Subject: Re: near/medium future digital media economics
From: "Stephen J. Turnbull" <>
Date: Sat, 20 May 2006 13:49:22 +0900

>>>>> "Ben" == Ben Tilly <> writes:

    Ben> Email has existed for over 3 decades and allows people to
    Ben> communicate with strangers.  I submit that most of us mostly
    Ben> talk with people we know.

I'm not talking about "talking", I'm talking about connection.  You
know, the kind of connection that associates you with the company that
administers, or with the Tsuchiura
office of Nomura Shoken.  Didn't know about those, did you?  So you
obviously didn't "talk" to them personally, and those connections cost
you no time, though you almost certainly connected to the former, and
quite likely are fuzzily connected to the latter ("shoken" means
"securities broker" in Japanese).

It's true that asymptotically the value of such networks will be
limited by people talking to each other.  But today less than one
percent of the world's population can say that their personally
received value is dominated by their social relations.  Most people
spend well over 50% of their time merely providing for the physical
needs of themselves and the four, five, or ten people they most value
talking with.

So I conjecture we have several generations of "mere" economic growth
to pass through before the kinds of consumption activity you focus on
present a binding constraint on network valuation.

    Ben> If you disagree, then I expect you today to go out, find a
    Ben> random email address, contact that person and open up a
    Ben> conversation.  I am fairly confident in predicting that
    Ben> you'll be disappointed in the result.

You're paying no attention at all to what I've written, except those
parts you find easy to disagree with.

    >> What search technology *may* make possible is scaling up search
    >> in a heterogeneous network to a billion participants or so.

    Ben> It does.  However what do people search FOR?

I'm not talking about people doing the searching.  Read what I wrote,
I said that explicitly.

This is really important.  I can't give crystal-clear examples,
because what we're talking about is Tom's claim of a new emergent
effect.  It is certainly true that historical claims of new emergent
effects *that will transform society globally* have been nearly always
bogus, but not quite so bogus as perpetual motion.  In particular, new
emergent effects that support a profitable business model for a while
are found regularly.

I can't be very optimistic about Tom's more grandiose claims, but this
being FSB, I certainly do hope, and expect with positive probability,
that there's a business opportunity in it for someone, maybe Tom
himself.  It's worth being precise about our analysis for that

And there are such global innovations.  The market (bazaar) per se is
one.  The very special markets for primary factors (ie, land, labor,
and financial capital) are another.  I suspect that the Internet is a
third.  We don't really understand the connection between the abstract
economics of the market and its generalization to economics of more
general networks, so it's hard to explain what's going on.  I can only
humbly request that you try to figure out what I'm trying to say, help
me to clarify it (including in my own mind), and disagree with *that*
as appropriate (and of course correct my math mistakes!)

    Ben> Andrew and I have been contacted since then by multiple
    Ben> people who had come up with their own scaling estimates, it
    Ben> is fascinating how many different approaches all come up with
    Ben> n log(n) or something similar.

Which is not Metcalfe's law, but it is still a *strong* network
technology in economic terms.  Do you know what Walmart's margin on
turnover is?  Around 2%.  Can you imagine what they could do with n
log n returns to scale if they can dominate an inherently linear
industry on that margin?

    Ben> This is true, but people DON'T join networks at random.

The networks I'm talking about, people don't join at all.  They *are*
members; they participate as much as they please.  Thus the focus on
marginal cost of participation per unit compared to value per unit.

    >> communication (sorry, no examples---that's Tom's job! ;-) might
    >> come pretty close, at least up to population levels feasible
    >> for humans on this planet.

    Ben> Whether it comes close depends on what you're communicating.
    Ben> With markets I'm communicating something very simple that
    Ben> machines can easily evaluate.  With content I'm communicating
    Ben> something complex that machines cannot easily evaluate.  The
    Ben> resulting dynamics are very different.

The machines don't evaluate, the network does.  The market works for
cars and homes just as it does West Texas Light and red wheat #2.

    >> I think the jury's out on just how far Metcalfe's Law can
    >> extend its domain---but the financial markets are a pretty
    >> compelling example for "hey, this really does work sometimes!"

    Ben> So if Metcalfe's Law failed offline, for Usenet, and in Web
    Ben> 1.0,

Who said it has failed for Usenet and Web 1.0?  We're talking about a
social phenomenon.  Internet time does not apply, it is way too early
to talk about failure, even for Usenet (which might be worth
considering a kind of Web 0.1 for this purpose).

    Ben> It is a basic property of human nature that virtually
    Ben> everything is junk to us, and the *meaningful* connections we
    Ben> draw have very different topologies.

Meaningful ! <=> valuable.  In fact, "meaningful" ! <=> "meaningful
connection".  Sometimes the medium is the message, sometimes the
message is valuable but otherwise not meaningful.

