Network Working Working Group B. Kahin, Editor
Request for Comments: 1192 Harvard
November 1990
Commercialization of the Internet
Summary Report
Status of this Memo
This memo is based on a workshop held by the Science, Technology and
Public Policy Program of the John F. Kennedy School of Government,
Harvard University, March 1-3, 1990.
This memo provides information for the Internet community. It does
not specify any standard. Distribution of this memo is unlimited.
Introduction
"The networks of Stages 2 and 3 will be implemented and operated so
that they can become commercialized; industry will then be able to
supplant the government in supplying these network services." --
Federal Research Internet Coordinating Committee, Program Plan for
the National Research and Education Network, May 23, 1989, pp. 4-5.
"The NREN should be the prototype of a new national information
infrastructure which could be available to every home, office and
factory. Wherever information is used, from manufacturing to high-
definition home video entertainment, and most particularly in
education, the country will benefit from deployment of this
technology.... The corresponding ease of inter-computer
communication will then provide the benefits associated with the NREN
to the entire nation, improving the productivity of all information-
handling activities. To achieve this end, the deployment of the
Stage 3 NREN will include a specific, structured process resulting in
transition of the network from a government operation a commercial
service." -- Office of Science and Technology Policy, The Federal
High Performance Computing Program, September 8, 1989, pp. 32, 35.
"The National Science Foundation shall, in cooperation with the
Department of Defense, the Department of Energy, the Department of
Commerce, the National Aeronautics and Space Administration, and
other appropriate agencies, provide for the establishment of a
national multi-gigabit-per-second research and education computer
network by 1996, to be known as the National Research and Education
Network, which shall:
(1) link government, industry, and the education
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community;
....
(6) be established in a manner which fosters and
maintains competition and private sector investment in high
speed data networking within the telecommunications
industry;
....
(8) be phased out when commercial networks can meet the
networking needs of American researchers."
-- S. 1067, 101st Congress, 2nd Session, as marked up April 3, 1990
["High-Performance Computing Act of 1990"], Title II, Section 201.
Background
This report is based on a workshop held at the John F. Kennedy School
of Government, Harvard University March 1-3, 1990, by the Harvard
Science, Technology and Public Policy Program. Sponsored by the
National Science Foundation and the U.S. Congress Office of
Technology Assessment, the workshop was designed to explore the
issues involved in the commercialization of the Internet, including
the envisioned National Research and Education Network (NREN).
Rather than recapitulate the discussion at the workshop, this report
attempts to synthesize the issues for the benefit of those not
present at the workshop. It is intended for readers familiar with
the general landscape of the Internet, the NSFNET, and proposals and
plans for the NREN.
At the workshop, Stephen Wolff, Director of the NSF Division of
Networking and Communications Research and Infrastructure,
distinguished "commercialization" and "privatization" on the basis of
his experience developing policy for the NSFNET. He defined
commercialization as permitting commercial users and providers to
access and use Internet facilities and services and privatization as
the elimination of the federal role in providing or subsidizing
network services. In principle, privatization could be achieved by
shifting the federal subsidy from network providers to users, thus
spurring private sector investment in network services. Creation of
a market for private vendors would in turn defuse concerns about
acceptable use and commercialization.
Commercialization and Privatization
Commercialization. In the past, many companies were connected to the
old ARPANET when it was entirely underwritten by the federal
government. Now, corporate R&D facilities are already connected to,
and are sometimes voting members of, mid-level networks. There are
mail connections from the Internet to commercial services such as
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MCIMAIL, SprintMail, and Compuserve. DASnet provides a commercial
mail gateway to and from the Internet and commercial mail services.
UUNET, a nonprofit corporation, markets TCP/IP services (Alternet)
with access to the Internet as well as mail services. Performance
Systems International (PSI), a startup company which now operates
NYSERNET (the New York State regional network, partially funded by
NSF) is aggressively marketing Internet-connected TCP/IP services on
the East and West Coasts. RLG is selling access to its RLIN database
over the Internet directly to end users. Other fee-based services
include Clarinet, a private news filtering service, and FAST, a non-
profit parts brokering service. However, in all these cases, any use
of the NSFNET backbone must, in principle, support the "purpose of
the NSFNET."
