The Economics of Networks ( and Beckstrom’s Law ) Rod Beckstrom CEO and President 29 July 2009 27Apr08

29Jul09 Addressing the Internet

29Jul09 Participating in the Internet eco-system and supporting it

Do network economics matter? Value of network to one user Total value of a network Security economics Security risk management Hacker economics Economics of deterrence Supply chain incentives Economics of Internet protocols (architecture) Economics of outages Economics of resiliency (correlation of losses) 29Jul09

Metcalfe’s Law 29Jul09 fax networks is larger today than ever, but less valuable because of substitutes such as email, Fedex, UPS, PDF’s, web, etc., thus the model does not hold Where: V = value of network j n = the number of end points or nodes p = some constant V j = n 2 * p Historic Network Value Models

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New Model: Beckstrom’s Law Economics of Networks 29Jul09 The value of a network equals the net value added to each user’s transactions, summed for all users.

V i,j = ΣB - ΣC Where: V = value of network j to user i B = the benefit value of all transactions C = the cost of all transactions Value of a Network to One User New Network Model 29Jul09

V = B - C V = $26 - $16 V = $10 If it costs $26 to buy the book in a store or $16 to buy it over the Internet, including shipping, the net value is $10. Online Book Purchase Case 29Jul09

V[j] = ΣV i,j = ΣB - ΣC Network Value is Summation of Value to All Users New Network Model 29Jul09

29J ul09 Where: ΣV i,j = value of a network j to all users V i,j = net present value of all transactions to user i with respect to network j, over any time period j = identifies one network i = one user of the network B i,k = the benefit value of transaction k to individual i C i,l = the cost of transaction l to individual i r k and r l = the discount rate of interest to the time of transaction k or l t k or t l = the elapsed time in years to transaction k or l n,m,p = maximum number of individuals i and transactions k and l Beckstrom’s Law New Network Model

The “Network Effect” 29Jul09

For those networks where… The “Network Effect” 29Jul09 More users add to more total value

For those networks where… The “Inverse Network Effect” 29Jul09 More users reduce total value <

Private Golf Clubs AARP Support groups Costco FaceBook Coops YPO Your social networks Twitter Your customers Internet … Examples 29Jul09

Where: SI = Security Investments L = Losses C’ = C – SI – L (all costs except SI & L) V = B - C’ - SI - L Security Model V = B - C Economics of Security Basic Model V = B - C 29Jul09

Minimize Security Costs = SI + L The Fundamental Security Risk Management Function Economics of Security 29Jul09

Loss $ Security Investment $ 0 Pareto Chart of Best Security Investments Against Losses (hypothetical curve) Economics of Security 29Jul09

Loss $ Security Investment $ 0 Different security technology investments can be ranked in order of payoff (reduced losses per dollar of investment). IP Patch IDS DLP Economics of Security 29Jul09

Loss $ Better network protocols can drive Loss function down for most or all users. Security Investment $ 0 Economics of Protocols 29Jul09

Minimize the Hacker’s Gain Minimize V = B - C’ - SI - L For example, by seeking to reduce their Benefit or take. Increase their operating costs (making stealing more difficult). Force them to invest more in their own Security Investments (making it harder for them not to get caught). Increase their losses by improving enforcement and increasing penalties and imprisonment, for example. Economics of Deterrence 29Jul09

Value of network to individuals Total value of a network Security economics Security risk management Hacker economics Economics of deterrence Supply chain incentives Economics of Internet protocols (architecture) Economics of outages Economics of resiliency (correlation of losses) Economics of Networks 29Jul09

Be used to calculate or determine: The value of a network How to optimize a company’s security investments How to optimize a country’s security investments Rigorously compare alternative security investments The economics of hacking The incredible leverage of supply chain hacking Incentivize discovering supply chain hacks Incentivize better supply chain testing The value of re-architecting the Internet Analyze internet business models Value of having a diversity of networks Value of having redundant protocols within a network The Model Can . . . 29Jul09

Be used to calculate or determine:

The value of a network

How to optimize a company’s security investments

How to optimize a country’s security investments

Rigorously compare alternative security investments

The economics of hacking

The incredible leverage of supply chain hacking

Incentivize discovering supply chain hacks

Incentivize better supply chain testing

The value of re-architecting the Internet

Analyze internet business models

Value of having a diversity of networks

Value of having redundant protocols within a network

Granular Scalable Subset-able Accurate Similar to P&L concepts Leverages cost accounting techniques Testable As simple as it can be but no simpler A foundation for derivative models Beckstrom’s Law Benefits 29Jul09

You have to get the data or estimate it Beckstrom’s Law Downside 29Jul09

t not n ! 29Jul09

Questions 29Jul09

Thank You ! [email_address] 29Jul09