Looking for yet another explanation of the dot com bust? Metcalfe’s law is wrong, researchers Andrew Odlyzko and Benjamin Tilly claim.

As I wrote last year, Metcalfe’s Law holds that a network’s value is the square of the size of a network.* If two people are connected by instant messenger, fax machines, or cell phones, the value is four. If 20 people are connected, then the value is 400. Bob Metcalfe made the claim in 1980, aiming to explain his ethernet, but dot-commers often cited it in the late 1990s.

But two University of Minnesota professors say that real network growth is less dramatic. Their research shows that a network’s value grows something like n times the log of n. In one calculation, Metcalfe’s Law called for 100 percent growth, where the researchers found that it only grew at five percent. Moreover, not all connections on a network provide the same value.

Such calculations may sound purely academic, but they help to explain the failure of mergers and business plans for telecom, email, text messaging, and other network companies. Network value just doesn’t grow as fast as we hoped. Moreover, some connections provide more value than others. (Something that should be clear to anyone who has their neighbour’s kid’s address, but not Bill Gates’ in their email contacts list.)

* Note: Although Metcalfe’s Law holds that the network’s value grows at the square of n, the actual calculation is n(n-1), since you can’t communicate with yourself. If just one person has a cell phone, the network has no value.

(c) 2005 by Andrea Coutu of www.AndreaCoutu.com. All rights reserved.