Music consumers find that purchasing or obtaining music online suits them far better than acquiring hard copy music products through traditional retail outlets. Napster, the first major advance in music downloads provided a free music sharing service that enabled consumers to choose and download only those songs they wanted. Its main problem was that it relied on one central exchange to facilitate the exchange of music, and at its peak its network consisted of more than 20 million users. The fact that it had a centralized server (or in network terms, one main hub) meant that it made an easy target for the organized music industry in its legal battle to close Napster down. Apple’s iTunes service sells music (legally) under a similar system, and charges around USD 1 per song, grossing over USD 1 million daily.
However, users no longer need to rely on centralized distribution or even central servers for their music – the Internet is a huge network of distributed power, which connects anyone to anyone else in a very short time. Nowadays services such as Morpheus permit users to share millions of files (including movies and pictures as well as music) daily (although the legality of these exchanges is questionable). The first of these distributed network systems was Kazaa, the brainchild of Niklas Zennström and Janus Friis. After numerous legal battles with the recording industry, these entrepreneurs used their peer-to-peer technology to create Skype, the internet telephony network. Nowadays Skype exceeds an average of 9 million daily users worldwide. The network effects are immense – users encourage friends and family to download Skype so that they can all engage in free communication. Skype was acquired by eBay in 2006 in a multi-billion dollar deal.
Metcalfe’s Law is a very real factor explaining Betfair’s success. The fact that more than fifty thousand players use the site to place and lay bets each day means that the likelihood of any individual player finding a match for what they want (assuming that what they are asking for is reasonable) is very high. This of course results in highly efficient and very liquid markets, which are to the advantage of all players.
Networks are important because they create short cuts. Anyone who is part of the network is by definition in contact with anyone else who is part of it, and can therefore bypass more traditional channels and structures (such as conventional bookmakers and totalisators in this case). As networks grow, their utility increases, so Metcalfe’s Law tells us – this is true for those who are part of the network, and for those who then choose to join it. Neither traditional bookmakers nor totalisators enjoy the same network advantages as Betfair: Bookmakers only have contact with players in their geographic vicinity or those with telephone access. Totalisators are on tracks only in some countries, where they will be affected by liquidity problems on quiet days, and even when they are not, they are restricted by local geography. Betfair faces none of these restrictions, and can enable the world to wager. 1
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