Around 1980 Robert Metcalfe, the inventor of the Ethernet standard and founder of 3Com, developed a simple but powerful model to describe how networks become more important as they grow. He observed that a network’s value lies in the number of links it enables among members and that the quantity of links increases as the square of the total of the network’s members. Result: The value of a network increases in proportion to the square of the number of people using it.
This observation came to be known as Metcalfe’s Law. It was similar to an idea developed by economists about “network effects” — meaning that some resources become more valuable to a person using them according to the number of other people also using them. The telephone system long ago demonstrated the validity of this idea, but at the dawn of the Internet era, network effects became the Holy Grail for many business builders, who wanted to “get big fast” in order to exploit them before the competition did. Many Internet-era business models and technologies, including online marketplaces and communities, person-to-person auction sites, and instant messaging, are based on the assumption that network effects will profitably apply.
A few examples, however, show that Metcalfe’s Law doesn’t always hold. The average American’s telephone service, for instance, would not become much more valuable if everyone in China... To read the complete article, login or sign-up using the form below.
Get a premium subscription today to read this and all MIT Sloan Managmeent Review articles.
More Info.
Buy this article. Purchase one or more copies of this article as a PDF.
Subscribe today to read the most recent articles and the current issue of MIT Sloan Management Review.
Upgrade to premium
Current Subscribers: Do you subscribe to MIT Sloan Management Review? Register for online access.
- Register for free access to recent articles and the current issue of MIT Sloan Management Review.
- Subscribe and read articles from the past three years online.
- Premium subscription—access to the entire archive of articles.
