Telecommunications: Characteristics and Competitiveness of the	 
Internet Backbone Market (16-OCT-01, GAO-02-16).		 
								 
Although most Americans are familiar with Internet service	 
providers that give consumers a pathway, or "on-ramp," to the	 
Internet, few are familiar with Internet backbone providers and  
backbone networks. At the core, Internet's are many		 
high-capacity, long-haul "backbone" networks. Routing data	 
traffic over long distances using high-speed fiber lines,	 
Internet backbone providers both compete in the marketplace and  
cooperate in the exchange of data traffic. The cooperative	 
exchange of traffic among backbone providers is essential if the 
Internet is to remain a seamless and widely accessible public	 
medium. Interconnection among Internet backbone providers varies 
both in terms of the physical structure and financial agreements 
of data traffic exchange. The physical structure of		 
interconnection takes two forms: (1) the exchange of traffic	 
among many backbone providers at a "network access point"--a	 
common facility--and (2) the exchange of traffic between two or  
more backbone providers at "private" interconnection points. No  
publicly available data exist to evaluate  competitiveness in the
Internet backbone market. Evolution of this market is likely to  
be largely affected by two types of emerging services. First,	 
demand is likely to rise for time-sensitive applications, such as
Internet voice systems. Second, more				 
"broadband"--bandwidth-sensitive--content, such as video, will	 
likely flow over the Internet in the coming years.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-16						        
    ACCNO:   A02232						        
  TITLE:     Telecommunications: Characteristics and Competitiveness  
of the Internet Backbone Market 				 
     DATE:   10/16/2001 
  SUBJECT:   Competition					 
	     Internet						 
	     Internet service providers 			 

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GAO-02-16
     
A

Report to the Subcommittee on Antitrust, Business Rights and Competition,
Committee on the Judiciary, U. S. Senate

October 2001 TELECOMMUNICATIONS Characteristics and Competitiveness of the
Internet Backbone Market

GAO- 02- 16

Letter 1 Results in Brief 1 Background 4 Facilities and Financial
Arrangements of Interconnection Among Backbone Providers Vary 7

Despite Competitiveness of the Backbone Market, Various Concerns Exist 15
The Introduction of New Services Over the Internet May Be

Constrained by Limits in Capacity 24 Conclusion 27 Recommendation 29 Agency
Comments 29

Appendixes

Appendix I: Scope and Methodology 32

Appendix II: Internet Protocol Addresses and Backbone Routing 34

Appendix III: GAO Contacts and Staff Acknowledgments 36 GAO Contacts 36
Acknowledgments 36

Figures Figure 1: Hypothetical Internet Backbone Networks With Connections
to End Users 5 Figure 2: Movement of Internet Traffic in Peering
Relationships

Among Backbone Providers 11 Figure 3: Movement of Internet Traffic in
Transit and Peering

Relationships Among Backbone Providers 12 Figure 4: Routing of Internet
Traffic Among Comparably Sized

Backbone Providers 13 Figure 5: Routing of Internet Traffic Among
Differently Sized

Backbone Providers 14

Abbreviations

ARIN American Registry for Internet Numbers CIDR Classless Inter- Domain
Routing DOJ Department of Justice DSL Digital Subscriber Line FCC Federal
Communications Commission IP Internet Protocol ISP Internet service provider
NAP network access point NRIC Network Reliability and Interoperability
Council NTIA National Telecommunications and Information Administration

Lett er

October 16, 2001 The Honorable Herbert Kohl Chairman The Honorable Mike
DeWine Ranking Member Subcommittee on Antitrust, Business Rights and
Competition

