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Network Working Group G. Huston Request for Comments: 1744 AARNet Category: Informational December 1994

                 Observations on the Management of
                     the Internet Address Space

Status of this Memo

 This memo provides information for the Internet community.  This memo
 does not specify an Internet standard of any kind.  Distribution of
 this memo is unlimited.

Abstract

 This memo examines some of the issues associated with the current
 management practices of the Internet IPv4 address space, and examines
 the potential outcomes of these practices as the unallocated address
 pool shrinks in size.  Possible modifications to the management
 practices are examined, and potential outcomes considered.  Some
 general conclusions are drawn, and the relevance of these conclusions
 to the matter of formulation of address management policies for IPv6
 are noted.

1. Introduction

 The area explicitly examined here is the allocatable globally unique
 IPv4 address space.  Explicitly this includes those address groups
 uniquely assigned from a single comprehensive address pool to
 specific entities which are then at liberty to assign individual
 address values within the address group to individual hosts.  The
 address group is handled by the technology as a single network
 entity.

 At present these addresses are allocated to entities on a freely
 available, first-come, first-served allocation basis, within the
 scope of a number of administrative grounds which attempt to direct
 the allocation process to result in rational use of the space, and
 attempt to achieve a result of a level of equity of availability that
 is expressed in a sense of multi-national "regions" [1].

 In examining the current management policies in further detail it is
 useful to note that the IPv4 address space presents a number of
 attributes in common with other public space resources, and there are
 parallels in an economic analysis of this resource which include:

Huston [Page 1]  RFC 1744 Management of Internet Address Space December 1994

1. the finite nature of the resource

    This attribute is a consequence of the underlying technology
    which has defined addressed entities in terms of a 32 bit address
    value.  The total pool is composed of 2**32 distinct values (not
    all of which are assignable to end systems).

1. the address space has considerable market value

    This valuation is a consequence of the availability and extensive
    deployment of the underlying Internet technology that allows
    uniquely addressed entities the capability to conduct direct end-
    to-end transactions with peer entities via the Internet.  The
    parameters of this valuation are also influenced by considerations
    of efficiency of use of the allocated space, availability of end
    system based internet technologies, the availability of Internet-
    based service providers and the resultant Internet market size.

1. address space management is a necessary activity

    Management processes are requires to ensure unique allocation and
    fair access to the resource, as well as the activity of continuing
    maintenance of allocation record databases.

 Increasing rates of Internet address allocation in recent years imply
 that the IPv4 address space is now a visibly finite resource, and
 current projections, assuming a continuation of existing demand for
 addresses predict unallocated address space exhaustion in the next 6
 - 12 years (rephrasing current interim projections from the IETF
 Address Lifetime Expectancy Working Group).  There are two derivative
 questions that arise from this prediction.  Firstly what is the
 likely outcome of unallocated address space exhaustion if it does
 occur, and secondly, are there corrective processes that may be
 applied to the current address management mechanisms that could allow
 both more equitable allocation and potentially extend the lifetime of
 the unallocated address space pool.  These two issues are considered
 in the following sections.

2. Outcomes of Unallocated Address Space Exhaustion - No change in

 current Address Management Policies

 As the pool of available addresses for allocation depletes, the
 initial anticipated outcome will be the inability of the available
 address pool to service large block address allocation requests.
 Such requests have already been phrased from various utility
 operators, and the demand for very large address blocks is likely to
 be a continuing feature of address pool management.  It is noted that
 the overall majority of the allocated address space is very

Huston [Page 2]  RFC 1744 Management of Internet Address Space December 1994

 inefficiently utilised at present (figures of efficiency of use of
 less than 1% are noted in RFC 1466, and higher efficiency utilisation
 is readily achievable using more recent routing technologies, such as
 Variable Length Subnet Masks (VLSM) and disjoint subnet routing).
 Given the continuing depletion of the unallocated address pool, and
 the consequent inability to service all address allocation requests,
 it is a likely outcome of interaction between those entities with
 allocated address space and those seeking address allocation that
 such allocation requests could be satisfied through a private
 transaction. In this situation an entity already in possession of a
 sufficiently large but inefficiently utilised allocated address block
 could resell the block to a third party, and then seek allocation of
 a smaller address block from the remaining unallocated address space.
 The implication is that both address blocks would be more efficiently
 utilised, although it is the entity which has large blocks of
 allocated address space which would be the primary beneficiary of
 such transactions, effectively capitalising on the opportunity cost
 of higher efficiency of address block use.