Under the draft acceptable use policy in effect from 1988 to mid-
1990, use of the NSFNET backbone had to support the purpose of
"scientific research and other scholarly activities." The interim
policy promulgated in June 1990 is the same, except that the purpose
of the NSFNET is now "to support research and education in and among
academic institutions in the U.S. by access to unique resources and
the opportunity for collaborative work." Despite this limitation,
use of the NSFNET backbone has been growing at 15-20% per month or
more, and there are regular requests for access by commercial
services. Even though such services may, directly or indirectly,
support the purposes of the NSFNET, they raise prospects of
overburdening network resources and unfair competition with private
providers of network services (notably the public X.25 packet-
switched networks, such as SprintNet and Tymnet).
Privatization. In some respects, the Internet is already
substantially privatized. The physical circuits are owned by the
private sector, and the logical networks are usually managed and
operated by the private sector. The nonprofit regional networks of
the NSFNET increasingly contract out routine operations, including
network information centers, while retaining control of policy and
planning functions. This helps develop expertise, resources, and
competition in the private sector and so facilitates the development
of similar commercial services.
In the case of NSFNET, the annual federal investment covers only a
minor part of the backbone and the regional networks. Although the
NSFNET backbone is operated as a cooperative agreement between NSF
and Merit, the Michigan higher education network, NSF contributes
less than $3 million of approximately $10 million in annual costs.
The State of Michigan Strategic Fund contributes $1 million and the
balance is covered by contributed services from the subcontractors to
Merit, IBM and MCI.
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At the regional level, NSF provides approximately 40% of the
operating costs of the mid-level networks it funds -- with the
remainder covered by membership and connection fees, funding from
state governments, and in-kind contributions. This calculation does
not include a number of authorized networks (e.g., PREPnet, and,
until recently, NEARnet and CERFnet) that receive no NSF funding.
However, NSF also funds institutional connections to the NSFNET,
which includes payments by the institution to the regional network.
Other agencies (DOD, NASA, and DOE) have also funded some connections
to NSFNET networks for the benefit of their respective research
communities -- and have occasionally funded the networks directly.
Finally, the campus-level networks at academic institutions probably
represent a perhaps 7-10 times larger annual investment than the
mid-level networks and the backbone together, yet there is no federal
funding program at this level. Furthermore, since these local
networks must ordinarily be built by the institution rather than
leased, there is an additional capitalization cost incurred by the
institutions, which, annualized and aggregated, is perhaps another
20-50 times the annual costs of the mid-level and backbone networks.
(These figures are the roughest of estimates, intended only for
illustration.)
The NSFNET Backbone as a Free Good
Whereas the NSF funding of mid-level networks varies greatly -- from
0% to 75% -- the backbone is available as a free good to the NSF-
funded mid-level networks. It is also used free of charge by other
authorized networks, including networks not considered part of
NSFNET: CSNET, BITNET, UUNET, and PSI, as well as the research
networks of other federal agencies. As noted, their use of the
backbone is in principle limited to the support of academic research
and education.
Through their use of the NSFNET backbone, these networks appear to be
enjoying a subsidy from NSF -- and from IBM, MCI, and the State of
Michigan. BITNET and some agency networks even use the backbone for
their internal traffic. Nonetheless, these other networks generally
add value to NSFNET for NSFNET users and regional networks insofar as
all networks benefit from access to each other's users and resources.
However, small or startup networks generally bring in fewer network-
based resources, so one side may benefit more than the other. To the
extent that the mail traffic is predominantly mailing lists (or other
information resources) originating on one network, questions of
imbalance and implicit subsidy arise. For example, because of the
mailing lists available without charge on the Internet, three times
as much traffic runs over the mail gateway from the Internet to
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MCIMAIL as from MCIMAIL to the Internet. This pattern is reinforced
by the sender-pays fee structure of MCIMAIL, which discourages
mailing list distribution from within MCIMAIL.
