So Facebook has bought Instagram for ONE BILLION DOLLARS.

Instagram currently has zero revenue, but to earn reasonable financial return on the $1 billion investment they probably need revenues of around $200 – 300 million per year. This just doesn’t seem possible to me.

So I think Om Malik is right, it was a purely defensive acquisition for Facebook:

Facebook was scared shitless and knew that for first time in its life it arguably had a competitor that could not only eat its lunch, but also destroy its future prospects. Why? Because Facebook is essentially about photos, and Instagram had found and attacked Facebook’s achilles heel — mobile photo sharing.

In other words, great for Instagram’s founders, not so great (but better than the alternative) for Facebook, and probably lousy for competition and for customers (ie users).

I’ve taken my tpot.tv web app off the air. In case you haven’t tried it, tpot.tv was an app that presented a handpicked selection of interesting videos from both Vimeo and YouTube. I designed it especially for watching videos on iPad, with a scrolling strip of videos thumbnails across the bottom and a large video player filling the screen. Not that I’m claiming any credit, but the same style of design has been adopted by YouTube, Vimeo and Google Play in recent times. At least I know I was on the right track design-wise.

Anyway, the main problem was that tpot.tv never attracted enough attention and traffic to make it sustainable. I eventually intended to insert discrete ads to generate some revenue but traffic levels never exceeded about 100 visitors per day. Given that it was taking about an hour per day to find half a dozen or so interesting videos, the benefits and costs to me didn’t stack up.

I learned a lot of things through this process. Making web apps is very hard because there are so many different platforms you have to worry about. The other problem is getting attention – I listed the web app in Google’s Chrome store and a few other web app stores. However, almost all of the visitors from these stores were viewing tpot.tv on their computer, despite having designed it especially for iPad. I submitted tpot.tv to app review sites, but none are interested in web apps. The key lesson is that iPad users are not looking for web apps, they are looking for native apps in the App Store.

I might reincarnate tpot.tv as a native iPad app at some point. Then the interesting question will be whether to make the app free and insert ads, or have some sort of subscription model.

Google’s Project Glass concept video is getting a lot of attention (not all good). There are some similarities to this cheesy Nokia concept video posted about two and a half years ago:

Thankfully Google Glass doesn’t seem to require the dorky bracelet. But the part that really struck me in the Nokia video is where she chooses some music to play. She has to select Music, then Songs, then choose a song, then Play. This is pretty similar to the interaction required on an iPod or iPad via the Music app. But voice control like Siri cuts through all these menus.

The potential importance of advanced voice control (Siri still needs work) is very apparent when you think about this. No matter how good your design, graphical interfaces still require obscuring features within menu layers of some kind. Voice control provides more direct and faster control of the device and requires less thought. All you need to think about is which song you want to play, and you don’t need to devote brainpower to navigating the UI.

Right now the Internet is going gaga for Paper, a beautifully designed note taking and sketching iPad app from design studio FiftyThree. Being an economist, I’m going to focus on Paper’s pricing –

The app itself is free. This gives you access to all features and two drawing tools – a brush and an eraser. Four other drawing tools are available via in-app purchase for US$1.99 each or US$7.99 for a bundle of all four.

First up, it’s a little stupid to price the bundle of all four tools higher than the price of buying all the tools individually. Ok, it’s only three cents more, but that’s bound to annoy some customers. More importantly, profitable bundle pricing usually involves giving some discount for the bundle, to segment demand between groups of customers who want all tools and customers who only want one or two. I would have priced the four tool bundle at the same price as three individual tools.

The design of the in-app store is also a little dumb in that the four tool bundle is presented last in a scrolling window after all individual tools. This doesn’t matter if the bundle is the same price (or more expensive!) than the individual tools, but if there’s a bundle discount then it should be presented first so people realise it exists before buying any individual tools. I didn’t even realise there was a bundle option at first and thought I could only buy each tool separately.

Second, I’m not sure about the wisdom of the in-app purchase strategy. It does allow people to experience the app for free, which will feed overall demand through word of mouth. But having got the app for free, the question is whether the marginal value of each tool to the user exceeds $1.99. In other words, does each new tool provide more than $1.99 of value to the user on top of what they already have for free?

Under this pricing model there’s no way to extract value for all the other functions of the app itself including its beautiful design. The in-app purchase mechanism makes the app feel expensive because you are being asked to pay $1.99 for a relatively minor addition to a nearly full functioning app. My gut feeling is that this will be less profitable than simply selling a fully functioning app for $7.99.

The key point is that in-app purchases have a different frame of reference to app purchases and that will matter for demand and revenue. The relevant comparison for the consumer is marginal benefit versus price. Giving away the app for free changes the marginal benefit significantly.

An article in the NZ Herald today is full of retailers’ lament about how consumers can buy $300 shirts online for $150 from overseas.

While that’s great for consumers, it also means a huge number of purchases that would have been made with local retailers are now going overseas and delivering little economic benefit to this country outside the freight sector.

Wrong – when I buy a shirt for $150 that I was willing to pay $300 for, I receive an “economic benefit” (otherwise known as consumer surplus) of $150. This is a genuine benefit that I receive, and while local retailers are worse off, it’s quite wrong to say there’s “little economic benefit outside the freight sector”.

