In 1974, while working for the Xerox Corporation in Hawaii, I was having a difficult time selling a product known as the Xerox telecopier. I was having trouble selling the telecopier because it was a new product. Potential customers kept asking, "Well, who else has one?" In other words, having a telecopier had no value without someone else having a telecopier--that is, a network of telecopiers.

Today, most people call a telecopier a "fax machine."

As more and more people began using these new machines, the value of the telecopier went up; sales became much easier. Ten years later, after a decade of struggling to sell these new machines, suddenly every business had to have one. The telecopier went up in value once it became a network of telecopiers.

Metcalf's Law

Robert Metcalf is one of the creators of Ethernet, the founder of 3 Com Corp (which produced the famous Palm Pilot®), and is credited for defining Metcalf's Law, which states:

A Network's Economic Value = (Number of Users)2

Stated in everyday terms: Just one telephone, existing by itself, has no real economic value. The moment there are two telephones, according to Metcalf's Law, the economic value of the phone network is squared: it goes from zero to four. Add a third phone, and the economic value jumps to nine; add a fourth and it leaps to 16.

In other words, as you grow a network, its economic value increases, not arithmetically, but exponentially.

From Rugged Individual to Networker

During my father's generation, people like John Wayne were the movie heroes of the day. In business, the heroes were giants such as John D. Rockefeller and J.P. Morgan, men who had built huge business empires; much like John Wayne, they were strong, independent, rugged individuals. This model of the hero business person is alive and well today; however, new types of heroes and business models began emerging in the 1950's.

One of these models is the franchise. A franchise is a form of business network, that is, it is composed of multiple businesses working together.

When franchises first appeared, many old-style businesses criticized the model, even calling it illegal. Today, a McDonald franchise owner has much more horsepower than the rugged individual who starts his or her own hamburger stand. If a McDonalds locates near that independent burger place, chances are, the rugged individual is soon out of business.

A brand new franchise is not very valuable; that is, not until it starts gaining more and more franchises. I remember seeing the first Mailboxes Etc. and wondering what it was. Within just a few years, I was seeing one every few miles.

Metcalf's Law at work.

In fact, a small packaging and mail shop that had been in business in my neighborhood for years was forced out of business when a Mailboxes Etc. franchise opened up in the same shopping center. Again, rugged individual loses to the networker.

Metcalf's Law for Everyone

Network marketing, the second type of networked business today, is a network of individuals, rather than a network of franchised businesses. That is network marketing.

Like franchising, this type of networked business came under much criticism in its beginnings; to some extent, it continues to be criticized today--yet it is growing into many domains once controlled exclusively by traditional businesses. Why does it keep growing, despite criticism and opposition? Metcalf's Law.

The beauty of network marketing is that it has made available the power of Metcalf's Law to the average individual. But you must obey the law! Simply joining a network marketing company is a good start, but in and of itself, that doesn't entitle you to harness the power. That's like buying a telephone--and being the only one with a telephone.

In order to harness the power, your job is to clone or duplicate someone just like you. The moment there are two of you, your economic value is squared: your network's value has just gone from zero to four. With three of you, your network's economic value more than doubles, from four to nine. If the two people you brought in bring in two more people each, the economic value of your network starts looking like a rocket taking off for the moon.

Instead of you working hard arithmetically, you're building a network whose economic value grows exponentially. That's the power and the value of a networked business. That's why working hard to build a network makes more sense than working hard as an individual. In the long run, a successful networker has the potential to out-earn most
professional people, such as doctors, lawyers, accountants, and other rugged individuals. The difference and the power are explained through Metcalf's Law.

The Future: Networking

Today, the World Wide Web is shaking up the world of business. The Internet allows more and more businesses and people to work together as networks. We can communicate vast mounts of information instantaneously, through the Internet.

The networking model, and its intrinsic power, as expressed so poetically by Metcalf's Law, has captured the thrust of business. It is the future.

In the world of business, there will always be rugged individuals--but I predict that the future is much brighter and more profitable for those businesses and individuals who choose instead to work as networks.

 

This passage is excerpted with
permission from
The Business School for People Who Like Helping People, by Robert T. Kiyosaki,
with Sharon Lechter, authors of
Rich Dad Poor Dad.