The impact of such imbalances is not clear. For now, the capacity of
the NSFNET backbone is staying ahead of demand: It jumped from 56
Kbps to 1.544 Mbps (T-1) in 1988 and will go to 45 Mbps over the next
year. But NSF is concerned about a possible recurrence of the
congestion which drove users off the NSFNET prior to the 1988
upgrade. Given the tripling of campus-level connections over the
past year, continued growth in users at each site, the parade of new
resources available over the network, and, especially, the
development of high-bandwidth uses, there is reason to fear that
demand may again overwhelm capacity.
Offering the NSFNET backbone at no cost to authorized networks both
encourages undisciplined use of the backbone and inhibits private
investment in backbone networks. It constrains the development of a
market for commercial TCP/IP services by diverting an established and
rapidly growing user base to a subsidized resource. Charging NSFNET
regionals and other mid-level networks for the use of the NSFNET
backbone would resolve this problem, but this would impose a
substantial cost burden on the mid-level networks, which would in
turn have to raise membership and connection fees dramatically. To
compensate, the NSF subsidy that now underwrites the backbone could
be moved down the distribution chain to the users of the backbone --
i.e., to the regional networks, to the campuses, or even to
researchers themselves.
Each option poses unique opportunities and problems. In theory, the
further down the chain the subsidy is pushed, the more accountable
providers will be to end-user needs. Funding in hands of researchers
would make universities more responsive to researchers' networking
needs. Funding in the hands of universities would in turn make
regional networks more responsive and competitive. And funds for
regional networks would spur a general market for backbone services.
But the mechanisms for expressing user demand upward through these
tiers are imperfect. And, from an administrative standpoint, it is
easier for NSF to simply provide one free backbone to all comers --
rather than deal with 25 mid-level networks, or 500 universities, or
perhaps tens or hundreds of thousands of individual researchers.
Option: Funding Researchers
It would be possible to earmark funds for network services in agency
research grants as a matter of course, so that no new administrative
process would be required. But since network costs are presently not
usage based, such funding will not readily translate into
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identifiable services and may simply end up in local overhead
accounts since few institutions allocate out costs of access to the
Internet. The use of vouchers rather than cash add-ons might help
ensure that federal resources are in fact applied to qualifying wide
area network services -- and possibly avoid the imposition of
standard institutional overhead on direct funding. However, if
vouchers can be sold to other institutions, as economists would
advocate in the interests of market efficiency, these advantages may
be compromised. Even non-transferable vouchers may create a unique
set of accounting problems for both funding agencies and
institutional recipients.
A federal subsidy channeled automatically to research grants could
substantially limit or segregate the user community. It would tend
to divide the academic community by exacerbating obvious divisions
between the resource-rich and resource-poor -- between federally
funded researchers and other researchers, between scientists and
faculty in other disciplines, and between research and education.
Within the academic community, there is considerable sentiment for
providing basic network services out of institutional overhead to
faculty and researchers in all disciplines, at least as long as basic
services remain unmetered and relatively low at the institutional
level. Of course, special costing and funding may well make sense
for high-bandwidth usage-sensitive network services (such as remote
imaging) as they become available in the future.
Option: Funding Institutions
Alternatively, funding for external network services, whether in the
form of cash or vouchers, could be provided directly to institutions
without linking it directly to federal research funding. As it is,
institutions may apply for one-time grants to connect to regional
networks, and these are awarded based on peer assessment of a number
of different factors, not just the quality of the institution's
research. But redirecting the subsidy of the backbone could provide
regular support at the institutional level in ways that need not
involve peer review. For example, annual funding might be tied to
the number of PhD candidates within specific disciplines -- or to all
degrees awarded in science. Geographic location could be factored in
-- as could financial need. This, of course, would amount to an
entitlement program, a rarity for NSF. Nonetheless, it would allow
institutions to make decisions based on their own needs -- without
putting NSF in the position of judging among competing networks,
nonprofit and for-profit.
