Rethinking Reed’s Law

I posted last month on Reed’s Law, the notion that Group Forming Networks (GFNs) create value more quickly than regular networks.  It makes sense to me that a network whose nodes themselves are networks (think MySpace, Facebook, social networking in general) would increase in value more quickly than traditional networks (think AT&T).

My thinking on this has been greatly influenced by Umair at Bubblegeneration and Nivi, both of whom are younger and smarter than me and thinking hard about this stuff.

But it’s not just the young guys in the business who are thinking hard about Reed’s Law.  Tim Oren has been busy rethinking Reed’s Law on his blog.

And yesterday, Tom Evslin came out and said that he thinks Reed’s math is wrong.

So, to summarize, Reed is right that GFNs set up the potential to create value much more rapidly than traditional networks.  How "much more quickly" this happens is the subject of some healthy debate.  And whether there is a natural limit to how far this goes is another subject of some discussion.

So last night, after a nice event with the Tacoda engineering and operations team, we got talking about Reed’s Law. Joe Wilson, who has been working in the Internet arena for a long time, suggested to me that the value creation equation needs to also take into account the "monetization ability" of each of these GFNs.

Tacoda specializes in helping people who operate online properties "monetize" them. So it wasn’t surprising to hear Joe talk that way.

I guess the bottom line for me on this stuff is that its important to understand the underlying fundamentals of online businesses, but getting the math exactly right may not be the most productive use of time. I’ve met plenty of great entrepreneurs over the years who know that revenues minus costs equals profits, but have no idea what a differential equation is.  And it never got in their way.