Metcalfe’s Law, Network Effects & Strategic Partner Ecosystems
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This is one article in a series I’m writing about multivariate Network Effects and how they factor into building robust strategic partner ecosystems that scale a business’ revenue and market footprint. Herein, I’ll draw from my successes and failures managing partnerships and building ecosystems at Google, Intel, and other organizations with partners of all shapes, sizes, and flavors. The article below was originally published here.
In 1999, I joined Intel out of graduate school to manage strategic partnerships. I was new to both Silicon Valley and the world of technology but, before long, like every dutiful Intel employee who paid any attention, I learned about the famed Moore’s Law.
Before long, though, a lesser-cited technological law came to intrigue me even more.
I. METCALFE’S LAW
About halfway through my time at Intel, I learned about Metcalfe’s Law and the power of Network Effects. Metcalfe’s Law, which was named after Robert Metcalfe in the 1980s, states that “a network’s impact is the square of the number of nodes in the network. For example, if a network has 10 nodes, its inherent value is 100 (10 * 10).” (Thank you, Technopedia.)
In other words, as the nodes in a network increase, the network’s value increases exponentially.
An easy example of Metcalfe’s Law is Facebook. As its user base grew, the number of potential connections between people increased exponentially. And, therefore, theoretically, the value of the Facebook ‘social graph’ (ie, network) increased exponentially.
It was 2002 and I had recently transitioned into a role focused more on our scaling Intel’s overall market value by nurturing a global partner ecosystem of ISVs, OEMs, TPVs, SIs that served both our enterprise- and consumer-oriented customers.
Also around that time, Intel was pushing further beyond desktop computing into servers, laptops, devices (iPAQ anyone?), and consumer products (pc cameras, MP3 players). Setting aside the returns from some of those initiatives, we were on a mission to showcase how end-to-end networked technology, including rapidly increasing broadband combined with ‘Web Services’ (now Cloud), would revolutionize the way our technology infrastructure would connect people, places, and things.
As a result, I started examining the partner landscape through the lens of Metcalfe’s Law. In doing so, I experienced that, while managing individual partners was fun and rewarding, assembling a network of seemingly disparate organizations around a common objective — whether a product, service or cause — was that much more fulfilling.
Considering the impact of network effects elevated the art of strategic partnerships to a whole new level.
However nerdy, I was hooked.
Metcalfe’s Law fascinated me because I’m a connector at heart. Professionally, this means I enjoy forming and leading strong strategic partnerships that create value for all stakeholders; personally, I value relationships most in life.
Over time, though, I started thinking about other aspects of network effects that Metcalfe’s Law seems not to factor into the equation. such as: the value of each individual node, inter-node connection strength, network arrangement, and network purpose.
By way of example, let’s apply some of these other variables when assessing the value of a telephone network, which is a classic example of Metcalfe’s Law. The more phones that are part of a telecommunications network, the greater that network’s value.
However, do sub-par mobile phones add equal value to the network? What about phones that connect to the greater network via weaker networks?
Yes, the quantity of nodes is critical, but that’s only part of the equation.
II. A NETWORK’S VALUE IS MULTIVARIATE
As I’ve gone on to build and cultivate partner ecosystems for Google and others, I’ve spent more and more time thinking about the larger picture when it comes to Network Effects. I’ve been particularly interested in ecosystems of strategic business partners, but network dynamics show themselves in many places.
Through this exploration, I’ve identified at least five core variables that I believe, when examined together, help us develop a more comprehensive understanding of a network’s value. [2]
Those five variables, as far as I can see, are:
Mind you, I’m not a traditional mathematician, so I won’t attempt to amend Metcalfe’s equation to include these other attributes. Someone very well may have already written a mathematical corollary that more comprehensively and/or scientifically assumes this broader set of variables.
I should probably ask Tor Bair. I don’t know him, but he wrote this interesting article about combinatorial growth, a concept I’m still digesting at the rate of, well, something that takes a while to digest: Exponential Growth Isn’t Cool. Combinatorial Growth Is.
