Icann president debunks internet economics

Rod Beckstrom, president of 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?” he 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 he developed with Vint Cerf, changes the way many companies should view their value, as well as helping to quantify the value of network administrators and security officer’s work.

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

Bill Gates dropping his Facebook account was a case in point he said, where the number of friends became so great that the network lost its value because he was spending too much time on there.

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

For computer security Beckstrom’s Law the computer security officer tries to minimise the amount they spend on security and losses to the network. Security is not an investment, it is a cost to reduce loss Beckstrom said.

In terms of deterring hackers then the costs of hacking had to be raised, by increasing internet security against the attacker with better technology and law enforcement, increasing the costs to the hacker in terms of legal penalties and reducing the total value that they can gain from the target.