how its modified drone will deliver a package in under 30 minutes for a total shipping fee of $1. The so-called Prime Air service is still in a developmental phase. Ultimately, it’s aimed at small parcel deliveries in a relatively short range (15 miles).

The prototypes currently accept a small package, take off vertically like a helicopter, and then fly forward like an airplane. They include sensors to keep the drone from hitting large objects in their airspace and to assist in landing on a pad with a designated Amazon logo. Tech enthusiasts are naturally pleased to see a prototype only a few short years after its conceptual announcement. What we should all be asking ourselves, however, is whether the approach is viable.

Research and Development Costs

In order to build up the infrastructure to allow for short-range Prime Air flights, some analysts are already estimating it could cost Amazon as much as $50 million for a full launch of the program. Then there are the costs of the drones themselves. Luckily, Amazon is cash heavy. Even $100 million in R&D is not skin off of the back of the online retail giant. In exchange for the invested cash, Amazon can replace one of the biggest side costs of online shopping: shipping fees. For the large volume of orders that could be handled by Prime Air, Amazon does not have to cover the costs of a driver, the vehicle, its fuel, insurance, and so on which are all built into shipping costs. If Amazon can invest up front in that level of infrastructure, it would free itself of human capital obligations down the road. So far, it seems, the research and development costs would pay for themselves.

Regulations

For regulators like the Amazon logo, commercial drones are not an appealing concept. Amazon has been working closely with regulators to help establish protocols and standards for an emerging industry of unmanned flight for commercial purposes. So far, regulations include remaining below certain heights and the drone staying within viewing range of the operator. That line of sight rule is a tricky one, but it’s the FAA’s most stubborn point so far. That may be why Amazon debuted its prototype in the UK. If Amazon is going to tap into the world’s largest consumer economy, they are going to have to go through the FAA. That will mean lobbying expenses and lots of patience. Otherwise, the cost of paying operators to deliver only within viewing range would far outweigh the cost advantages of the drones.