Put simply, Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of users in the system. At least that’s how Robert Metcalfe, the inventor of Ethernet, the most famous local-area computer-networking standard, first formulated it when he was working at Xerox PARC in Palo Alto in the mid-1970s. But the real message of Metcalfe’s Law is metaphysical: the more people you can sign onto a network, the much more valuable it becomes. And that is all you need to know to set off a business—and social—revolution.
You don’t need to look any further for proof of Metcalfe’s Law than the single most important new technological phenomenon of our time: the Internet. The ARPAnet, with a few hundred users in 1969, was a useful research tool; its stepchild, the Internet, with a couple billion users in 2007, is the single most powerful force in the world economy. The incremental cost of adding any one of those new users to the Net was essentially zero, but the cumulative impact was in the trillions of dollars.
As important as the Internet has been, it is beginning to look like mere preparation for an even bigger tech wave: online communities. These days, a whole new generation of entrepreneurs is taking Metcalfe’s Law to heart and creating web-based structures that link together people of common interests into ever more valuable networks: MySpace, FaceBook, YouTube, LinkedIn, CraigsList … there are hundreds now, and more to come. Some are attached to existing businesses, but the most famous exist untethered in cyberspace, having no real business or revenues—and yet, given their incredible sale prices ($1.6 billion by Google for YouTube, for example), they unquestionably have real value.
When Metcalfe first pointed this out, few people noticed. His is a particularly maverick genius, half serious technology entrepreneur (he founded 3Com) and half fun-loving iconoclast (once, having mistakenly predicted the crash of the Internet, he publicly ate his words onstage). Thanks to never being taken quite seriously, Metcalfe spent many years largely uncredited for his greatest discovery. Even now, when it seems every other new high-tech business plan is built upon his Law, Metcalfe has moved from Silicon Valley to Maine, where he is more likely to be found in a local diner than in a laboratory.