Classroom Companion: Business

9.6.2 
 Sarnoff’s Law
Sarnoff’s law is about the value of broadcast networks such as radio and television 
broadcast networks. In such networks, one sender transmits information to a group 
of n receivers. Sarnoff claimed that there is no additional value for new customers 
to join the network because others have done so in the past. For the supplier, the 
value of the network is the number of customers connected to it, that is:
V
n
n
Sarnoff
 
~ ,
in which V(n) is the value of the network and n is the number of devices connected 
to the network. The value added by a new user to the network (network effect or 
feedback term) is F
Sarnoff
(n) = V
′
Sarnoff
(n)~1. Hence, there is no network effect in this 
case. Every new user adds only a single link to the network. This is shown in 
.
Fig. 
9.11
, in which the number of customers equals the number of links in the 
network which, in turn, equals the total value of the network. The value of a com-
pany providing a broadcast service depends on the number of customers only since 
. Fig. 9.10 A new user joins the network. (Authors’ own figure)
9.6 · Estimating the Value of Networks

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each customer provides a fixed income to the company. There is no other value 
created in these networks.
The law is named after David Sarnoff (1891–1971), an American pioneer of 
radio and television manufacturing and broadcast. Sarnoff spent most of his 
career in the Radio Corporation of America (RCA) and the National Broadcasting 
Company (NBC) and was one of the most influential businessmen in the early days 
of radio and television.
Sarnoff’s law applies to all kinds of broadcast networks in which there is no 
interaction or exchange of value between users or customers. The only interaction 
in a broadcast network takes place between the provider of the service and the 
users. In addition to radio and television broadcast networks, there are several 
examples of other digital services in which there is no network effect, for example:
5
In Google Search, a user does not benefit from using the search engine because 
other people are using it. Therefore, there are no direct network effects stimulat-
ing people to use the search engine so that, in this respect, Google Search is a 
Sarnoff network. However, there may be a weak indirect network effect, hardly 
recognized by the users, since search habits of the users contribute to refine-
ment of the engine’s search algorithm which, in turn, results in more accurate 
search results for other users. On the other hand, Google is a multisided plat-
form, where the users of Google Search generate a strong cross-side network 
effect for the advertisement business of Google since the number of people 
using the search engine determines the fees that Google can charge advertisers.
5
Netflix uses a subscription-based business model. Each subscriber contributes 
to the value of Netflix by paying regular subscription fees. There is no interac-
tion or exchange of value between Netflix subscribers. On the other hand, Net-
flix was initially subject to negative network effects (word-of-mouth) and loss 
of users to the illegal Popcorn Time because of overloaded databases (Idland 
et al., 
2016
).
5
The value of Wikipedia depends entirely on the volume and quality of the arti-
cles in the encyclopedia. There is no interaction between readers, writers, and 
benefactors and thus no feedback effects prompting new readers of Wikipedia. 
Digital service
Users
. Fig. 9.11 A broadcast 
network. (Authors’ own 
figure)