More generally the issue is about the gains from (international) trade. Online retailers overseas have economies of scale that local retailers can’t match, hence their lower prices. This is a good thing for the country as a whole. It will be painful for local retailers, and some of them might go out of business or be forced to be more efficient. But overall there is a net economic benefit if shirts that formerly cost $300 can now be had for half price. We can outsource retailing activities to other countries that are relatively more efficient, and use our scarce resources to produce other things.

If you have trouble seeing this, think about it from a personal point of view. Imagine you had to produce all your own clothes, grow your own food, and build your own house. You’re probably not very good at many of those things, and you’d work extremely hard to achieve a meagre standard of living. So you don’t do that, you specialise in teaching, or law, or medicine, and trade your services for things produced by other people. If someone else is more efficient than you at producing something, you should let them do it and focus on what you do best, and this will benefit both of you.

Exactly the same logic applies from a country’s point of view as it does from your own point of view. If you think international trade is not good for the economy then you should be growing your own food.

Against my better judgement I am going to wade in to the Apple / working conditions in China brouhaha …

I have never visited an Apple factory, or any kind of electronics factory, in China. I have however visited China twice. I visited small cities as well as big ones.

The scale and pace of economic development occurring right now in China is astounding. You have to see it with your own eyes to really understand. Massive infrastructure is being built everywhere, and in the big cities you can get the very best of the best of everything.

However, China is a huge country with a huge population and the economic miracle has not yet reached everyone. Millions of people have few good job opportunities. I suspect that the average American living in a city of 5 million people has no idea what the quality of life is like for many of the people living in a city of 5 million people in China (a small city by Chinese standards). There is a big difference, again it is something you need to see to really appreciate.

Now Apple’s factories in China are by no means perfect, but they are surely much much better than the options that are available to many people in China. Literally hundreds of thousands of people have jobs that are likely to be significantly better than the alternatives. No wonder Foxconn has no trouble recruiting employees. Chinese people are not stupid, and they would not work at Foxconn if they had something better.

It is important to be realistic about the alternatives. It’s also important to realise that restrictions on working conditions benefit those who work, but makes the product more expensive. Higher costs of production mean less demand, and less work, and fewer jobs. At the margin, somebody will be forced into a less desirable job. Does that make the world better or worse overall? I am not sure, but it’s important when debating this issue to recognise the tradeoff and recognise the costs. Like many economic problems, it is not a black and white issue.

So in a few hours Apple is going to announce what it has decided to do with its $100 billion cash horde. Since basically everyone on the Internet has an opinion on this right now, I thought I should add mine.

I don’t think they will do something predictable (sensible?) like paying a huge dividend. That would be like naming the new iPad the iPad 3. My guess is they will make some key acquisitions to make Apple less dependent on outsiders and its suppliers. It looks like Foxconn can be had for about 5 billion US dollars. I also predict they will spend big on R&D, aimed at destroying Android.

Or they could just give about 15 dollars to every person on the planet :) We’ll find out in about three hours from now …

Update: Boring!!

After initially being confused that “the new” iPad doesn’t have a name (iPad 3, iPad 2 HD, etc …) I realised dropping the version number is consistent with the way that Apple has named most of its products. MacBooks and iMacs don’t have version numbers and they never had. They do just fine without them.

The version number disease started with the iPhone 3G, which Apple wanted to distinguish from the original iPhone which lacked 3G capability. Then came the faster 3GS, then the 4 and 4S. This disease infected iPads too, but Apple now seems to have cured it.

When I leave a store empty handed, no one ever asks me why did you not buy anything? Clearly I had some demand because I used my valuable time to go to the store, but the demand was unfulfilled.

Steve Jobs was right that people often don’t know what you want until you give it to them, but in many more mundane cases people do know what they want. There is so much potential to learn …

My previous post might make me look like a fast broadband hater, but I’m not, I just hate it when costs get represented as benefits.

Many of the benefits of fast broadband are claimed to be in education. Back when I was a lecturer, I thought that video lectures were some newfangled nonsense and students wouldn’t learn anything unless they came and sat down before me.

Recently, for fun, I’ve been “taking” a Stanford University course on computer programming via iTunes U. Now that I’m on the other side of the camera, I have a different opinion. Video lectures are great! If my mind wanders, I can rewind and review, or fast-forward the boring bits. I can watch the lectures on the bus to work, and review them again when I’m doing the homework problems. At the moment iTunes U lacks the ability for students to interact and ask questions or get their homework marked, but surely these features will come.

It helps that the Stanford course is very well organised and the lecturer, Paul Hegarty, is one of the best I’ve ever seen. Actually this technology is probably bad news for most lecturers. If you’re an average lecturer, why should students come to you when they can access the best in the world? Just like digital music caused the local CD shop to close down, digital teaching might spell the end for local teaching, at least for some subjects like economics and mathematics that are suitable for mass teaching.

I predict in 10 or 20 years we’ll start to see the rise of global teaching megastars, but fewer teachers overall. There will also be opportunities to teach extremely niche subjects where local demand wouldn’t support it, but there is sufficient global demand.