What If Metcalfe's Law Is Wrong?

[Commentary] Networks — be they telecom, social, transportation or otherwise -- are the fabric of modern society. They provide immense value to consumers and businesses alike, enhancing mutual relationships and enabling the distribution of goods, services and information. But does this value grow as the size of the networks grow? And if so, how much?

"Metcalfe's Law" has long been accepted as characterizing the value -- and value growth -- of fully connected networks. It states that the value of a network is proportional to the square of the number of its nodes, which may take the form of devices -- such as computers -- or users, in which case a network connection is represented by a "friend" or "follower." But there are times when the "law," which has been used to explain network effects and justify mergers and acquisitions, appears to overstate a network's value. And if that's the case, what can service providers do about it? While the number of possible connections in a network is indeed proportional to the square of the number of nodes, value is not necessarily equivalent to number. There are several reasons that Metcalfe's Law can overestimate the value of a network. First, typically only a fraction of the possible connections have value. Second, there are natural limits to consumption of that value. And third, the value of the entire network may decline over time.