Last week Bill Gates told a business forum in New Delhi why he quit Facebook: He was overwhelmed by the number of friend requests coming his way.
That's a perfect example of the economics behind ICANN Chief Executive Rod Beckstrom's model for how to value a network. In a keynote speech Friday at Defcon, Beckstrom, former director of the U.S. National Cybersecurity Center, laid out an economic model for valuing not only Internet networks, but also social ones.
"Beckstrom's Law" says that the value of a network is the net value of each user's transaction summed up for all users. At its core, the concept is about transactions: The value for users is the total benefits from all transactions in a network minus the cost of those transactions.
Here's an example: Say you purchase $100 worth of stuff from Amazon each month over the course of a year. You could probably buy that stuff offline for about the same price, but you might pay extra for gas to drive to the store and an opportunity cost for your time. If the brick-and-mortar commerce cost amounted to $50 a month on top of the $100 you spent on books, then the value of Amazon's network to you would be $600 a year. Subtract from that the cost of connecting to Amazon's network, perhaps $40 a month for an Internet connection and computer hardware, and you have a value of something like $120.
That's the value you get from Amazon's network. Add up that amount across all Amazon users, and you have the total value of Amazon's network.
Beckstrom's concept was likely designed to target Internet networks, but its beauty is that it can be applied to real-world social networks as well. Take networks like private golf clubs, for example. Having lots of members is good because it keeps costs down, but at some point there are too many members to get a tee time. Beckstrom's Law could be used to help determine the kind of numbers that are good for everyone, and identify the tipping point where each new member makes everybody else worse off.
Beckstrom says that network value should be a big concern for social networks like Facebook and Twitter, which all want to scale to massive numbers of users. Since users are typically concerned only about how much the network is worth to them, there can be an inflection point where suddenly each new user makes life harder for existing users.
That's where Bill Gates comes in. For him, the value of Facebook's network decreased with every new user who sent a friend request his way. The idea contrasts with a popular assumption called Metcalfe's Law that values networks based on the square of the number of users.
"If Metcalf's law was true, Bill Gates would say the more people the better," says Beckstrom. "But that's not true because you've got the transactions, all those updates and notices."
It's a new way of thinking about things and could take a while to catch on. But according to Beckstrom, the model couldn't be any simpler: Value is the total benefits minus costs. You tally transactions, and you measure them.
"You can do it with every network you're involved in," Beckstrom says. And like Bill Gates, "you already do it implicitly."
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