Google's core area of competence is not advertising, advertising is just the means which, so far, has been most efficient to monetize their core competence, but its also a means which has limited range for continued growth.
> In Googles's case they want their legacy to be more than ads, so they are throwing money at vanity projects. These projects generate good press, and satisfy their ego, but in the real world they have little chance of success, and little hope of returning much to the company. For example, Google Glass.
Viewed a different way, there is a limit to how much money Google can pour into its established lines of business with a good return, and one of the things they use the surplus for is high-risk, long-term, high-potential (but low-probability) return projects. Which it can afford to miss on virtually all of, because if it hits even a couple, it'll provide more return than more sedate uses of that money would, and it can afford to throw money at enough projects that it is likely to hit some winners.
2. Not sure how displaying notifications and having a camera with some basic voice recognition is that big of an advantage right now for a smartwatch. Maybe I'm missing something big, but it doesn't seem like Glass did anything that could translate to a smartwatch that smartwatches don't already do better than Glass. Also, they already have Android Wear.
I'm pretty sure they discovered/made things they could leverage with regards to integration with apps/smartphones and voice interaction. They did a lot of work with interactions involving very pared down and minimal visual information. Also, it doesn't have to stop with a smartwatch. What if they had an in-car HUD as well as a background service running on a smartphone that could leverage the HUD, the watch, or any enabled and linked display device? For example, what if he whole system could figure out I was in the living room, then enable a Glass-like interaction through the media PC+remote, with optional voice? (You'd have to activate the voice, of course.)
Re: camera -- I can see lots of potential for far more discrete devices and telepresence devices, especially in corporate and government environments.
The strategy you outline, and that Google is taking, smacks of desperation, and sends two signals to investors 1) the ad business is declining and 2) the company is desperately trying to find something else that works. However this is based on a false premise. Advertising is not going away. I don't see other media companies making cars -- instead I see them trying to work out new business models in their core area of competence.
I suspect that much of this is founder driven. It's often the case that founders don't really like what their business has become. In Googles's case they want their legacy to be more than ads, so they are throwing money at vanity projects. These projects generate good press, and satisfy their ego, but in the real world they have little chance of success, and little hope of returning much to the company. For example, Google Glass.