Planning the renovaton
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.