Committee on the Judiciary United States Senate

While most Americans are familiar with Internet service providers (ISP)-
such as America Online or EarthLink- that provide consumers a pathway, or
?on- ramp,? to the Internet, many are less familiar with Internet backbone

providers and the operations of backbone networks. At the core of the
Internet- a vast network of interconnected networks- many highcapacity,
long- haul "backbone" networks operate in a somewhat paradoxical context.
Routing data traffic over long distances using highspeed

fiber lines, Internet backbone providers both compete in the marketplace and
cooperate in the exchange of data traffic. The cooperative exchange of
traffic among backbone providers is essential to ensure that the Internet
remains a seamless and widely accessible public medium. Because of your
interest in the functioning and competitiveness

of the Internet backbone market, you asked us to report on (1) the physical
structure and financial arrangements for traffic exchange among backbone
providers, (2) the nature of competition in the Internet backbone market,
and (3) how this market is likely to develop in the future. To respond to
your request, we interviewed representatives of backbone

companies, Internet service providers, other large users (such as
corporations and universities) that purchase backbone services, and a local
telephone company. In addition, we interviewed academic experts,
representatives of relevant trade associations, and officials from the
Federal Communications Commission (FCC), the National Telecommunications and
Information Administration (NTIA) of the Department of Commerce, and the
Antitrust Division of the Department of Justice (DOJ). Results in Brief
Interconnection among Internet backbone providers- fundamental to the

global connectivity of all Internet users- varies both in terms of the
physical structure and financial arrangements of data traffic exchange.

The physical structure of interconnection takes two forms: (1) the exchange
of traffic among many backbone providers at a ?network access point?- a
common facility- and (2) the exchange of traffic between two or more
backbone providers at ?private? interconnection points. Once viewed as an
efficient way for multiple backbone providers to exchange traffic, network
access points became increasingly congested and service quality

deteriorated as Internet use and traffic flows increased in the 1990s.
Backbone providers thus began to bypass these congested exchange points and
establish ?private? interconnections in many types of locations. According
to many backbone providers with whom we spoke, the majority

of their traffic is now exchanged through private interconnections. There
are also two types of financial arrangements for interconnection among
backbone providers: ?peering? and ?transit.? In a peering relationship, two
providers agree to exchange traffic destined only for each others? networks.
This usually happens free of charge. By contrast, a transit arrangement
entails the payment by one provider to another for the transmission of
traffic between the two providers and for delivery of traffic to other
providers. Although most traffic was initially exchanged under

peering agreements, the largest backbone providers now generally only peer
with other large providers and charge transit fees to smaller backbone
providers and other customers. No publicly available data exist to allow a
precise economic evaluation of the competitiveness of the Internet backbone
market. However, the industry participants we interviewed generally viewed
the backbone market as competitive. Several companies that purchase backbone
connectivity stated that the market has become more competitive in the last
few years. In particular, they noted that the price of backbone connectivity
has declined, and the ability of purchasers to negotiate other

favorable contract terms has improved. Despite this generally favorable view
of the market, some companies noted that only a handful of backbone
providers (often called the ?Tier 1? providers) have networks with extensive
geographic scope and peering relationships with other large

providers. Some companies that purchase backbone connectivity also noted
that they consider themselves tied to their original backbone provider
because they obtained Internet addresses- numeric codes specifying each
user?s network location- from one provider and changing

providers requires a disruptive ?readdressing? of their networks. Finally,
many companies noted that Internet connectivity is dependent not only on
services from backbone providers, but also services from local telephone
companies. We were told by companies we interviewed that limited choice for
providers in a separate but necessary market- the market for local

telephone providers- creates problems for providers of Internet service. On
the other hand, a representative of one incumbent local telephone company we
spoke with stated that there is growing competition in the local telephone
market as evidenced by the recent finding of the FCC that lines served by
competitors nearly doubled in 2000 to 8 percent of all local access lines.

Future evolution of this market is likely to be largely affected by two
types of emerging services. First, demand is likely to increase for time-
sensitive applications, such as Internet voice service. Second, it is
expected that more ?broadband?- bandwidth- intensive- content, such as
video, will flow over the Internet in the coming years. Industry
participants we interviewed were generally optimistic about the private
sector?s ability to address the need for ?quality of service? routing- that
is, dealing with the

delivery of time- sensitive traffic across backbone networks. Similarly,
industry participants were also optimistic that the capacity of backbone
networks will be sufficient to support the delivery of broadband content.
Many of the officials we interviewed were concerned about the availability
of necessary infrastructure in the local telephone networks to support the

delivery of broadband content. One local incumbent telephone company we
spoke with noted that broadband service is being aggressively rolled out in
local markets.