There are, however, questions about what sort of services the
earmarked funding or vouchers could be used for. Could they be used
to pay the institution's BITNET fee? Or a SprintNet bill? Or to
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acquire modems? For information services? And, if so, what sort?
Such questions force the funding agency to assume a kind of
regulatory in an environment where competing equities, demonstrated
need, technological foresight, and politics must be constantly
weighed and juggled.
Option: Funding Regional Networks
Shifting the subsidy to the regional networks is appealing in that it
appears to be the least radical alternative and would only require
allocating funds among some two dozen contenders. Since most of the
regional networks are already receiving federal funding, it would be
relatively simple to tack on funds for the purchase of backbone
services. However, providing additional funding at this level
highlights the problem of competition among mid-level networks.
Although most regional networks are to some degree creatures of NSF,
funded to ensure the national reach of NSFNET, they do not hold
exclusive geographic franchises, and in some areas, there is
competition between regionals for members/customers. NSF grants to
regional networks, by their very size, have an effect of unleveling
the playing field among regionals and distorting competitive
strengths and weaknesses.
Alternet and PSI further complicate the picture, since there is no
clear basis for NSF or other agencies to discriminate against them.
The presence of these privately funded providers (and the possibility
of others) raises difficult questions about what network services the
government should be funding: What needs is the market now capable of
meeting? And where will it continue to fail?
Experience with regulation of the voice network shows that it is
inefficient to subsidize local residential service for everybody. If
one is concerned about people dropping off the voice network -- or
institutions not getting on the Internet -- the answer is to identify
and subsidize those who really need help. The market-driven
suppliers of TCP/IP-based Internet connectivity are naturally going
after those markets which can be wired at a low cost per institution,
i.e., large metropolitan areas, especially those with a high
concentration of R&D facilities, such as Boston, San Francisco, and
Washington, DC. In the voice environment, this kind of targeted
marketing by unregulated companies is widely recognized as cream-
skimming.
Like fully regulated voice common carriers (i.e., the local exchange
carriers), the non-profit NSF-funded regional networks are expected
to serve all institutions within a large geographic area. In areas
with few R&D facilities, this will normally result in a
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disproportionately large investment in leased lines. Either remote
institutions must pay for the leased line to the nearest network
point of presence -- or the network must include the leased line as
part of common costs. If the regional network assumes such costs, it
will not be price-competitive with other more compact networks.
Accordingly, a subsidy redirected to the regional networks could be
keyed to the density of the network. This might be calculated by
number of circuit miles per member institution or some form of
aggregate institutional size, figured for either the network as a
whole or for a defined subregion. This subsidy could be available to
both for-profit and non-profit networks, but only certain non-profit
networks would meet the density requirement, presumably those most in
need of help.
Increasing the Value of the Connection
The principal advantage in underwriting the backbone is that it
provides a evenhanded, universal benefit that does not involve NSF in
choosing among competing networks. By increasing the value of
belonging to a regional network, the backbone offers all attached
networks a continuing annual subsidy commensurate with their size.
Increased value can also derived from access to complementary
resources -- supercomputer cycles, databases, electronic newsletters,
special instruments, etc. -- over the network. Like direct funding
of backbone, funding these resources would induce more institutions
to join regional networks and to upgrade their connections. For
example, where a database already exists, mounting it on the network
can be a very cost-effective investment, increasing the value of the
network as well as directly benefiting the users of the database.
Commercial information services (e.g., Dialog, Orbit, Lexis) may
serve this function well since they represents resources already
available without any public investment. Marketing commercial
services to universities over the Internet is permissible in that it
supports academic research and education (although the guidelines
state that such commercial uses "should be reviewed on a case-by-case
basis" by NSF).
But to date there has been remarkably little use of the regional
networks, let alone the NSFNET backbone, to deliver commercial
information services. In part, this is because the commercial
services are unaware of the opportunities or unsure how to market in
this environment and are concerned about losing control of their
product. It is also due to uneasiness within the regional networks
about usage policies and reluctance to compete directly with public
packet-switched networks. However, for weak regional networks, it
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may be necessary to involve commercial services in order to attract
and hold sufficient membership -- at least if NSF subsidies are
withdrawn. Without a critical mass of users, commercialization may
need to precede privatization.
