Ebay + Skype: Metcalf’s vs. Reed’s Law

Ebayskype_2Plenty has been written about the speculated and ultimate purchase of Skype by Ebay so I’m not going to rehash the basic summaries.  But there is an interesting assessment that’s instructive in how Web 2.0 and Communications 2.0 drive value for users and suppliers of community networks.

Umair provides analysis of both the financial and strategic drivers to the Ebay-Skype acquisition.

The foundation of the analysis looks at the definition of Web 2.0 (what it means) and how Metcalf’s Law compares to Reed’s Law as a result.

Umair writes:

Web 2.0 is a shift from tight, hierarchical architectures which realize exponential network FX, to loosely structured architecture which realize combinatorial network FX.

….from a world of x^n, to a world of n^x, where n is network size, and x is utility/value/etc.
More simply, Web 2.0 is about the shift from network search economies, which realize mild exponential gains – your utility is bounded by the number of things (people, etc) you can find on the network – to network coordination economies, which realize combinatorial gains: your utility is bounded by the number of things (transactions, etc) you can do on the network.

The point is that this shift is combinatorial – each person can do X activities in a combinatorial network, and it’s combinations of these activities that make value explode. Contrast with a exponential network, where it’s the number of people on a network that create value. That is, a relationship between any two people is 1:1 in an exponential network, but many to many in a combinatorial network.

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