Because your install is in a directory, the sites in your WordPress network must use sub-directories.
This was doing my nut in! I was installing (what I thought) was a vanilla installation of WP for multi-site but in the network setup, I got this error. This error is meaningful in the case where your site is not in the root of your web server but in a sub-directory (folder) like example.com/mysite, subdomains requires the use of the document root.
The problem with the error is that it is also displayed if you are accessing your site via "localhost" or an ip address - which in my case I was doing while I was waiting for a new DNS entry to be setup. What this meant was that the wordpress installation had used my ip address in its configuration rather than the domain name I intended to use.
What I had to do was access the WP database (I used phpmyadmin) and edit two entries in wp_options table, the entries for siteurl and home, changing them to my domain name.
The problem with the error is that it is also displayed if you are accessing your site via "localhost" or an ip address - which in my case I was doing while I was waiting for a new DNS entry to be setup. What this meant was that the wordpress installation had used my ip address in its configuration rather than the domain name I intended to use.
What I had to do was access the WP database (I used phpmyadmin) and edit two entries in wp_options table, the entries for siteurl and home, changing them to my domain name.