 Such reselling / trading opportunities which involve the use of the
 unallocated address pool would in all likelihood be a short term
 scenario, as the high returns from this type of trading would
 increase the allocation pressure from the pool and act to increase
 depletion rates as more pressure is placed to claim large address
 blocks for later resale once such blocks are no longer available from
 the unallocated pool.

 Following exhaustion of the unallocated address pool a free trading
 environment in address blocks is a probable outcome, where address
 blocks would be bought and sold between trading entities.  The
 consequent market, if unregulated, would act to price address space
 at a level commensurate with the common expectation of the market
 value of addresses, trading at a price level reflecting both the
 level of demand, the opportunity cost of more efficient address use,
 and the opportunity cost of deployment of additional or alternate
 internetworking technologies to IPv4.  It is interesting to note that
 within such an environment the registry (or whatever takes the place
 of a registry in such an environment) becomes analogous to a title
 office, acting to record the various transactions to ensure the
 continued accuracy of "ownership" and hence acts as a source of
 information to the purchaser to check on the validity of the sale by
 checking on the validity of the "title" of the vendor.  This impacts
 on the characteristic features of Internet address registries, which
 effectively become analogous to "titles offices", which typically are
 structured as service entities with "lodgement fees" used to fund the
 action of recording title changes.  Whether existing registries adapt
 to undertake this new function, or whether other entities provide
 this function is a moot point - either way the function is a

Huston [Page 3]  RFC 1744 Management of Internet Address Space December 1994

 necessary adjunct to such a trading environment.

 It is also anticipated that in an unregulated environment the trade
 in address blocks would very quickly concentrate to a position of
 address trading between major Internet providers, where a small
 number of entities would control the majority of the traded volume
 (market efficiency considerations would imply that traders with large
 inventories would be more efficient within this trading domain).  It
 is also reasonable to expect that the Internet service providers
 would dominate this trading area, as they have the greatest level of
 vested interest in this market resource.  This would allow the
 Internet service provider to operate with a considerably greater
 degree of confidence in service lifetime expectation, as the service
 provider would be in the position of price setting of the basic
 address resource and be able to generate an address pool as a hedge
 against local address depletion for the provider's client base.
 There is of course the consequent risk of the natural tendency of
 these entities forming a trading cartel, establishing a trading
 monopoly position in this space, setting up a formidable barrier
 against the entry of new service providers in this area of the
 market.  Such a scenario readily admits the position of monopoly-
 based service price setting. Compounding this is the risk that the
 providers set up their own "title office", so that in effect the
 major trading block actually controls the only means of establishing
 legitimacy of "ownership", which in terms of risk of anti-competitive
 trading practices is a very seriously damaged outcome.

 Assuming a relatively low cost of achieving significantly higher
 efficiency address utilisation than at present, then the resultant
 market is bounded only by the costs of agility of renumbering.  Here
 renumbering would be anticipated to occur in response to acquisition
 of a different address block in response to changing local address
 requirements, and the frequency of renumbering may occur in cycles of
 duration between weeks and years.  Markets would also be constrained
 by deployment costs, where local address trading within a provider
 domain would have little cost impact on deployment services (as the
 aggregated routing scenario would be unchanged for the provider and
 the provider's peers) whereas trading in small sized blocks across
 provider domains would result in increased operational service cost
 due to increased routing costs (where efforts to create aggregated
 routing entries are frustrated by the effects of address leakage into
 other routing domains).

 In examining this consequent environment the major technical outcome
 is strong pressure for dynamic host address assignment services,
 where the connection and disconnection of hosts into the Internet
 environment will cause a local state change in allocated addresses
 (which may in turn trigger consequent extended dynamic renumbering

Huston [Page 4]  RFC 1744 Management of Internet Address Space December 1994

 from time to time to accommodate longer term address usage trends).
 It is also reasonable to predict a strengthening market for dynamic
 address translation technologies, as an alternate client strategy to
 the purchase of large address blocks from the trading market (this
 scenario is the use of a private, potentially non-unique address
 space within the client network, and the dynamic translation of end
 host addresses into a smaller unique Internet routed address pool to
 support external end-to-end sessions), and also the strengthened
 market for firewall boundary technologies which also admit the use of
 private address space within the client domain.

 While it is not possible to accurately predict specific outcomes, it
 would appear to be the case that increasing overall efficiency of
 address utilisation will be most visible only after unallocated
 address pool exhaustion has occurred, as there is then a consequent
 strong economic motivation for such activity across all the entire
 Internet address space.

