A Critique of New Rules for the New Economy In New Rules for the New Economy, Kevin Kelly proposes an interesting thesis as to how the internet economy works and suggests 10 strategies for internet firms to succeed. While his views are fresh and thought provoking, some of his assumptions are questionable, leading to suspicious conclusions and strategies. In addition, his strategies fail to address a central issue for internet startups – how to make profit or how to sustain losses long enough to make profit.

Key Assumption: “Magic of n^2” One key assumption in Kelly’s overall argument on the new economy is the Metcalfe Law, also known as the “magic of n^2” – each time there is a new member to a network, the connections would double and the value of the network grows exponentially. However, it is questionable that Metcalfe’s law is a golden rule in all circumstances in the network economy. While it is plausible that a network is worth more if there are more members, it is hard to quantify exactly how much more. The truth is that, while the quantity of connections within a network increase when a new member joins, the quality of each connection might decrease. Therefore exponential growth of value is an exaggeration. In addition, exponential growth cannot be indefinite. Once the network size reach a certain level, connections and interactions among members would stabilize. This is especially true given that a human being only has 24 hours a day and limited amount of attention to allocate.

The “Increasing Returns” and the “Follow the Free” Logic Partially based on the Metcalfe’s law assumption, Kelly arrives at the argument of increasing returns in the net economy, and therefore suggests the strategy of “follow the free” to build the size of the network. The problem is that “increasing returns” does not equate to increasing profits. Following Kelly’s doctrines, a lot of doc coms in late 1990s started to follow the free and build networks in a frenzy, believing that their initial investment would eventually pay off. However, few of such efforts truly paid off. True, there is Yahoo which is a successful example of building network size and follow the free, yet for every Yahoo out there, there is 10 Value Americas. The sad fact is that in the real world, few companies can afford to follow the free just to build the size, and few investors can be enthusiastic about a losing firm for an indefinite period of time -- the recent cool-down in internet IPOs is a perfect demonstration of the latter point. I am not arguing that “follow the free” is the wrong path. Even though this method does not guarantee success, it might be the only choice. The issue becomes, there must be some other tricks that are more important for internet startup firms to make money. Maybe business models? Contents? Proprietary service? Differentiation? Unfortunately Kelly’s little book offers little insight in this regard.