ICANN president debunks internet economics

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ICANN president debunks internet economics

Metcalfe's Law is fatally flawed.

Rod Beckstrom, the recently appointed president of the Internet Corporation for Assigned Names and Numbers (ICANN), has used his address to the Black Hat USA 2009 conference to propose a new economic model for valuing computer networks and the internet.

Many economists have used a derivative of Metcalfe's Law, which posits that the value of a network is equal to the number of network nodes squared. That model is fundamentally flawed, Beckstrom said, and had led to the internet bubble in the late 1990s.

Investment banks ploughed millions into firms with no profitability because they had a lot of customers and would therefore be valuable. However, rather than look at nodes, economists should look at transactions.

"Who cares how many nodes there are?" Beckstrom said. "If you look at a value of the network, focus on the transactions. The value of the network equals the net value added to each user's transactions, summed for all users."

This model, which Beckstrom developed with Google chief internet evangelist Vint Cerf, changes the way many companies should view their value, as well as helping to quantify the value of the work done by network administrators and security officers.

For example, some networks grow the number of users but become less valuable since the value of their transactions is so small.

Microsoft chairman Bill Gates dropping his Facebook account was a case in point, Beckstrom said. The number of 'friends' became so great that the network lost its value.

Understanding the inverse network model is crucial to internet economics, he said, and the same laws affect computer security.

Chief security officers try to minimise the amount they spend on security, but Beckstrom maintains that security is not an investment, but a cost to reduce loss.

To deter hackers, the cost of hacking has to be raised by increasing internet security against the attacker with better technology and law enforcement, harsher legal penalties and reducing the total value that can be gained from the target.

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