====== Sarnoff's Law ======
Sarnoff's Law states that the value of a broadcast network is directly proportional to the number of its users (viewers or listeners). Named after [[David Sarnoff]], the visionary leader of [[RCA]] and a titan of early American radio and television, this principle perfectly captured the value of one-way media in the 20th century. Imagine a single radio tower broadcasting a baseball game; its value comes from the sheer number of people tuning in. If you double the listeners, you double the network's value to advertisers and owners. The key feature is its one-to-many, non-interactive structure: the network sends a message, and the audience passively receives it. While it may seem simple compared to modern network theories, Sarnoff's Law provides a fundamental baseline for understanding how value can be created from audience size alone and serves as a critical point of comparison for more complex, interactive networks.
===== How Sarnoff's Law Works =====
The logic behind Sarnoff's Law is linear and straightforward. The value (V) is proportional to the number of users (N).
  * **V ≈ N**
This reflects a broadcast or "one-to-many" relationship. Think of it like a town crier standing in the square. His value is measured by how many people gather to hear his news. The listeners don't interact with each other //through// the town crier's platform; they simply consume the information he provides.
Key characteristics of a Sarnoff-style network include:
  * **Centralized Content:** A single source (e.g., a TV station, a newspaper, a company's marketing department) creates and distributes all content.
  * **Passive Audience:** The users are primarily consumers of information with little to no ability to contribute or interact with one another on the platform.
  * **Linear Growth:** Each new user adds a consistent, single unit of value. The 100,000th subscriber to a magazine is, from a network value perspective, just as valuable as the 10th.
Classic examples include traditional broadcast TV channels, AM/FM radio stations, and newspapers. In the digital age, a simple blog without a comments section or a company's one-way email newsletter also operates under this principle.
===== Sarnoff's Law vs. Other Network Laws =====
Understanding Sarnoff's Law is most useful when comparing it to the more powerful [[network effects]] described by later laws. This comparison helps an investor correctly identify the source of a company's value.
==== Sarnoff's Law (Value ≈ N) ====
This is the simplest model, representing linear growth. It's a foundational concept but applies to a shrinking number of pure-play businesses in our interactive world.
  * **Best for:** Analyzing one-way broadcast media.
==== Metcalfe's Law (Value ≈ N^2) ====
Formulated by Robert Metcalfe, the co-inventor of Ethernet, [[Metcalfe's Law]] describes interactive networks where every user can connect with every other user. The value grows exponentially because each new user adds a huge number of potential new connections.
  * **Example:** The telephone network. If you have 5 people, you have 10 possible connections. Add a 6th person, and you add 5 //new// connections. Social media platforms like [[Facebook]] or [[LinkedIn]] are classic examples, where the primary value comes from user-to-user interaction.
==== Reed's Law (Value ≈ 2^N) ====
Proposed by David P. Reed, [[Reed's Law]] takes this a step further, arguing that the true value of a network lies in its ability to support group formation. The potential number of subgroups in a network of size N is 2^N, which creates an even more explosive value curve.
  * **Example:** Platforms like [[WhatsApp]], [[Slack]], or Reddit, where users can easily form countless public and private groups. The value is not just in one-to-one connections but in the rich tapestry of communities that can emerge.
===== Relevance for the Modern Investor =====
For a [[value investor]], understanding which law governs a company's business model is not an academic exercise—it's fundamental to valuation. Misjudging the nature of a network can lead to catastrophic investment errors.
==== Don't Bring a Sarnoff to a Metcalfe Fight ====
Applying Sarnoff's Law to a business that actually follows Metcalfe's Law would lead you to dramatically undervalue it. Conversely, and perhaps more dangerously, believing a simple broadcast business has the exponential growth potential of a true interactive network is a recipe for disaster. An investor must ask:
  * **"Is this company's value derived from the content it pushes out, or from the connections its users make with each other?"**
Answering this question helps determine the strength and durability of the company's [[economic moat]]. A Sarnoff-style business is often easier for a competitor to replicate—you just need better content. A Metcalfe- or Reed-style business, however, builds a powerful moat through its network effects; users are reluctant to leave because all their friends, colleagues, or communities are there.
==== Finding Hidden Value ====
Sarnoff's Law can also help you spot opportunities. A company might be historically viewed by the market as a simple Sarnoff-style media company (e.g., a news website). However, if that company successfully adds interactive features—like a thriving community forum, user-generated content, or social sharing tools—it can begin to transition toward a Metcalfe or Reed model. An astute investor who spots this transition before the rest of the market could acquire a rapidly growing network at a linear-growth price. It provides a framework for analyzing business model evolution, a core skill in finding long-term, sustainable value.