http://www.forbes.com/forbes/2007/0507/052.html

QT:”

Using a 35mm slide (see chart below), I argued that my customers needed their Ethernets to grow above a certain critical mass if they were to reap the benefits of the network effect. …. The cost of installing the cards at, say, a corporation would be proportional to the number of cards installed. The value of the network, though, would be proportional to the square of the number of users…..

Why should that be so? The network effect says that the value of that Ethernet card to the person on whose desk it sits is proportional to the number, N, of other computer users he can connect to. Now multiply this value by the number of users, and you have a value for the whole operation that is roughly proportional to N^2.

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In 1993 George Gilder, seeking to quantify the network effect, uncovered a slide from my 1980s Ethernet sales presentation and the formula saying that value is proportional to N 2. He christened it Metcalfe’s Law….

Recall that there is a critical mass beyond which the value of the network exceeds its cost. Where is this crossover point? You can find it by solving CxN=BxN 2, where C is the constant of proportionality of cost and B is the constant of proportionality of value. The critical mass threshold can be expressed as N=C÷B. Not surprisingly, the lower the cost per connection, the lower the critical mass. The higher the value per connection, the lower the critical mass.

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