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

        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

   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.

   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

   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

   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

   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

   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

   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

   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

   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.

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

   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