Here’s a graphic from Tor’s article, which clearly reflects how combinatorial growth leads to a bounty of Holy Shot:
I’ve also never met Robert Metcalfe, but he invented the Ethernet so I can assume safely that he was smarter than I am. I’ve been known to overcomplicate matters from time to time, so maybe that’s the case here. Maybe I can track him down so he can set me straight on all of this.
Anyway, if you find something smarter than what I share here, please share.
For now, though, I propose a qualitative amendment, which I will call The Conrad Corollary: A network’s value depends not only on the quantity of nodes in a network, but also on the value of each individual nde, strength of the connection between the nodes, network arrangement, and network purpose. [3]
III. DO THESE ADDITIONAL VARIABLES MATTER?
Let’s consider The Conrad Corollary relative to some basic network examples.
An organization might have 100 strategic partners, but the ecosystem breaks down pretty quickly if those partners are ineffective and/or the strength of the relationship between those partners is weak.
Or let’s take teamwork, which many of us enjoy (or perhaps endure) on a daily basis.
According to Metcalfe’s Law, as I understand it, a team’s value would increase exponentially as the team adds new individuals. But as anyone who’s been on a team will tell you, that doesn’t hold up. Because, if our teammates are anything but A (or at least B/B+) players, the team isn’t likely to deliver.
More is definitely not always better.
Similarly, if a team communicates poorly (ie, the connection between the nodes is weak), that team is unlikely to perform well over the long haul.
Another obvious network example is LinkedIn, which has grown exponentially in value for its users as more and more people have joined. However, even if I have a large number of LinkedIn connections, it doesn’t much matter if they aren’t the right people or, more importantly, if I don’t find a way to strengthen my relationship with them in a meaningful way.
Conversely, a smaller group of carefully curated LinkedIn connections that align with my professional goals, and with whom I communicate regularly, would be more valuable. I’m not saying I do that, just that it might be good to do so.
The list goes on, but you get the point: A network’s value depends on many variables, not just the number of nodes.
IV. SCALING VALUE CREATION THROUGH PARTNER ECOSYSTEMS
These days, the name of the game when growing a business is scale. According to Fundable.com, “scaling is about adding revenue at an exponential rate while only adding resources at an incremental rate.”
The notion of scaling was certainly driven into our brains at Google, and I had the good fortune of indoctrinated to the dynamics, mechanisms, and methods by some of the best in the technology world. I may or may not be an expert in scaling, but I learned from those who are.
What interests me most these days is understanding how to cultivate partner ecosystems that scale value creation for all network stakeholders.
In fact, doing so is critical.
I stumbled across an article on Lunarpages.com titled The Power Of Together: Partner Ecosystems For Business Growth, which says this about the importance of building a strong partner ecosystem: “If your company is not positioned to participate in this new multiple partner ecosystem model, then you are likely to lag behind.”
The article goes on to say: “Whether your partnership ecosystem is large or small, it enables rapid changes in the competitive advantage for companies and helps create new customer experiences with a vision for the future.”
V. WEAVING A SYMMETRICAL PATH
In this series, I’ll share my thoughts on how Network Effects influence developing a robust partner ecosystem, writing articles on topics such as:
⬥ How businesses leverage Network Effects to scale both revenue and market footprint
⬥ The interconnection variable: How to build strong and sustainable strategic partnerships
⬥ Designing a partner ecosystem that causes all boats to rise with the tide
⬥ Unleashing the hidden potential of seemingly chaotic stakeholder systems
⬥ The Center Dot: How a network’s purpose, mission, and heart makes all the difference
In the end, the strongest ecosystems weave a symmetrical path through a system to create exponential value from what might otherwise appear chaotic.
FOOTNOTES
[1] I readily acknowledge I’m likely overlooking other variables that impact a network’s value, but these five are as far as I’ll go for now.
[2] I’ve named this The Conrad Corollary in honor of a manager, friend, and mentor who has arguably had the greatest impact on my career. She was masterful not just because of her vast personal and professional network, but also because the quality of people she attracted into her sphere and the strong relationships she built with those people. If there’s any value within this corollary, I attribute it to her; in whatever ways it’s flawed, that’s entirely on me.
Originally published at www.linkedin.com on April 10, 2018.
