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Network Working Working Group                           B. Kahin, EditorRequest for Comments: 1192                                       Harvard                                                           November 1990Commercialization of the InternetSummary ReportStatus 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 educationKahin                                                           [Page 1]

RFC 1192           Commercialization of the Internet       November 1990        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 asKahin                                                           [Page 2]

RFC 1192           Commercialization of the Internet       November 1990   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.Kahin                                                           [Page 3]

RFC 1192           Commercialization of the Internet       November 1990   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 toKahin                                                           [Page 4]

RFC 1192           Commercialization of the Internet       November 1990   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 intoKahin                                                           [Page 5]

RFC 1192           Commercialization of the Internet       November 1990   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 toKahin                                                           [Page 6]

RFC 1192           Commercialization of the Internet       November 1990   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 aKahin                                                           [Page 7]

RFC 1192           Commercialization of the Internet       November 1990   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, itKahin                                                           [Page 8]

RFC 1192           Commercialization of the Internet       November 1990   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 stemsKahin                                                           [Page 9]

RFC 1192           Commercialization of the Internet       November 1990   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 difficultKahin                                                          [Page 10]

RFC 1192           Commercialization of the Internet       November 1990   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.Kahin                                                          [Page 11]

RFC 1192           Commercialization of the Internet       November 1990Figure 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, EDUCOMKahin                                                          [Page 12]

RFC 1192           Commercialization of the Internet       November 1990   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 FoundationSecurity 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.eduKahin                                                          [Page 13]