8 minutes | Sep 5, 2013

How I grew my business exponentially understanding Metcalfe’s Law and fragmentation

Recently, I snuck into a conference room (at a Kauffman Foundation event, the organization behind Startup Weekend) where I accidentally had the pleasure of listening to a talk given by Robert Metcalfe, the man whose law I actually built my startups upon. Metcalfe is attributed and famous for a law that we know today as the Metcalfe’s Law. The law says that the value of a telecommunications network is proportional to the square of the number of connected users of the system. What this means is that if you come up with a new phone system and only two people are using it, the value of it is X. If you have four people using it, the value is not 2X because you have twice as many people using it, but actually 4X because each person can communicate with each other and the number of unique connections possible. The more people connected to a network, the higher its value, and as the formula shows, it grows exponentially. As you can see in the image, two telephones can make only one connection, five can make 10 connections, and twelve can make 66 connections. Although initially, Metcalfe’s Law was applied to telecommunication networks, it also applies heavily to many things that we do online––like Facebook for example. So, how is Metcalfe’s Law applied to online services? If you only have two people using Facebook, the value is not going to be that high. If you only have three of your friends using Facebook, the value is higher but still not that high. However, if you can get all of your friends using Facebook, the value is immense. The more people who use a service or a product, the higher the value people get out off using it. Services or networks simultaneously disappear and thrive in all over the world depending on the number of users. What is utilized in one country, may not be in another. Orkut, the social network that became popular in Brazil, was more heavily used than Facebook, which wasn’t popular there for a long time. It took many years for Facebook to actually get in on the Brazilian market because the majority of people were already using Orkut’s ––after all, why join an online network if only a few of your friends are on it versus a network everyone you know is tapped into? In fact, I would argue that Facebook was able to get traction in Brazil just because some Brazilians had friends living overseas. Such foreign friends were only using Facebook, and that forced some Brazilians to start using Facebook. Another example of
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