Metcalfe's Law and Network Quality:An Extension of Zhang et al.

Zhang et al. exploited data on Facebook and Tencent to validate Metcalfe's law, which states that the aggregate value of a communications network is proportional to the square of the number of users. This note points out that the value of a social network may be driven not only by its size, but also by increases in the variety and quality of the services offered. I therefore extend Zhang et al.'s approach by explicitly controlling for changes in network quality over time. For the case of Tencent, I also filter out revenues and costs that are unrelated to Tencent's core (social network) services. I find that these two extensions only strengthen Zhang et al.'s conclusions:Metcalfe's law now outperforms the other laws even more clearly.