Metcalfe’s Law: Manifest Destiny of Cerner and Epic?


(Originally published 10/25/2006 on zachmortensen.net)

In the previous article I promised to delve into the question of how the “big three” vendors and their peers can justify themselves as legitimate niche businesses within the broader IT and services market while simultaneously scorning their smaller rivals as “niche” healthcare IT vendors. To understand the answer, we need to turn back the clock more than 30 years to an early Silicon Valley success story that indirectly may have inspired the irrational exuberance of the Internet bubble and may — according to at least one group of people much smarter than me — be the driving force behind the recent Web 2.0 (or Bubble 2.0 as some cynics would say) phenomenon. Can we extend the same reasoning to the healthcare IT market? Read on and decide for yourself.

Back in 1973 an MIT and Harvard graduate named Bob Metcalfe was working at Xerox PARC and invented something he called Ethernet, which turns out to be one of the reasons why you are able to read this blog today. In 1979 Metcalfe left PARC and founded 3com, a company that made quite a bit of money over the years selling networking gear. Metcalfe’s greatest claim to fame of late seems to be his eponymous Law: Simply put, that the value of a network is proportional to the square of the number of its nodes (n^2), which seems almost obvious if you know anything about discrete math and complexity theory.

As someone who planned to make a lot of money selling network gear, it’s easy to understand why Metcalfe would have been excited by this principle. It meant that the value of the networks he was enabling his customers to create would grow at a rate that far outstripped their cost (he assumed cost was a linear function of n) once some “critical mass” was reached. Here is a reproduction of a 35mm slide that Metcalfe claims he used to illustrate the point in 1980:
metcalf.PNG
In other words, building a large Ethernet would eventually be a no-brainer. And to his credit, Metcalfe’s Law worked quite well for Bob Metcalfe and 3com.

Fast-forward 20 years to the Internet boom. Metcalfe had long since departed 3com, but Metcalfe’s Law was still going strong in the business strategies of many of the high-flying telecom companies building the infrastructure of the promised New Economy, they having made enormous capital investments banking on “network effects” to eventually kick in and create value far in excess of cost. They were gambling on network traffic doubling every three to four months as it had in 1995 and 1996, but few industry observers noticed before it was too late that the actual growth rate had slowed to a fourth of that rate. We all know the rest of the story: These companies took on massive debt to finance growth that ultimately didn’t materialize, the dot-com bust devastated the industry and was followed closely by a wave of accounting scandals that produced the largest corporate defaults in the history of the free market.

Andrew Odlyzko, formerly a researcher at AT&T Labs and now on faculty at the University of Minnesota, was one industry observer who foresaw the slowdown in growth that ultimately contributed to this calamity. In March 2005 he and Benjamin Tilly published a paper refuting Metcalfe’s law as overestimating the true value of a network. They contend that the value of a network of n nodes, rather than being proportional to n^2, is instead proportional to n log n since the value of each network connection is not equal, and by Zipf’s law the distribution of value by connection is a powerlaw. In layman’s terms: The value of a network still grows faster than its cost, just not nearly as fast as Metcalfe had assumed; and the difference between the assumed rate and the actual rate may have been the undoing of many telecom and Internet companies.

In July 2006 Odlyzko, Tilly, and Bob Briscoe of BT published a follow-up article in IEEE Spectrum, bluntly titled “Metcalfe’s Law is Wrong“. Their thesis: The Web 2.0 phenomenon — inspired by the success of Google, social networking sites like MySpace, and online video providers like YouTube — is poised to repeat the Internet bubble of the 1990’s based again on the flawed reasoning of Metcalfe’s law. Metcalfe in turn recently posted a rebuttal on a partner’s blog.

The ongoing debate over Metcalfe’s Law may seem entirely academic, but the truth has profound implications for the healthcare IT industry.

We can certainly model a clinical or hospital information system as a network, whether it be a network of devices, departments, users, or even a hierarchical network of all these entities rolled up inside a larger network of hospitals and clinics. For the sake of this discussion, let’s use the network-of-departments model since that is the most common battleground of the “big three” and their siblings vs. the “niche” best-of-breed vendors in the acute-care segment.

If Metcalfe is right, then the value of the system is proportional to the square of the number of departments using it. Double the number of departments on the system, and the value of the system doesn’t just double, it quadruples. Of course, Metcalfe’s Law assumes that the connections between each department have equal value. Therefore, connecting the ED to the Lab, Pharmacy, or (gasp) Patient Accounting is just as important as connecting the ED to Dietary or Rehab.

We could continue this thought experiment, but I’ll spare you the agony. It should be clear to anyone who has worked on a hospital information system implementation that the equal-value assumption is absurd. We all know that Lab, Pharmacy, and Accounting are always in Phase One of the project, whereas Dietary and Rehab are relegated to the depths of the ill-defined scope and infrequently executed project plan of Phase Four. If connections to all departments were equally valuable, why would the same cast of characters get the short end of the stick in every implementation?

If Metcalfe’s Law is sound and applies to healthcare IT, then network effects will eventually kick in and carry the “big three” to a position of market domination as they drive their smaller competitors out of every little niche. If Metcalfe’s Law does not apply to healthcare IT or is fundamentally flawed, then so are the one-size-fits-all strategies of these current market leaders, as they and their clients will find that the “critical mass crossover” point of the cost and value curves fails to materialize after pouring hundreds of millions or even billions of dollars into their quest to find it.

Metcalfe’s rebuttal to the recent IEEE article is an ominous sign for those healthcare IT vendors who have built their strategy on a bet that network effects will eventually emerge in their products. Metcalfe doesn’t give any examples proving that his law is sound, rather he challenges his critics to find an example to prove otherwise, which is exactly what they did in their 2005 paper. Rather than explain why Zipf’s law doesn’t apply to networks as Odlyzko, et al propose, Metcalfe actually invokes The Long Tail in his defense, which concept is entirely based on Zipf’s law in the first place. He goes on to concede that his “proportionality constant” in the value function may in fact be a function of n, but offers no reason why that function can’t be log n. Metcalfe and his apologists (unaware as the latter may be) certainly owe us a better explanation of their zealous adherence to this dogma.

So why is it that big “niche” players like Cerner and Epic believe that their manifest destiny is to dominate every small niche in the healthcare IT market? You could blame the Kool-Aid, or you could blame Metcalfe’s Law and its “network effects”. But if the brilliant Bob Metcalfe who conceived this idea can’t mount a more-convincing defense of his reasoning, does anyone imagine that Neal or Judy can do better?

 

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