This report makes a recommendation that the FCC periodically evaluate
whether existing data collection efforts are providing needed information on
the Internet backbone market and, if deemed appropriate, exercise its
authority to establish a more formal data collection program.

We provided a draft of this report to FCC, NTIA, and the DOJ for their
review and comment. FCC and NTIA officials stated that they were in general
agreement with the facts presented in the report. Technical

comments provided by FCC, NTIA, and DOJ officials were incorporated in this
report as appropriate.

Background To access the Internet, most residential users dial in to an ISP
over a telephone line, although other physical means of access to the
Internet 1 -

such as through a cable television line- are becoming increasingly common. 2
For a residential customer, the ISP sends the user?s Internet traffic on to
the backbone network. To perform this function, ISPs obtain direct
connections to one or more Internet backbone providers. Small business users
may also connect to a backbone network through an ISP, however, large
businesses often purchase dedicated lines that connect

directly to Internet backbone networks. An ISP?s traffic connects to a
backbone provider?s network at a facility known as a ?point of presence.?
Backbone providers have points of presence in varied locations, although

they concentrate these facilities in more densely- populated areas where
Internet end users? demands for access are greatest. If an ISP or end user
is far from a point of presence, it is able to reach distant points of
presence over telecommunications lines. Figure 1 depicts two hypothetical
Internet backbone networks that link at interconnection points and take
traffic to and from residential users through ISPs and directly from large
business users.

1 The Internet was established through the funding of experimental research
and educational networks by various federal agencies beginning in the late
1960s. Private sector companies began investing in long- haul data networks
in the early 1990s and by the mid- 1990s private firms came to manage
backbone infrastructure originally funded by the government.

2 For an in- depth discussion of consumers? access and use of the Internet,
see

Telecommunications: Characteristics and Choices of Internet Users (GAO- 01-
345), February 2001.

Figure 1: Hypothetical Internet Backbone Networks With Connections to End
Users

Seattle

Business ISP users

Chicago POP

San Residential Francisco

POP users

New York ISP

Denver

POP Residential

POP users Business

users Los Angeles

Business users

Atlanta

Dallas

POP

Point of presence Point of interconnection Backbone A Backbone B

Once on an Internet backbone network, digital data signals that were split
into separate pieces or ?packets? at the transmission point are separately
routed over the most efficient available pathway and reassembled at their
destination point. The standards that specify most data transmissions are

known as the Internet Protocol (IP) Suite. Under part of this protocol,
streams of packets are routed to their destination over the most efficient
pathway. Other aspects of the protocol facilitate the routing of packets to
their appropriate destination by examining the 32- bit numeric identifier-

or IP address- attached to every packet. Currently, IP addresses for North
America are allocated by the American Registry for Internet Numbers (ARIN).
3

There are many Internet backbone providers offering service in the United
States. Boardwatch- an industry trade magazine- reports 41 backbone
providers with a national network 4 and many other regional backbones.
Approximately five to eight of these national providers are considered to be

?Tier 1? backbone providers. 5 A Tier 1 provider is defined by Boardwatch as
having a network of wide geographic scope, having a network with many IP
addresses, having extensive information for traffic routing determinations,
and handling a large percentage of transmissions. 3 ARIN is a nonprofit
entity that provides for registration of IP numbers for North America, South
America, the Caribbean, and sub- Saharan Africa. ARIN is one of three
regional Internet Registries that collectively provide registration services
to all regions of the world.

4 Boardwatch identified 41 national Internet backbone providers as of July
2001. A national backbone is defined by Boardwatch as having three
characteristics: points of presence in at least five states; four national
public peering agreements; and a marketing focus on selling wholesale, high-
bandwidth dedicated connections to ISPs. Boardwatch also considers whether a
backbone network crosses the country to reach both coasts.

5 There is no definitive list of Tier 1 providers. FCC?s Office of Plans and
Policy Working Paper, The Digital Handshake (2000), identifies five Tier 1
providers. Some other sources report a higher number.

