Hotmail, ICQ, and, recently, Napster, are perfect examples of these viral businesses. As a consequence of these and other web success stories, it is not surprising that industry pundits have waxed poetic on the veracity of Metcalfe's Law and its role in validating the ever-increasing value of the Internet economy. Unfortunately, this conclusion is wrong. Metcalfe's Law is just a temporal anomaly. While it would be great to believe that Metcalfe's Law will hold up for generations, it fundamentally isn't possible.
Networks saturate for a variety of reasons.
As the population of a network increases, the value of each additional member diminishes. In addition, technologies mature and become obsolete causing once healthy networks to atrophy. While the markets are extremely efficient and accurate in the long run, they are completely incapable of keeping up with the pace of technological and business innovations that we are currently experiencing. The Internet economy moves at a pace that is much too fast for the public markets, which, in general, view snapshots of companies and industries based on quarterly reporting periods. Moreover, the value of the Internet economy continues to expand at a fantastic rate.