Wearables: more like social networks or hoverboards?

Apple is going to release its highly-anticipated iWatch this October. It will have a 2.5 inch rectangular display. I’m pretty skeptical that anyone will want one. But I could, I suppose, be wrong. iWatch could turn out to be the next facebook. let me explain:

Apple’s chance of first-mover advantage is zero. The smart watch market is already quite busy. Samsung and Google have products out. So do others.

smash misses.
smash misses.

None is making much of a splash.

We have a vision of tech breakthroughs as being radical new inventions. But really they stand on the shoulders of others.

Here’s a little extract from an email I got in April 2005, when facebook was still mainly for ivy league students and working on attracting early stage investors.

“I actually don’t know what this Bebo service does, but it looks like some of you are ‘existing members’ so I’m assuming it’s a good thing I need to get on the band wagon with.”

I joined Bebo. I can’t remember if I joined Hi5. I definitely didn’t join MySpace. But I thought about all of them and dismissed their usefulness long before I …

Joined facebookApple is betting that its smartwatch will be like facebook. That it will enter a market that has been a graveyard for competitors and make them look foolish. You wouldn’t bet on any company that wasn’t Apple being successful. And the Apple of 2009 might have been able to make a smartwatch into a runaway smash hit. But is 2014 Apple equally savvy?

There are clues that the magic began to evaporate when Steve Jobs passed away:

Why Apple no longer innovates.

Apple Inc. (AAPL) No Longer The King Of “Cool Tech”

There’s No Way Around It: Apple Is In ‘Reset,’

Although there are clues that the backlash is mainly clickbait and the magic is still there.

Source: Google
Source: Google

Investors are betting that the combination of fitness monitors and mini-notifications in the smartwatch will be just right. That it will click with the zeitgeist and zoom away until tehre are two types of people. Those who have an iWatch, and those planning to get one.

But when a product already exists in the market, you have to really nail your version to capture the market. That’s an art, not a science, it requires judgment in the 99th percentile, not the 98th. There is evidence a company like Apple can continue to be good for a long time. But can it be very very good? I doubt it.

The iWatch may not turn out not to be a facebook. It could be a hoverboard.

Something from science fiction that is possible to produce, but turns out to have severe limitations.

Not like this.
Not like this.

If that turns out to be the case, the iWatch will be a niche product and eager investors will lose a lot of money on Apple stock.

What would happen to Google if the return on search engine marketing was negative 63 percent? Some researchers just crunched out that exact number.

Imagine you’re doing some internet shopping. You want some shoes to replace a favourite pair that is worn out. You type in the name of the place where you got the last pair, and click the first link that comes up. You choose the exact same pair, sling the credit card, and start waiting for the postman.

The shoe retailer sees this: someone searched for their name, clicked the link they paid Google to install, and then went on to make a purchase. They add that to their return on investment for buying ads associated with their own company name.

But searching for a company name suggests you already know that company exists. And now a new working paper from the National Bureau of Economic Research has shown that buying the ads that sit alongside searches for your own company name is pretty stupid. 

“search advertising only works if the consumer has no idea that the company has the desired product”

This also applies for ads with both the retailer name and a product in it. Like “Myer suits” or “Kogan TV”.

Google effect is neutral
The effect of suspending paid search for branded terms like ebay shoes

The research is not some wishy-washy lab experiment. It was done by eBay Research, and involved a giant control experiment. eBay started by cancelling all the paid search advertisements for terms like “ebay shoes” in 30 per cent of America.

It then widened the experiment to non-branded searches, like “shoes”

What it found was startling:  “on average, U.S. consumers do not shop more on eBay when they are exposed to paid search ads.

The reason is this. Search engine marketing causes a big leap in traffic from people that have never used eBay before. But a vast majority of people that use eBay are experienced users. because the search engine can’t target the newbies, the return on investment ends up being very poor.