Unlike telecommunications services, the provision of Internet backbone
service is not regulated by governmental communications agencies. Dating
back to the 1960s when data signals began to flow over public telephone
networks, FCC determined that ?basic services?- the physical transport of
data over telephone networks- would be regulated, but ?enhanced services?-
the data- processing or computer- enhanced functions of data transmissions-
was a vibrant and competitive market that should remain free of regulation.
Congress maintained this distinction when it enacted

the Telecommunications Act of 1996, terming these services
?telecommunications? and ?information,? respectively. 6 No provisions were
contained in the 1996 act pertaining to Internet backbone services; rather,
the act sought to increase competition in other communications sectors,
primarily the local telephone market. However, the treatment of these more
established communications services and infrastructures under the
Communications Act of 1934- as amended by the 1996 act- has

indirectly affected the burgeoning Internet medium. 7 Additionally, the act
provided FCC and states the authority to take actions to encourage the
deployment of advanced telecommunications capability. 8

Facilities and Financial Two types of facilities are used for the exchange
of data traffic by Arrangements of interconnected Internet backbone
providers. The first type of facility,

known as a ?network access point? (NAP), enables numerous backbone
Interconnection providers to interconnect with each other at a common
facility for the Among Backbone exchange of data traffic. Internet data
traffic is also exchanged by

Providers Vary backbone providers at ?private? interconnections. Independent
of the type of facility at which backbone providers exchange traffic, two
different types of financial arrangements exist among backbone providers for
traffic

exchanges. In a ?peering? relationship, backbone providers exchange data
destined only for each other?s network generally without the imposition of a
fee. Transit payments, which involve the payment by one backbone 6 FCC has
determined that the term ?information services? contained in the 1996 act is
broader than and encompasses ?enhanced services.? In a 1998 report to
Congress, FCC determined that the provision of ?pure transmission capacity?
to Internet backbone providers is a telecommunications service. 7 Several
aspects of laws and regulations governing the telephone network are thought
to have nurtured the growth of the Internet. For a discussion of this topic,
see our recent report Telecommunications: Technological and Regulatory
Factors Affecting Consumer Choice of Internet Providers (GAO- 01- 93), Oct.
2000.

8 This authority was granted in section 706 of the Telecommunications Act of
1996.

provider to another for the mutual exchange of traffic and for the delivery
of traffic to other providers, have become more common with time.

Internet Data Are A NAP facilitates the interconnection of multiple backbone
providers. 9 In Exchanged Among

the early to mid- 1990s, the National Science Foundation designed and
Backbone Networks at Two

partially funded four NAPs, each of which was managed by a different Types
of Interconnection

company. Since that time, other interconnection points have been
constructed, and for purposes of this report, the term NAPs refers to
Facilities: NAPs and Private approximately 10 major traffic exchange points
that host backbone Interconnection Points

providers. 10 Managed by different companies, NAPs are not uniform
facilities; differences exist in terms of equipment, software, and data
transmission rates.

Although most backbone providers we interviewed use the NAPs, a few
providers voiced concerns about them. In the first years of their existence,
NAPs became congested with the rapid rate of growth in Internet traffic. Two
of the providers with whom we spoke said that some NAPs were not well
managed. Also, originally some NAP technology was not ?scalable?-

that is, beyond some level, it was very costly to increase the amount of
traffic that could be exchanged at a NAP. If traffic exchange at a NAP
became congested, service quality could be compromised. Two typical problems
that congestion causes include latency (delay in the transmission of
traffic) and packet loss (when transmitted data are actually lost and never
reach their destination). 11 For example, one backbone provider told us that
the loss of packets at some NAPs had sometimes reached 50

percent. 9 NAPs are commonly referred to as ?public? interconnection points,
even though no governmental entity is involved in administering these
facilities. A provider need not connect to every other provider at the NAP.
10 In addition to the NAPs, there are many other Internet traffic exchange
points at which multiple providers meet. There is now a blurring between
these collocation facilities and NAPs. Many of these traffic exchange points
are smaller facilities that host local ISPs and businesses along with
smaller backbone providers.