Impact of Removing NSF Subsidy from the Backbone
Any shift to a less direct form of subsidy may cause some disocation
and distress at the regional network level -- until the benefits
begin to be felt. No regional network has yet folded, and no
institution has permanently dropped its connection to a regional
network as a consequence of higher prices, but concerns about the
viability of some regionals would suggest that any withdrawal of
subsidy proceed in phases.
Moreover, as the NSF subsidy vanishes, the operation of the backbone
becomes a private concern of Merit, the Michigan Strategic Fund, IBM,
and MCI. While Merit and the Michigan Strategic Fund are more or
less public enterprises within the state, they are essentially
private entrepreneurs in the national operation of a backbone
network. Without NSF's imprimatur and the leveraging federal funds,
the remaining parties are much less likely to treat the backbone as a
charity offering and may well look to recovering costs and using
revenues to expand service.
The backbone operation could conceivably become either a nonprofit or
for-profit utility. While nonprofit status might be more appealing
to the academic networking community now served by the backbone, it
is not readily apparent how a broadly representative nonprofit
corporation, or even a cooperative, could be constituted in a form
its many heterogeneous users would embrace. A non-profit
organization may also have difficulty financing rapid expansion of
services. At the same time, the fact that it will compete with
private suppliers may preclude recognition as a tax-exempt
organization -- and so its ability to reinvest retained earnings.
Operation of the backbone on a for-profit basis would attract private
investment and could be conducted with relative efficiency. However,
given the dominant position of the backbone, a for-profit operation
could conceivably get entangled in complex antitrust, regulatory, and
political struggles. A nonprofit organization is not immune from
such risks, but to the extent its users are represented in policy-
making, tensions are more likely to get expressed and resolved
internally.
The status of backbone or regional networks within the Internet is
entirely separate from the question of whether network services are
metered and charged on a usage basis. Confusion in this regard stems
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from the fact that the low-speed public data networks (SprintNet,
TymNet), which are sometimes seen as competitive to Internet
services, do bill on a connect-time basis. However, these commercial
services use X.25 connection-based packet-switching -- rather than
the connectionless (datagram) TCP/IP packet-switching used on the
Internet. Internet services could conceivably be billed on per-
packet basis, but the accounting overhead would be high and packets
do not contain information about individual users. At bottom, this
is a marketing issue, and there is no evidence of any market for
metered services -- except possibly among very small users. The
private suppliers, Alternet and PSI, both sell "pipes" not packets.
Privatization by Function
As an alternative approach to encouraging privatization, Dr. Wolff
suggested barring mature services such as electronic mail from the
subsidized network. In particular, NSF could bar the mail and news
protocols, SMTP and NNTP, from the backbone and thereby encourage
private providers to offer a national mail backbone connecting the
regional networks. Implementation would not be trivial, but it would
arguably help move the academic and research community toward the
improved functionality of X.400 standards. It would also reduce
traffic over the backbone by about 30% -- although given continued
growth in traffic, this would only buy two months of time.
If mail were moved off the regional networks as well as off the
NSFNET backbone, this would relieve the more critical congestion
problem within certain regions. But logistically, it would be more
complicated since it would require diverting mail at perhaps a
thousand institutional nodes rather than at one or two dozen regional
nodes. Politically, it would be difficult because NSF has
traditionally recognized the autonomy of the regional networks it has
funded, and the networks have been free to adopt their own usage
guidelines. And it would hurt the regional networks financially,
especially the marginal networks most in need of NSF subsidies.
Economies of scale are critical at the regional level, and the loss
of mail would cause the networks to lose present and potential
members.
