I’ve been trying to digest Umair’s latest presentation on “edge competencies” especially because Umair’s distinction on Metcalfe & Reed’s law (+ his own Hague law) is an in interesting framework for segmenting as well as evaluating network effects driven business models. I’ve spend better part of my career at companies that tried to leverage network effects so it’s a important field of study that interests me highly. Furthermore, the framework has also garnered a lot of buzz, as it should, around the web from the likes of Fred Wilson (1,2) and the Stalwart blog.

The first thing I learned is that Umair has to be atleast 3x smarter than me , but more importantly, network effects can be really segmented into 3 parts

1. The re-usability of the “trading” unit. For example, since content is produced once but consumed multiple times (zero or close to zero marginal cost per “sell”!), its increasing return economies of scale is much higher than that of companies which use network effects for trading non re-usable or non re-consumable “units” such as physical goods. (but of course physical goods is “valued” more per unit usually so content centric businesses needs to realize higher scale to achieve the same network value)

2. Peer production symmetry. The more “flat” the distinction between producer and consumer (or client and server) the more value is created. In eBay’s case, ideally, you want all your buyers to be sellers as well – thus increasing participation, transaction per user, as well as loyalty. Bill Burnham called it “input-output asymmetry” more than a year ago on his blog.

3. Network efficiency and size. The is probably the best understood part of the network effects business model. How big is the network? how many users? How easy is it to participate in the network (acquisition+activation)? And finally, how efficient, fast, easy, is it to trade on the platform.

(BTW, I hope I’m paraphrasing Umair correctly)

One thing, however, that I do have a few questions with is whether Google, as Umair asserts, has exponential (Reed’s) network economies of scale. Obviously the regression graph of revenue on users makes it seem so. But on a technical level I question the “number of Google users” is an apple to apple comparison to other companies’ user numbers. The # of adwords/adsense accounts is only a small % of the real user number of Google. Searchers do not need accounts and thus are not counted. Furthermore, gmail, gtalk, orkut, etc users are only a subset of ad clickers (consuming participants). The unique vistors / month metric is also a vastly deflated # as total registered user base is used for other companies. I’m not sure which one Umair used (or Google used). As a result, as keyword prices increased significantly over the last year, the user # held steady (there are only so many buyer of keywords, they are just buying more) it seems as if Google revenue/user is growing exponentially.

Using the framework I outlined, I also question Google is truly a Reed’s law business.

1. The major trading unit for Google is “information” (which arguably is re-usable) but the most monetizable segment is really “purchasing information.” Ad buyers are trying to sell something and thus only search traffic that have commerce intention are really monetized by Google (i.e. clicked on). As a result, Google can only monetize their traffic as fast as their ad buyers are selling and ad clickers consuming physical goods or services. Thus Google’s scale economies are limited by the offline inefficiency of production and consumption (like everyone else).

2. There is significant asymmetry between ad buyers and ad clickers – as most searchers do not buy ads from Google.

3. The last part regarding Google’s network size and efficiency is where Google really kicks ass. It is obviously a popular/great service with a lot of traffic. Furthermore, its dynamic pricing mechanism is the enviable model of value pricing. So on this part, Google gets a full score.

I do believe Google has as good an opportunity as anyone to become a “Reed’s” law business as it expands beyond search to other business lines that are more amenable to achieve Reed’s economies (Gtalk, etc). But for now, it’s simply enjoying a hypergrowth phase like many previous internet darlings. Of course, I could be very wrong as I have to admit I did not fully comprehend the intricacies of the framework as presented by Umair.