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Friday, August 20, 2010

Metcalfe's law

Two telephones can make only one connection, five can make 10 connections, and twelve can make 66 connections.
Metcalfe's law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2). First formulated in this form by George Gilder in 1993,[1] and attributed to Robert Metcalfe in regard to Ethernet, Metcalfe's law was originally presented, circa 1980, not in terms of users, but rather of "compatible communicating devices" (for example, fax machines, telephones, etc). [2] Only recently with the launch of the internet and Web 2.0 design did this law carry over to users and networks as its original intent was to describe Ethernet purchases and connections. [3] The law is also very much related to economics and business management, especially with competitive companies looking to merge with one another.
Network effects
Metcalfe's law characterizes many of the network effects of communication technologies and networks such as the Internet, social networking, and the World Wide Web. Chairman of the U.S. Federal Communications Commission, Reed Hundt, says that this law gives the most understanding to the workings of the internet.[4] Metcalfe's Law is related to the fact that the number of unique connections in a network of a number of nodes (n) can be expressed mathematically as the triangular number n(n − 1)/2, which is proportional to n2 asymptotically. In more simple terms, if there are 5 telephones, the most number of connections that can be made can be found by substituting the number into the equation which in this case equals 10. The law is abundant and existent due to the ability of internet users to link together. If the internet were for information posting only, Metcalfe's Law would be a mere imaginative concept. Websites and blogs such as Twitter, Facebook, and Myspace are the center of this law taking effect. Forty five percent of Americans in 2005 said the internet had played a huge role in a major decision in their life as a result of this social networking.[5]. Some of the major decisions involved buying a home, buying a car, inquiring medical help, and discovering a career. Interconnecting two networks is said to greatly exceed the power of the two separate, individual networks.
The law has often been illustrated using the example of fax machines: a single fax machine is useless, but the value of every fax machine increases with the total number of fax machines in the network, because the total number of people with whom each user may send and receive documents increases. Goods characterize the first component or intrinsic network effect. Services fall under the second component of network effects known as complementary.[6] A social networking site works the same way as the fax machine described above. The greater number of users with the service, the more valuable the service becomes to the community. Deriving from Metcalfe's Law, every new "friend" accepted or added on these social networking sites makes the user's profile exponentially more valuable in terms of the law. Positive and negative outcomes take place with all network effects involving a service of this sort. New jobs, relationships, and opportunities arise with more people coming together, however, if not used correctly, services of this type can lead to distant relationships.
With so much emphasis on creating a universal communication and networking unit, little thought has been provided regarding signs of a reverse effect. As new members or consumers buy a good or service, others may leave the group to discover alternatives. With less users, the consumer is more of a priority to the company's success. On the other hand, with millions of people using a good or service, companies display less of a personal connection because one person is not vital to the success of the whole unit. [7] Reverse network effects promote individualism, allowing people to not just follow the system, but almost create their own.

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