A New Model for Network Valuation
From Meritology
Author's Abstract
What is the value of a network? This has remained a question in economics for decades. This research piece presents a new model for answering that question. In seeking to develop a model for cybersecurity risk management, it became apparent that having such a model depended on answering another question first, namely, “what is the value of the network we are protecting?” This line of fresh inquiry led to a new proposed model for valuing network.
Previous models for valuing networks sought to estimate value based on the size or structure of the entire network. Metcalfe’s Law, the most popular version, proposed that the value of a network was proportional to the square of the number of nodes on a network. In this exponential growth model, the value of the network rises with the number of users, regardless of size. 1 Reed’s Law built on Metcalfe’s insights but focused on the number of sub‐groups which can form within a broader network. Both of these conceptual models provided some useful insights, but were limited by focusing on the network as a whole, observed from a central perspective. Being largely conceptual, these models were not generally applied to actual, applied network valuation problems, although Metcalfe’s Law was used to verbally justify lofty valuations for new Internet technology companies until the stock market bubble burst in March of 2000.
This piece presents a new economic model of networks (Beckstrom’s Law) that is based on a completely different perspective – looking at the edge of the network and the value that it adds to users transactions. It applies a user centric perspective. Beckstrom’s Law solves the valuation problem by looking at how valuable the network is to each user. The value to each user is determined by calculating the net benefit value the presence of the network adds to all transactions conducted by the user over that network. The model can be used to value any size of network, whether it has two users or billions.
Any type of network can also be valued with the model: social networks, phone networks, train networks, texting networks, support groups, private clubs or even the entire Internet itself.
The model is simple, fine grained, additive, and scalable yet divisible through set theory.
Derivatives of the core model can be created to solve various network economic problems, such as risk management, hacker economics, supply chain intrusion economics, and deterrence economics.
Beckstrom’s Law can contribute to solving disparate network related economic problems, such as public policy formulation, information sharing incentives, and business model analysis.
Resource: [1] Title: A New Model for Network Valuation Author: Rod Beckstrom
