There’s a fascinating — and entertainingly pissy, if sometimes obtuse — argument going on over Metcalfe’s Law (which states that the value of a communications network grows exponentially as its number of users grows). On one side are three authors of an article in IEEE Spectrum, who insist that the law was wrong and even dangerous, for it justified the first internet bubble, and they fear it is being used now to inflate a second social bubble. On the other side is Ethernet inventor Bob Metcalfe himself, arguing at VC partner Mike Hirshland’s blog that his law is not only still valid but, when you tie it with Moore’s Law, it leads to the Law of the Long Tail.
And I will argue with them all — not against Metcalfe’s Law but against the way they value networks. The IEEE authors try to tote up the value of a network in terms of who owns it: the market capitalization of companies controlling networks. In other words, they — like telecoms of old — try to value the network at the center. But that is no longer how networks are valued at all. No, now they are valued at the edge. You and I value the networks we choose to connnect to in ways only we can measure. Metcalfe starts down the right path when, as Hirshland summarizes, he argues that with social networks “we need to consider not just the number of users but also the affinity between the members of the network.” Yes, and each network connection we make carries an intangible, personal quality that has direct impact on how much we value those networks and thus how much they are worth as a whole. We tote up our own value in terms like trust, engagement, joy, relevance, excitement, reputation, need, sex, and money. Human networks must be measured on human terms.
Network providers used to try to measure the value we put on networks negatively, in terms of switching costs. That was what AOL counted on for too damned long as they thought it would cost us too much hassle to switch off our AOL email addresses. Ha! But we each value a network positively on what it brings us. That is different for each of us and each of our connections. For example, I see no value, personally, in LinkedIn; it has never done a thing for me but attract a new form of spam, inconvenience, and embarrassment when I don’t link to someone. But for others I know, LinkedIn provides jobs, business, income, reputation; it is damned near invaluable. Similarly, I see little value in MySpace; for middle-aged me, it is merely a curiosity. For others, of course, it gets them songs or gets them laid. Put a price tag on that, if you dare. I see value in my Treo phone because it keeps me connected to anything, anywhere, anytime. I see great value in having a blog in the ‘sphere, for it brings me learning, ego gratification (I admit it), jobs, and money (but no sex).
An important factor in this is openness. The more open the network, the more valuable it is — but the harder it is to own, and thus the harder it is to value in old terms of ownership and market cap. That’s what really argues against the IEEE authors. They are trying to put a corporate value on networks. You can’t. That’s like trying to value air… or the internet. They defy ownership.
Can a network be too open? Of course. Email, one could argue, is too open because it permits spam. It remains valuable only if I gain control over that spam thanks to enabling tools. Usenet was too open and there was no such control, so its value sank to nil. Some wonder whether MySpace will be too open or at least too big: When everyone is your friend, you have no friends. So here we see the value of niches and of communities: the right people in the right relationships. Small is the new big.
Does this argue against Metcalfe? Does it show, as the IEEE guys want to, that the exponential growth in the value of a network does not continue and, indeed, topples? No, the problem is that all these calculations leave out the most important X factor to which Metcalfe alludes: affinity. And affinity is fed by many of those human intangibles I listed above: relevance, emotional connections, convenience, reputation, and on and on. So, I will argue, the value of a network should be calculated with a multiplier, which is the value a network’s members put on it:
Network value = the sum of the value each member of the network places in it.
But, of course, that is incalculable (what, again, is the dollar value of love?).
Does this further argue against Metcalfe that small networks can have more value than big networks? No, because one should value a network as the sum of its networks. We see the internet that way. We also should see the blogosphere that way. This is why I continue to think it is absurd and wrongheaded to analyze the blogosphere on its supposed A-list. The vast majority of people who read blogs never read any of the blogs on that A-for-alleged list. They read and interact with the ones that are meaningful to them. The blogosphere is not the value of the few on top or even of the total but instead of the unlimited connections enabled within. This is also why I see such power in networked journalism: the network is additive.
This is also about the mass of niches. When television as a medium stopped having to serve everyone at once — when cable, VCRs, and now the internet allowed it to serve smaller interests, tastes, and audiences — television as a whole grew; this explosion is far from over. Fewer people watch HBO than NBC but those who do clearly value it more because they pay for it.
And this is about the value of being the right size: I value the Continental President’s Club because everyone in the airport does not belong; if everyone did, its value would fall to nil. This isn’t about snottiness. It is about control.
Jarvis’ Law: Give the people control, and we will use it. The corollary: Don’t give us control, and you will lose us.
The more we control the network at the edge, the more valuable it is to us, and the more valuable it is as a whole, but the harder it is to own and control. Yet that doesn’t stop you from making money. See: Google. It grew by making connections — establishing unlimited networks of information and now advertising — with content and connectivity it did not own or control. See Skype, which didn’t so much grow its own value as deflate the value of its competitors down to their true worth as communications networks stripped of their monopolistic advantages. If you want to talk a bubble, there was none ever bigger than the artificial bubble of the telecommunications companies and their closed networks; open networks have certainly popped that. (See Isenberg’s Law: “Just deliver the bits, stupid.” See also Yochai Benkler’s The Wealth of Networks.)
I think the next valuable network will rise out of helping us find the good stuff in video anywhere — not just on networks and not just on YouTube, anywhere.
But the truly valuable network, the network of networks, the unbreakable bubble of bubbles, will be the one that manages to bring people together wherever we are, not just on MySpace (read: RupertsSpace), not just in Flickr or Del.icio.us, and not even just in the blogosphere, but everywhere. The internet doesn’t need more social networks. The internet is the social network. We have our identities, interests, reputations, relationships, information, and lives here, and we’re adding more every day. The network enabler that manages to help us tie these together to find not just connections or email addresses or information or songs but people — friends, colleagues, teachers, students, partners, lovers — across this open world, that will be the owner of the biggest network of them all: The Google of people.
I’m no mathematician or scientist, so I have to express this in words, but here’s the way I calculate the value of networks:
The Law of Open Networks: The more open a network is, the more control there is at the edges, the more the edges value the network, the more the network is worth.
The business lessons from this: Any choke point of control, via ownership, decreases the value of the network. Enablers increase the value of the network. The network will abhor and find ways around choke points. The network will value enablers and that is the point at which value may be extracted from the network. The value in networks in the open future is not in ownership and control but in enabling others to control.
: And as if all that’s not enough, see also Tom Evslin and Fred Wilson on Reed’s Law — which holds, in Fred’s words, that “if each node of the network was itself a network (a GFN) then the value of the network scales with the exponential of the number of nodes in the network” — and my clumsy efforts to get my head around it here and here. Fred Wilson begs Metcalfe to also tackle Reed. See as well Umair Haque on Google and Reed and on Metcalfe and the edge.
: Here’s Om Malik on Metcalfe.
: Proving that one Hugh cartoon is worth 1,200 of my words: