The Great She Elephant’s mention of City AM reminded me that I made a note on this organ in my little black book, but I couldn’t remember what it was, so I went and looked it up and I realised that it was a thing I was writing about the “laws” of networks and of male brains! Writing in his “The Long View” column in City AM, managing editor Marc Sidwell pointed to Metcalfe’s Law and Reed’s Law in a discussion on network economics and mentions that Reed’s Law may be more important — see “Bitcoin is a lesson in now networks can supercharge innovation economies”, City AM. p.16 (12th Apr. 2013). Now, I wrote a couple of articles about this a few years ago. As I said back in 2007…
I’m a Reed’s Law man, myself
I tried really hard not to comment on Marc’s column but I wrote down those notes and because of GSE I just found them so I thought I would blog them for fun. They reveal a fundamental character flaw but I can’t help sharing it!
At a recent event, a telecommunications supplier invited me along to a reception they were having in a club downtown somewhere so I went over with the guys for a half of shandy and a packet of pork scratchings. While we were there, a magician was moving through the crowd doing tricks. The magician, who was absolutely brilliant (the card tricks he did with the group of us were jaw-dropping) was Indian. I mean he was English but of Indian descent. I introduce his ethnicity only because it is relevant to the story. He began one of the tricks by saying something along the lines “My great grandfather learned this trick from an old man back in New Delhi when Queen Victoria was still the Empress of India”. For what reason I don’t know, but a deep-seated and fundamentally male character flaw was exposed at that moment, because I couldn’t help myself from saying “But New Delhi wasn’t founded until Edwardian times”, thus ruining the atmosphere. I apologised unreservedly (I then googled and discovered it was founded in 1911.)
Sometimes, you see, I just can’t help myself. I know it doesn’t matter to the point being made but I’m driven to trip over factual errors. I can’t think round them. So back to communications laws. I read this in a magazine and made a note to post a comment (which I never did).
In 1980, Bob Metcalfe, an inventor trying to persuade people to buy his $5,000 Ethernet cards, which connected computers in a local area network, came up with a formula that expressed the value of a network as the number of connections squared. The specifics of “Metcalfe’s Law” have frequently been challenged, but the basic idea that networks add value exponentially as they grow has not.
What was my comment? Well, for one thing, “squared” isn’t “exponential” – they mean completely different things – and for another thing Metcalfe’s Law has been measured to be something more like NlogN rather than N*N anyway. There is an exponential law to networking, but this is the Reed’s Law mentioned by Marc. It is named after the AT&T researcher David Reed, which says that the power of a networks grow according to the number of subgroups that can be formed with the network, and this is a 2^N curve. I agree with Marc about its importance. In fact I wrote an article for Financial World magazine back in November 2006 explaining these laws for financial services professionals and saying that I thought that over time Reed’s Law dominates (we place it centrally in the technology roadmaps that we develop for clients at Consult Hyperion). Metcalfe’s Law doesn’t shape financial services much anymore (everything is already connected to everything else) and Reed’s 2^N zooms off into the stratosphere leaving both Moore’s Law and Metcalfe’s Law behind.
What does this mean in strategy terms? I think it means that the shape financial services in any future that we can see is going to be shaped by the technologies that define, control and manage subgroups: in other words, the “disconnection technologies” of encryption, identification and authentication.
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