 As perhaps a cautionary comment regarding evolutionary technologies
 for IPv4, it would also appear to be the case that evolutionary
 technologies will not assume a quantum increase in economic viability
 simply because of unallocated address pool exhaustion.  Such
 technologies will only lever additional advantage over IPv4 once the
 marginal cost of increased IPv4 address space deployment efficiency
 exceeds the marginal cost of deployment of new technologies, a
 situation which may not occur for some considerable time after
 unallocated address pool exhaustion.

3. Modification of Current Internet Address Management Policies

 The three major attributes of the current address allocation
 procedures from the unallocated pool are "first come first served"
 (FCFS) and allocation on a "once and for all" (OAFA) basis, and the
 absence of any charge for address allocation (FREE).

 As noted above, the outcomes of such a process, when constrained by
 the finite quantity of the resource in question, ultimately leads to
 a secondary market in the resource, where initially allocated
 resources are subsequently traded at their market valuation.  This
 secondary trade benefits only those entities who established a
 primary position from the unallocated pool, and it is noted with
 concern that the optimal behaviour while the unallocated pool exists
 is to hoard allocated addresses on the basis that the secondary
 market will come into existence once the pool is exhausted.  Such a
 market does not benefit the original address management operation,
 nor does it necessarily benefit the wider community of current and
 potential interested parties in the Internet community.

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 It is also noted that the outcome of a free address allocation policy
 is the vesting of the management of the address space to the larger
 Internet Service Providers, on the basis that in the absence of end
 client address allocation charging policies which have the capability
 of ensuring an independent address management function, those
 entities who have the greatest vested interest in the quality of the
 address allocation and registration function will inevitably fund
 such an operation in the absence of any other mechanism.  The risk
 within this scenario is that placing the major asset of any
 communications medium into the sphere of interest of the current
 entities trading within that medium acts to increase the risk of
 anti-competitive monopolistic trading practices.

 An alternate address management strategy is one of allocation and
 recovery, where the allocation of an address is restricted to a
 defined period, so that the allocation can be regarded as a lease of
 the resource.  In such an environment pricing of the resource is a
 potential tool to achieve an efficient and dynamic address allocation
 mechanism (although it is immediately asserted that pricing alone may
 be insufficient to ensure a fair, equitable and rational outcome of
 address accessibility and subsequent exploitation, and consequently
 pricing and associated allocation policies would be a normative
 approach to such a public resource management issue).

 It is noted that pricing as a component of a public resource
 management framework is a very common practice, where price and
 policy are used together to ensure equitable access, efficient
 utilisation and availability for reallocation after use.  Pricing
 practices which include features of higher cost for larger address
 blocks assist with equitable access to a diversity of entities who
 desire address allocation (in effect a scarcity premium), and pricing
 practices can be devised to encourage provider-based dynamic address
 allocation and reallocation environments.

 In the same fashion as a conventional lease, the leasee would have
 the first option for renewal of the lease at the termination of the
 lease period, allowing the lease to be developed and maintain a
 market value.  Such pricing policies would effectively imply a
 differential cost for deployment of a uniquely addressed host with
 potential full Internet peering and reachability (including local
 reachability) and deployment of a host with a locally defined (and
 potentially non-unique) address and consequent restriction to local
 reachability.

 It is also observed that pricing policies can encourage efficient
 address space utilisation through factors of opportunity cost of
 unused space, balanced by the potential cost of host renumbering
 practices or the cost of deployment of dynamic address allocation or

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 translation technologies.

 There are a number of anticipated outcomes of a management mechanism
 which including pricing elements for the IPv4 address space

 Firstly current address space utilisation projections (anticipated
 useful lifetime for the pool of unallocated addresses) would extend
 further into the future due to the factors of cost pressure for more
 efficient address utilisation, and the additional cost of issuing a
 local resource with a globally unique address and the opportunity
 cost of extravagant use of global addresses with purely local
 domains.

 Secondly dynamic host address binding technologies, and dynamic
 network address translation technologies would be anticipated to be
 widely deployed, based on the perceived cost opportunities of using
 such technologies as an alternative to extensive static host address
 binding using globally unique addresses.  Use of such technologies
 would imply further extension of the lifetime of the address pool.

 Such pricing practices could be applied on a basis of all future
 address allocations, leaving those entities with already allocated
 address blocks outside of the lease mechanism.  Alternatively such
 previous allocations could be converted to leases, applying a single
 management policy across the entire address space and accordingly
 levering the maximal benefit from such pricing policies in terms of
 maximising the lifetime of the address space and maximising the value
 of the address space.  In such a situation of conversion some level
 of recognition of previous implicit OAFA allocation policies can be
 offset through delay of conversion to lease and also through
 conversion of such previously allocated addresses to the lease,
 waiving the lease purchase costs in such cases.

