Concept 8: Metcalfe’s Law and Network Effects

This is the 8th post in a series. If you’re not familiar with how to read network graphs, you might prefer to start with Concept 1 or Concept 2.

Network effects are a phenomenon that makes some products and services more valuable with each additional person who uses them. Communication devices like mobile phones aren’t very valuable if only one person is using them. Social media platforms like Facebook aren’t very useful of only one person signs up. Services such as Airbnb, Uber and Wikipedia wouldn’t work if many people didn’t participate. However, with each additional person, the value of those products and services grows.

Metcalfe’s Law is one of the foundational concepts to explain these effects. It attempts to quantify the value of the network by measuring the number of possible links between people participating. Of course, not everyone is connected to everyone else using these products or services. This is more like the network effects equivalent of calculating the total addressable market.

NfX does a fantastic job of laying out many of the other foundational concepts including this one in their Network Effects Bible.

Ready for the next concept? The next one in the series is Concept 9: Scale Free Networks and Preferential Attachment