The National Research and Education Network
The initiative for a National Research and Education Network (NREN)
raises a broader set of policy issues because of the potentially much
larger set of users and diverse expectations concerning the scope and
purpose of the NREN. The decision to restyle what was originally
described as a National Research Network to include education was an
important political and strategic step. However, this move to a
broader purpose and constituency has made it all the more difficult
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to limit the community of potential users -- and, by extension, the
market for commercial services. At the regional, and especially the
state level, public networking initiatives may already encompass
economic development, education at all levels, medical and public
health services, and public libraries.
The high bandwidth envisioned for the NREN suggests a growing
distance between resource-intensive high-end uses and wide use of
low-bandwidth services at low fixed prices. The different demands
placed on network resources by different kinds of services will
likely lead to more sophisticated pricing structures, including
usage-based pricing for production-quality high-bandwidth services.
The need to relate such prices to costs incurred will in turn
facilitate comparison and interconnection with services provided by
commercial vendors. This will happen first within and among
metropolitan areas where diverse user needs, such as
videoconferencing and medical imaging, combine to support the
development of such services.
As shown in Figures 1. and 2., the broadening of scope corresponds to
a similar generalization of structure. The path begins with
mission-specific research activity organized within a single
computer. It ends with the development of a national or
international infrastructure: a ubiquitous, orderly communications
system that reflects and addresses all social needs and market
demand, without being subject to artificial limitations on purpose or
connection. There is naturally tension between retaining the
benefits of specialization and exclusivity and seeking the benefits
of resource-sharing and economies of scale and scope. But the
development and growth of distributed computing and network
technologies encourage fundamental structures to multiply and evolve
as components of a generalized, heterogeneous infrastructure. And
the vision driving the NREN is the aggregation and maturing of a
seamless market for specialized information and computing resources
in a common, negotiable environment. These resources have costs
which are far greater than the NREN. But the NREN can minimize the
costs of access and spread the costs of creation across the widest
universe of users.
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Figure 1. Generalization of Purpose:
Discipline-Specific Research CSNET, HEPnet, MFEnet
General Research early NSFNET, "NRN"
Research and Education BITNET, present NSFNET,
early "NREN"
Quasi-Public many regional networks,
"NREN"
National Infrastructure "commercialized NREN"
_______________________________________________________________
Figure 2. Generalization of Structure:
Computer time-sharing hosts
Network early ARPANET
Internetwork ESNET, NSFNET (tiered)
Multiple Internetworks present Internet
Infrastructure "NREN"
Workshop Participants
Rick Adams, UUNET
Eric Aupperle, Merit
Stanley Besen, RAND Corporation
Lewis Branscomb, Harvard University
Yale Braunstein, University of California, Berkeley
Charles Brownstein, National Science Foundation
Deborah Estrin, University of Southern California
David Farber, University of Pennsylvania
Darleen Fisher, National Science Foundation
Thomas Fletcher, Harvard University
Kenneth Flamm, Brookings Institution
Lisa Heinz, U.S. Congress Office of Technology Assessment
Fred Howlett, AT&T
Brian Kahin, Harvard University
Robert Kahn, Corporation for National Research Initiatives
Kenneth King, EDUCOM
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Kenneth Klingenstein, University of Colorado
Joel Maloff, CICNet
Bruce McConnell, Office of Management and Budget
Jerry Mechling, Harvard University
James Michalko, Research Libraries Group
Elizabeth Miller, U.S. Congress Office of Technology Assessment
Eli Noam, New York State Public Service Commission
Eric Nussbaum, Bellcore
Peter O'Neil, Digital Equipment Corporation
Robert Powers, MCI
Charla Rath, National Telecommunications and Information
Administration, Department of Commerce
Ira Richer, Defense Advanced Research Projects Agency
William Schrader, Performance Systems International
Howard Webber, Digital Equipment Corporation
Allan Weis, IBM
Stephen Wolff, National Science Foundation
Security Considerations
Security issues are not discussed in this memo.
Author's Address
Brian Kahin
Director, Information Infrastructure Project
Science, Technology & Public Program
John F. Kennedy School of Government
Harvard University
Phone: 617-495-8903
EMail: kahin@hulaw.harvard.edu
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