    >> First, it's not an assumption of equal value, really.  It's an
    >> assumption of equal expected value per connection, independent
    >> of the number of connections.  Apply Law of Large Numbers, live
    >> Metcalvian ever after.

    Ben> Sorry, insert the word expected and my statement still
    Ben> stands.  (It may be that my expectations are rather different
    Ben> than yours, but I think that mine have a better grounding in
    Ben> actual human behaviour...)

Nevertheless, this stuff is very delicate.  I ask you to be precise,
because there are lots of participants who are not going to make the
automatic generalization from "equal value" to "equal expected/average

    >> Second, consider Mr. Lynch's problem.  Have you ever watched a
    >> headhunter network a LUG meeting? ;-) If such people (excuse
    >> the exaggeration) are a constant fraction of the population,
    >> whammer jammer, Metcalfe's Law!  (In the long run, nobody else
    >> will matter if they obey Metcalfe's Law---their Metcalfe value
    >> is a lower bound on social value.)

    Ben> Yes I have.  It is the headhunter's job to facilitate finding
    Ben> potential connections of value.  Their presence (like a
    Ben> search engine online) therefore can bring the potential value
    Ben> of the network from O(n) to O(n * log(n)).

I don't understand that statement at all.  I'm now not sure my
implicit model made sense at all, so I won't try to argue for
Metcalfe's Law in the sense of a quadratic increase at this point.
But the value of the match achieved is an order statistic and, unless
you believe that people have unbounded potential value for a single
connection, thus bounded above.  Since there's one match per person,
the best *your* model of headhunting can achieve is O(n).

    Ben> Yes, this is true.  For instance in telephone networks, many
    Ben> strangers will call the local pizza parlour.  However again
    Ben> their potential value is bounded above by the potential value
    Ben> that humans find from being on the network, which I believe
    Ben> is generally far, far lower than Metcalfe's Law predicts.

An economist only needs strictly superlinear to get seriously excited.
I realize that from the point of view of corporate profit or rents
earned by top programmers, quadratic is very nice, but the social
organization effects are driven by small differences at the margin.

    Ben> I agree that Google increases the size of the network by
    Ben> increasing the marginal value of participating on the network
    Ben> to all participants.  However that's a second-order effect
    Ben> and I think it far smaller than the primary benefit of
    Ben> lowering the difference between the value that people
    Ben> actually achieve and theoretically could in a perfect world.

You are seriously confusing if you call an effect that is O(f(n)),
f' > 0, "second-order" compared to an effect that is O(1).  What are
you trying to say?

    Ben> Oh no.  Reed's Law *explicitly* says that every new member
    Ben> has that effect.  Which is why it doesn't pass the "smell"
    Ben> test.

    >> Strawman!  Strawman!  Out to the cornfields with you!

    Ben> Strawman?  How so?

    Ben> Reed's law says that the value of a network is exponential in
    Ben> the size of that network.  At some point adding a new person
    Ben> will, on average, increase the value of that network by more
    Ben> than the current GNP.  This is not a strawman argument - it
    Ben> is just a demonstration that Reed's law is not very
    Ben> realistic.

That's true, but that's not the argument you wrote above.

    >> Reed's Law would work if the fraction of great minds per
    >> generation were constant regardless of size of generation, and
    >> everybody else was worth precisely zero in this sense.  I think
    >> that's unlikely but arguable.

    Ben> I don't see that.

You don't understand the "in a linear context substitute expected
value for constant value, and get the same theorem" argument?  Above
you claimed it goes without saying.  Or are you once again implicitly
referring to the argument that I immediately proceed to make myself,
but you haven't made yet?

I expect that of propaganda maestros like RMS, but not of you.

    >> The problem with Reed's law is elsewhere.  It is that it
    >> assumes that all needed groups actually form.  If there's one
    >> great mind, then she has to participate in all (N-1)(N-2)
    >> possible groups for her to get Reed's law to work.  Again, you
    >> could adjust this for some sort of average or probabilistic
    >> formation, but I don't think that makes much more sense than
    >> assuming all groups form---you still need the number of groups
    >> forming to be proportional to the number of possible groups,
    >> and eventually Ms. Great Mind will get tired of all that
    >> networking.

    Ben> Um, your math is off.  She has to participate in something
    Ben> proportional to 2**(n-1) possible groups for her to get
    Ben> Reed's law to work.  This is unrealistic.

Yeah, well at least I was off in the direction such that correcting
the math made the argument work better.  :-)

Graduate School of Systems and Information Engineering   University of Tsukuba        Tennodai 1-1-1 Tsukuba 305-8573 JAPAN
        Economics of Information Communication and Computation Systems
          Experimental Economics, Microeconomic Theory, Game Theory