What would Instagram be worth without any users? How about TikTok? That’s right, these massive platforms would probably be worth close to nothing. The sudden loss of value these social media monsters would experience can be explained by one simple concept: Metcalfe’s Law, or more commonly known as “network effects”.
Introduced in 1980 by internet/ethernet pioneer Robert Melcafe, the law states that the value of a network is proportional to the square of the number of users or connected devices (Joost, 2020, par. 4). In short, the more people use the product the more utility for the product.
However, this law moves beyond the digital world as it can be observed in the social world as well: as the group of people communicating with each other increases, so does the number of interactions in the group. And as Mecafe’s laws would suggest, exponentially.
When thinking about businesses which work as autonomous teams, this is an important concept to understand due to the fact that the human mind cannot handle large amounts of efficient interactions. As the author states, there is a limited amount of people with whom individuals can communicate, coordinate and perform well with.
Think about it, how many close friends do you keep in touch with? Would you be able to keep in touch with 35 close friends? Probably not, at least not without losing your mind or being a terrible friend. And as enterprises increasingly move away from the old-fashioned hierarchical structure towards a more decentralized network team structure, this piece of information has become critical to their success.
Taking network effects into account, in order to keep teams efficient, it is necessary to keep them small. So let us think of this phenomenon as Melcafe’s Law in reverse or as a negative network effect, which suggests that as a network grows, its value might decrease, at least after a certain point (Cuofano, 2022). Remember this key pillar in efficient team building: Bigger does not mean better, at least not in human interactions.
Cuofano, G., & About The Author Gennaro Cuofano Gennaro is the creator of FourWeekMBA. (2022, July 8). What are negative network effects and why they matter. FourWeekMBA. Retrieved August 31, 2022, from https://fourweekmba.com/negative-network-effects/
Fernandes, T. (2021, April 11). Metcalfe’s Law and why you should keep it in mind. Medium. Retrieved August 31, 2022, from https://medium.com/pm101/metcalfes-law-and-why-you-should-keep-it-in-mind-9a3b217226fc#:~:text=Metcalfe’s%20law%20says%20that%20every,of%20nodes%20in%20the%20network.
Joost. (2021, December 6). Solve communication complexity with networks of small teams. Corporate Rebels. Retrieved August 31, 2022, from https://corporate-rebels.com/metcalfe-law