How much is the World Wide Web worth today? Is it billions of dollars? Trillions? It’s impossible, really, to say how much. Lots, for sure. But where does all that value come from? Is it the wealth of information available at our fingertips? Is it the ability to communicate more easily than ever before? Is it because no matter how zany the activity you want to participate in, “there’s an app for that?” What if the value is something more? More importantly, how can your company harness that value to build positive experiences for your customers?

Let’s start simple. I remember when I was a kid I made a really lousy telephone system by stringing two tin cans together. It worked, but not very well and the worst part was that I could only talk to one friend at a time. Its value was just one possible connection. What if I could have added more friends to my “network” of tin cans? Let’s say I added just three more friends for a network of five cans. Now ten different connections are possible. If the network jumps to twelve cans, an amazing sixty-six connections are possible. As the number of endpoints in a network grows, the number of possible connections grows at a faster rate and each additional endpoint adds value to the others.

This phenomenon is known as the “network effect” and has been well known since the early 1900’s when telephone networks were first being introduced. The addition of each new telephone on the network adds to the value of all the previously installed telephones.

In the 1980’s Robert Metcalfe, one of the founders of 3Com, used Network Effects to sell Ethernet network cards to corporate America. He reasoned that the value of a computer network grew much faster than cost of deploying it. In other words, the cost of the network grew linearly while the value of the network grew exponentially. Over time this effect has come to be called “Metcalfe’s Law.”

Metcalfe’s Law has been used to explain the growth and value of many different technologies including telephones, fax machines, and cell phones. Most recently it has been used to explain the World Wide Web and the growth of Social Media such as Facebook.

It has been argued by many that the success of the World Wide Web can be explained by the network effect achieved by linking pages together. Every page connected to the Web enhances the value of other pages. But this only partially explains what’s happened. Other hyperlink schemes exist and have failed and the number of web sites that have failed is legion. Take the hugely popular, reader-edited, online encyclopedia Wikipedia, for example. Other large-scale Wiki-based web sites have failed to mimic its popularity. Clearly the Network Effect is coming from something more than just Web pages and the hyperlinks between them. Many experts contend that it is the implicit social network operating behind the scenes that actually carries the Network Effect.¹ In other words, it’s the people connecting over the network, not the network itself that carries the power.

In the feedback world, social media and social networks are red hot. Every company in the world is grappling with ways to leverage Facebook, Twitter, and the Blogosphere. Most companies are keenly interested in both gathering feedback from and broadcasting information across social networks. Metcalfe’s law gives interesting insights into this process.

There are interesting corollaries to Metcalfe’s Law that don’t get talked about much. The first is that in order for Network Effects to apply, linking must occur.² In other words, our customers must be linking with each other and with us. But do we really want that? Do we encourage our customers to connect with one another or do we want it to be a one-way street where we control the communication? Typically we’re worried about our customers communicating negatively one with another.

Another interesting corollary is that the Network Effect engine can run in reverse. Usually when the “value” of the network is discussed it refers to the communication potential of the network. The communication can be about anything. It could be stories that help your brand or damage your brand. That means that if negative news about your company goes “viral” (spreading like a virus outbreak), the Network Effect can cause its brand to circle the bowl even faster than ever before.³

Most of the hubbub about social media has been focused on negative press when customer service blunders are aired publicly on a massive scale. Many company’s social media strategies are simply “early warning systems” much like the United States created during the Cold War. They’re effectively saying, “Just tell me when the missiles are launched.” Such a strategy assumes, misguidedly, that something could even be done once a social media thermonuclear strike is underway.

Think about it for a second. Once a negative story goes “viral” and is powered by the Network Effect, there is almost nothing a single company can do by sending a limited-linkage, one-way message out into the Web, especially if the message isn’t backed by the implicit social connections discussed earlier. The only real strategy is to inoculate our customers by creating a positive-feedback social network in advance.

Forward-thinking companies must embrace Metcalfe’s Law and plan for Network Effects in their social media strategy. Creating a positive web of customers with your company at the center is the only way to keep the engine running forward, instead of in reverse. Only then can your company reap the positive rewards of the true value of the Network.