The original Metcalf's Law and criticizmThe potential value of a communications networkincreasesexponentiallywithitssize!.Fornetworkwith'n'endpoints (e.g.devices,people)usefulness is on the order of'n'times 'nThereforeanetworkwith10endpoints(value=10x10=100)is about 4 times more useful than network half the size (5endpointswithvalue5x5=25)V=nzExample:telecommunicationsnetwork.Odlyzko-Tilly critique:"overestimate";ButfasterthanlineargrowthasformulatedV=n lognbySarnoffLUEindhovelUniversityofTechnologyPAGE10EconomicsofInnovation201310/17/2013
The original Metcalf’s Law and criticizm • The potential value of a communications network increases exponentially with its size! • For network with 'n' endpoints (e.g. devices, people), usefulness is on the order of 'n' times 'n' • Therefore a network with 10 endpoints (value = 10x10=100) is about 4 times more useful than network half the size (5 endpoints with value 5x5=25) • Example: telecommunications network • Odlyzko-Tilly critique: “overestimate”; But faster than linear growth as formulated by Sarnoff Economics of Innovation 2013 10/17/2013 PAGE 10
Explainingthe growthof FB:Reed's LawFrom2005-2008mostvisitedIn2009,Facebookwasgrowingbysocial networking site in the2003*2004:1mill.users700.000 users a day!2008overtakenbyFBworld2013: just50 mill usersfmyspaceSource:FacebookLesson:Howwell social1200,000,000networksfacilitatetheformation1,000,000,000of groups, not individuals800,000,000600.000,000400.000,000200,000,0000TechnischeUniversiteitTU0600001Zi-uneZideSe090060-g60031-des0Eindhoven0Q2-uer08nUniversity of TechnologySSDEconomicsofInnovation201310/16/2013PAGE11
Explaining the growth of FB: Reed’s Law Economics of Innovation 2013 10/16/2013 PAGE 11 0 200,000,000 400,000,000 600,000,000 800,000,000 1,000,000,000 1,200,000,000 2004 2005 2006 Apr-07 Oct-07 Aug-08 Jan-09 Feb-09 Apr-09 Jul-09 Sep-09 2009 Feb-10 Jul-10 2010 Jul-11 Sep-11 2011 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Source: Facebook Lesson: How well social networks facilitate the formation of groups, not individuals
MarketswithnetworkproductsLock-inintoaparticulartechnologyLock-in:Resultof previouschoiceorchoicesofotherconsumersCreatesex-postpowerstosellers-Positivescenario(Weizacker,1984)-Negativescenario(Klemperer,1987)TechnischeUniversiteitTUEindhoveneUniversityofTechnology10/16/2013PAGE12EconomicsofInnovation2013
Markets with network products • Lock-in into a particular technology • Lock-in: Result of previous choice or choices of other consumers • Creates ex-post powers to sellers − Positive scenario (Weizäcker, 1984) − Negative scenario (Klemperer, 1987) Economics of Innovation 2013 10/16/2013 PAGE 12