4. Internet Environment Considerations

 Pricing for IPv4 addresses as a component of the overall address
 management framework is by no means a novel concept, and despite the
 advantages such pricing policies may offer in terms of outcomes of
 efficiency of utilisation, fair and equitable access, security of
 allocation and consequent market value, and despite the address pool
 exhaustion time offsets such policies offer, it is the undeniable
 case that no explicit pricing policies have been successfully
 introduced into the Internet address allocation processes to date.

 There are two predominate reasons offered in this analysis.  The
 first is the somewhat uncertain nature of the exact origin of primary
 ownership of the IPv4 address space, and the unallocated address pool
 in particular.  The address pool has been administered according to

Huston [Page 7]  RFC 1744 Management of Internet Address Space December 1994

 policies drafted by the Internet Assigned Numbers Authority (IANA).
 The policies drafted by IANA are effectively policies which are the
 outcome of the same consensus seeking approach used within the
 Internet Standards process, and it is noted that within such an
 environment unilateral declarations of ownership and related
 assertions of policy control have difficulty in asserting an
 effective role within the Internet community and such declarations
 are generally incapable of gathering consensus support (It can be
 argued that "ownership" is not a relevant concept within this domain,
 as the essential attribute of such address elements are their
 uniqueness within the global domain, and such an attribute is only
 feasible through common recognition of a coordinated and reliable
 management environment rather than the historical origin of the
 resource in question).  Secondly there is no formal recognition of
 the address space as being a shared international resource which sits
 within the purview of national public resource management policies
 and administrative entities of each nation, nor is there a
 recognition of the address space as a private resource owned and
 administered by a single entity.

 Recent policy changes, whereby large segments of the unallocated
 address pool have been assigned to international bodies on a regional
 basis, with further assignment to bodies within national contexts,
 have been undertaken with a constant address allocation policy of
 FCFS, OAFA and FREE, and although some effort has been made to
 increase the deployment efficiency through explicit allocation policy
 enumeration, the general characteristics of address allocation are
 unchanged to date (those characteristics being of course FCFS, OAFA
 and FREE).

 One potential scenario is to speculate that pricing processes imposed
 by the address allocation agency are not feasible within the current
 Internet environment to the extent that any such policies could
 significantly motivate increased address deployment efficiency to the
 levels required for longer term unallocated address pool lifetime
 extension.  The lack of capability to employ pricing as a managerial
 mechanism, even to the extent of cost recovery of the allocation and
 subsequent registry maintenance function has a number of possible
 longer term outcomes:

  a) such functions will be restructured and operated from duly
     authorised national administrative bodies for each nation.
     Here the observation that the address pool delegation sequence
     within the current Internet environment has not to date been
     aligned with recognised national public communications resource
     administrative entities is an expression of the major problem
     that the unallocated address pool is not recognised as being
     intrinsically the same public resource entity as the radio

Huston [Page 8]  RFC 1744 Management of Internet Address Space December 1994

     spectrum or the telephone number space.  The consequence of
     this mismatch between existing public resource management
     structures and IPv4 address space management implies that
     public operation for this activity on a national basis
     is not a commonly observed attribute.  The competency of such
     established public resource management structures in managing
     what continues to be a remarkably vibrant and dynamic
     technology-influenced domain must be questioned.  Potential
     outcomes may possibly include a rational and equitable address
     space management mechanism, but would also in all probability
     include a cost of a heavy damping factor on further
     technological innovation and refinement of the underlying
     technology base upon which the address space is sited as a
     longer term outcome.

  b) such functions are operated (and/or funded) by Internet Service
     Providers.  This is a more common scenario at present in the
     Internet IPv4 environment, and although such an operational
     environment does admit the potential for adequate funding for
     competent administration of the operation, the strong
     association of these entities who have established interests in
     the operation of enterprises based on the provision of services
     across the address space (i.e., strong interest in exploiting
     the address space) has a natural tendency to express domination
     of the market by established interests, threatening fair access
     to the common resource and threatening the open market of
     deployment of the technology.  It is reasonable to suggest that
     such alignments are undesirable from a public policy
     perspective.

  c) such functions are inadequately funded to service the level of
     activity, and / or administrated informally and consequently
     managed poorly, and the essential attribute of reliable address
     space management is not achieved.

 It is noted that these issues are largely unresolved within the
 Internet community today, and tensions between established and
 incoming Internet Service providers over equitable access to the
 unallocated address space pool are a consequent risk.

