Enjoy this oddly-prescient essay on which internet companies you should invest in circa 2001. Long before there was a Facebook, a Twitter, or even much of a Google, there was “The Killer App Equation”. Some of the prognostication was off-base, but there’s much that makes me wish I had put my money where my mouth was (or, more precisely, that I had money to put where my mouth was).
How to Find the Best Applications for the Internet
by Gregory D. Durgin, 1 April 2001
The other day I was thinking about how business reality had caught up to a lot of internet companies. I thought, wouldn’t it be nice if there was a simple mathematical formula for identifying an extremely useful and profitable internet application. Basically, is there a “killer app” equation? A few cups of coffee later, I stumbled across something in a book I was reading.
It was an interesting concept called Metcalfe’s law. Metcalfe’s law simply states that the value of a network is proportional to the number of connections it makes between users. The best networks connect every user to every other user.
There is a mathematical formula for finding connections based on N users. Take N, multiply it by N-1, and then divide the product by 2. For example, if 2 nodes are completely connected, then there is 1 link. If 3 nodes are connected, there are 3 links. If 4 nodes are connected, there are 6 links, and so on.
You begin to notice that if millions of nodes are completely connected, you will have a gigantic number of connections. And when that happens, you’ve got a killer network. You need a killer network before you can have a killer app.
The public telephone system is a killer network. Cellular communications infrastructure is a killer network. The interstate highway system is a killer network. The U.S. postal service is a killer network. All of these systems connect each of their millions of users with one another, blowing the network value through the roof.
Of course, the internet is a killer network, too. This brings us to the real heart of the matter: once you have a killer network, how do you find a killer app for that network?
Answer: a killer app is a useful service that uses the connectivity of a killer network completely. To really understand this, we need to look at some prominent internet applications. Here are just a few examples of killer apps and not-so-killer apps:
Online Auctioneers: A site like e-Bay has a large number of buyer/seller users and each of them is completely connected to other buyer/seller users. Sounds like a killer app to me!
e-Mail: I can send a message to anyone else in the world from my computer – and they can respond in kind. No other application has become so essential for modern business and life so fast.
Instant Messaging: I personally do not like the thought of using instant messaging since another killer app – the telephone – is more attractive to me. But I have to admit, based on user connectivity, an instant message is a beautiful thing.
Online Shopping: The convenience of online shopping does not make up for the complete lack of user connectivity. Amazon.com has the same user connectivity as your local Wal-Mart.
Priceline.com: Don’t be fooled by the gimmicky business model – there is no connectivity of users here. Bidding on plane tickets is one thing, but what if I want Delta Airlines to bid on my 1991 Nissan Sentra? I’ll go to e-Bay, instead.
Pay-per-use Content Sites: Transplanting book, music, or video stores to the web and charging people per use does not maximize connectivity. The user is only connected to the site.
Maybe this oversimplifies things, but I find that the greatest truths in life are the simple ones. And keep in mind that a service or product can be profitable without being a killer app. But if I were investing in a “dot-com” company, I’d take a good hard look at Metcalfe’s law first.