(Copied from http://www.mgt.smsu.edu/mgt487/mgtissue/newstrat/metcalfe.htm)

Robert Metcalfe founded 3Com Corporation and designed the Ethernet protocol for computer networks. Metcalfe's Law states that the usefulness, or utility, of a network equals the square of the number of users.

The telephone is of very limited use if only you and your best friend have one. If a whole town is on the system, it becomes much more useful. If the whole world is wired, the utility of the system is phenomenal. But in the predigital age, it could take many years for Metcalfe's Law to bear fruit. It was not until 1931 that telephone companies put a dial on the instrument, finally cutting the tremendous cost of employing switchboard operators and extending the reach of the system. First, telephone use had to reach a critical mass, or number, of users. So it is with any technology.

Until a critical mass of users is reached, a change in technology only affects the technology. But once critical mass is attained, social, political, and economic systems change. This is what authors Downes and Mui call the Law of Disruption. It took about 10 years for radio to reach critical mass in the U.S.; television took longer. Each of these technologies transformed family, economic, and political structures once they reached critical mass.

The same is true of digital technologies. Consider the Internet. It reached critical mass in 1993, when there were roughly 2.5 million host computers on the network. By November 1997 the vast network contained an estimated 25 million host computers. With computing cost continuing to drop rapidly and this dominant computing network growing exponentially, the stage is set for a social, political, and economic revolution. Moore's Law and Metcalfe's Law are in play. To achieve a dramatic effect on commerce, though, one more piece of the puzzle is required. Firms must see a transaction cost advantage that causes them to change their strategic thinking from the models of the past. Read on.