5. Concluding Observations

 In the absence of the capability to price the management of the
 Internet address space at administrative cost levels, let alone the
 capability to set pricing of address leasing at prices which reflect
 the finite nature of the resource and reflect (even in part) the
 market value of the resource, as a component of overall common
 address management practices, the most likely scenario is a

Huston [Page 9]  RFC 1744 Management of Internet Address Space December 1994

 continuation of the FCFS, OAFA and FREE address management policies
 until exhaustion of the unallocated address pool occurs.

 It is perhaps a sad reflection of the conflict of short term
 objectives and longer term considerations that the evident short term
 motivations of ready and equitable access to the IPv4 address (which
 were the motivational factors in determining the current Internet
 address allocation policies) run the consequent risk of monopoly-
 based restrictive trade and barrier-based pricing as a longer term
 outcome of unallocated address space exhaustion.

 While free address allocation and the adoption of policies which
 include pricing components both ultimately produce an outcome of
 strong pressure for increased address space utilisation efficiency,
 the removal of the neutral presence of the unallocated address pool
 does induce considerable risk of open market failure within the
 Internet itself if free address allocation policies continue until
 pool exhaustion has occurred.

 Further strengthening of the current FCFS, OAFA and FREE address
 allocation policies, in an effort to induce higher address
 utilization efficiencies across the remaining address space is not a
 viable address management strategy refinement, in so far as the
 trading market will then commence before unallocated pool exhaustion,
 trading in large address blocks which are precluded from such
 strengthened address allocation policies.

 The most negative aspect of this are is that these processes will
 erode levels of confidence in the self regulatory capability of the
 Internet community, such that significant doubts will be expressed by
 the larger community the Internet process is one which is appropriate
 for effective formulation of common administrative policy of one of
 the core common assets of the Internet.

 These outcomes can all be interpreted as policy failure outcomes.

 The seriousness of these outcomes must be assessed in the terms of
 the anticipated timeframe of such policy failure.  Current
 expectations of unallocated address pool lifetime of 6 - 12 years
 does allow the Internet community some time to revisit their methods
 of administrative process definition, but this observation is
 tempered by the IPv6 process and by increasing levels of pressure on
 the address space in terms of growth in address demand through growth
 of deployment of the Internet itself.

 It is perhaps an appropriate conclusion to acknowledge the
 impediments of existing processes to admit any significant process or
 policy change that would produce a more efficient and effective

Huston [Page 10]  RFC 1744 Management of Internet Address Space December 1994

 address space management regime.

 However it is this policy failure to efficiently utilise the IPv4
 address space through inadequate address pool management policies,
 rather than the exhaustion of the pool per se which is perhaps the
 driving force to design and deploy an evolutionary technology to IPv4
 which possesses as a major attribute a significantly larger address
 space.

 It is also appropriate to conclude that any outside observer of the
 IPv6 refinement process will look to see if there is any evidence of
 experiential learning in address management policies.  If there is to
 be a successor technology for IPv4 it would be reasonable to
 anticipate that associated address pool management mechanisms show a
 greater degree of understanding of public resource space management
 capability in the light of this experience.  If no such evidence is
 forthcoming then there is no clear mechanism to instil sufficient
 levels of consumer and industry confidence in such technologies in
 such a way which would admit large scale public deployment,
 irrespective of the technical attributes of the successor technology.
 Such potential mechanisms may include pricing components irrespective
 of the actual size of the address resource, given that the number's
 uniqueness is a resource with inherent market value irrespective of
 whether scarcity pricing premiums are relevant in such an address
 space.

 It is also appropriate to conclude that continuation of current
 address space management policies run a very strong risk of
 restrictive and monopoly-based trading in address space, with
 consequence of the same trading practices being expressed within the
 deployed Internet itself.

 The immediate action considered to be most appropriately aligned to
 both the interests of the Internet community and the broader public
 community is to examine Internet address space management structures
 which include pricing as well as policy components within the overall
 management mechanism, and to examine the application of such
 mechanisms to both the existing IPv4 address space, and to that of
 any refinement or successor Internet technology base.

Huston [Page 11]  RFC 1744 Management of Internet Address Space December 1994

6. References

 [1] Gerich, E., "Guidelines for Management of IP Address Space", RFC
     1466, Merit Network, Inc., May 1993.

7. Security Considerations

 Security issues are not discussed in this memo.

8. Author's Address

 Geoff Huston
 Australian Academic and Research Network
 GPO Box 1142
 Canberra  ACT  2601
 Australia

 Phone: +61 6 249 3385
 Fax: +61 6 249 1369
 EMail: Geoff.Huston@aarnet.edu.au

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