Rule of Metcalf’s Law

In the Hutong
Planning the renovaton
1348 hrs.

An outstanding article in July’s IEEE Spectrum (which I’m just working down to in my pile of reading) takes a good hard run at Metcalf’s Law and finds it wanting. This is not just an academic quibble: the authors make a point that refutes a major assumption underlying investments in the telecom industry in the U.S. and elsewhere, in particular China.

Metcalf’s Law, if you will remember, is the proposition that the value of a communicating network grows as the square of the number of users attached to it. In other words, if the value of a network with 10 users is, say $81, then the value of a network with 100 users is $10,000. This is also referred to by buzzword aficionados as “The Network Effect.”

The article’s authors, a researcher at BT, a professor of mathematics at the University of Minnesota, and a programer at a successful dotcom, propose an alternate formula that they suggests captures a more modest, realistic value for networks. Their conclusions are compelling, even though their formula is a simplistic as Metcalf’s (which they admit.)

But the underlying point is important – investors, venture capitalists, and companies in the communications industry continue to value technologies, projects, and ventures using Metcalf’s law as a guide, and down that path lie bubbles.

Looking at the results coming out of China’s fixed-line telecommunications providers (assuming they’re true and not manipulated as a gambit to push the government to issue them mobile licenses), the article provides some good perspective. Anyone holding a stake or considering an investment in the Chinese telecommunications industry – whether investing in fixed-line operators, mobile operators, value-added service providers, or online services – would do well to read the article and step back and review their assumptions.