“consumers who have completed at least three eBay transactions in the year before our experiment are likely to be familiar with eBay’s offerings and value proposition, and are unaffected by the presence of paid search advertising”

effect of paid ads is very low among frequent users

So search engine marketing is still good for people who don’t regularly use your site. But here’s the rub. Among people who shop on eBay all the time (50+ purchases a year), they use paid links 4 per cent of the time. eBay pays for all those clicks and an unsophisticated measure of the effectiveness of paid advertising would therefore show that paid links are effective.

Turning off ads left eBay with 99.5 per cent of its normal sales. The differences between the period with ads and the period without are far from striking:


Obviously small companies can still get bang for their buck advertising online. But big companies perhaps less so, and that might hurt Google.

“Of the $31.7 billion that was spent in the U.S. in 2011 on internet advertising, estimates project that the top 10 spenders in this channel account for about $2.36 billion.”

The study can’t reveal eBay’s actual expenditure on Google paid search, but it uses an estimate of $51 million a year, based on google’s public statements. That delivers a return on investment of -63 per cent. 

Frightening news for Google shareholders, who in the first quarter of 2014, have seen advertising revenues fall 1 per cent.


A surprising thing about Google, and the economics lesson it teaches us.

I learned something surprising about Google this week.

Their spam-filtering software lives an amazing double life.


I’ve known for some time that if you fill in this form (to post a comment on a blog, or whatever), you need only type the number on the right – it will ignore the number in the photograph. That was perplexing.

Then I discovered Google is using us. When you type the number in the photo, that gets sent to Google Maps, where it answers a question being asked by Streetview – ‘what street number is this?’.

This is quite brilliant. They apparently also use this program, called ReCAPTCHA, to decipher words the software can’t untangle when scanning books. So every time you post on a blog, you’re contributing to the quality of streetview, or scanned books.

Ingress by GoogleThe idea is so clever that Google now has software that is entirely designed to trick us into doing work for them.

I am talking about the “game” called Ingress. I downloaded this last week, because it was free and the Google App store told me it was highly regarded.

I opened the app and when it told me I had to “walk” to achieve the missions, I started pinching the screen, tapping, even shaking my mobile device to figure out how to “walk.” Soon it dawned on me. “Walk” meant “walk”. 

The app is designed to collect data on the walking distances, way-finding and walking time between landmarks, especially those which are in pedestrian areas not covered by the Google streetview system. (The game itself is pretty intriguing but also pretty confusing.)

The lesson of all this is the power of a big company – there are amazing things you can do inside a company that you couldn’t do outside.

One of the last century’s most famous economists – Herbert Simon (Nobel Prize in Economics 1978) argued the existence of companies actually showed markets’ weaknesses. (Here’s his great 1991 paper, Organisations and Markets.)

Inside companies, exchanges are based on relationships, not market payments. Unless you get paid piece-work, you are rewarded for being there, not for every article you write, or every ministerial briefing, or every line of code. You do the work because they trust you to do it. You are getting paid, sure, but you trust that working hard now will lead to reward down the line. It’s not specified in the contract.

Every time a company expands, they are saying that they have more faith in using relationships to get the output of the people they just hired, than using the market. The reason is transaction costs. 

Google is a monstrous, monstrous beast. It now has 47,756 employees, and if they are as happy as my friend who works there, they are very happy indeed.

While Google is tricking us into doing work for it via non-market transactions, Amazon is arranging to pay people to do similar work.

They have a “marketplace” called Mechanical Turk, where you can get stuck into the task of diong things computers can’t. Maybe selecting which photo of a landmark is clearest and best, transcribing some audio, or similar.

But it has been controversial. Bloggers complain the pay is too low and the jobs listed are themselves spam, the term digital sweatshop is being thrown about, and the Huffington Post has written about “Amazon’s new underclass.”

But there are many tasks, like completing surveys or any crowd-sourcing task, where low effort from lots of people delivers a better result than lots of effort from a few well-paid people.  Google seems to have this figured out – the market is not always the best solution.