11 When data packets are lost they should be resent; and while a user is not
aware that this has occurred, he or she will experience slower responses due
to this loss.

The congestion and poor quality of connections at the NAPs led backbone
providers to engage in another type of traffic exchange known as ?private
interconnection.? Private interconnection refers to the exchange of traffic
at a place other than a NAP. Usually, these private interconnections involve
two companies entering into a bilateral agreement to exchange traffic; no
third party manages the traffic exchange. 12 The parties interconnect their
networks at any feasible location, such as a facility of one of the

providers. 13 Because of the private nature of these agreements, the number
of private interconnections that currently exist across the United States,
according to one company representative, is not known. Despite a variety of
technological developments that have improved traffic flow at NAPs, 14 we
found that for the providers we interviewed, the majority of Internet
traffic exchange occurs at private interconnection

points. Of 17 backbone providers with whom we spoke, 15 15 used both NAPs
and private interconnections; the remaining 2 used only private
interconnections, avoiding the NAPs entirely. Slightly more than half of the
15 providers using both NAPs and private interconnection said they exchanged
more than 80 percent of their traffic at private exchange points. Of the 17
companies that we met with, 10 provided estimates of how their mix of
private interconnection and NAP use would likely change in the future. Nine
of the 10 stated that they either plan less use of NAPs in the next few
years or do not see their mix of NAPs and private interconnection changing;
only one company said that it was likely to make greater use of NAPs in the
future.

We found that some Internet backbone providers value several features of
NAPs. For example, when a company interconnects at a NAP, it saves on

12 However, three or more companies could decide to establish a private
interconnection arrangement. 13 Third- party locations are also now being
made available for private interconnection among backbone providers. For
example, one industry representative described a private interconnection
arrangement on the premises of a video store.

14 For example, beginning in 1998, NAP administrators began augmenting the
original technology employed at NAPs- Fiber Distributed Data Interface
(FDDI)- with Asynchronous Transfer Mode (ATM) switches to ease the problems
of dropped and delayed packets. More recently, optical switches are being
deployed at NAPs. Congestion should be further relieved by the construction
of new NAPs.

15 This analysis does not include one backbone provider with whom we spoke
that was not yet providing service.

equipment costs and administrative overhead. Representatives of two
companies with whom we spoke noted that the NAPs play an important role in
helping to keep the market for backbone service open for entry, and thus
more competitive, because NAPs provide new backbone firms an efficient, low-
cost method for exchanging traffic with numerous other providers.
Interconnection Among

When the commercial Internet began, only a few major backbone providers
Internet Backbone of relatively similar size existed, each of which sent and
received roughly

Providers Occurs Under equal amounts of traffic. The similarities among
these backbone firms led

Two Types of Financial them to view each other as ?peers.? These providers
elected to exchange traffic for free, rather than trying to measure the
actual traffic exchanged

Arrangements: Peering and and developing a payment method. In a peering
arrangement, two

Transit backbone providers agree to exchange traffic destined only for each
others? networks. 16 As depicted in figure 2, the peering agreement between

backbone provider A and backbone provider B only covers traffic going from
A?s network to B?s network and vice versa. For backbone A to move traffic to
backbone C?s network under peering, it must have a peering agreement
directly with backbone C.

16 A distinction is sometimes made between ?public peering?- the mutual
exchange of data traffic without payment at NAPs- and ?private peering?- the
mutual exchange of traffic without payment at private points of
interconnection.

Figure 2: Movement of Internet Traffic in Peering Relationships Among
Backbone Providers

Backbone Peering

Backbone provider A

provider B Backbone provider C

By the mid to late- 1990s, another financial arrangement known as ?transit?
emerged. Transit and peering are distinctive in two key respects. First,
while peering generally entails traffic exchange between two providers
without payment, transit entails payment by one provider to another for
carrying traffic. Transit agreements thus constitute a supplier- customer
relationship between some backbone providers, much like the relationship
between a backbone provider and a nonbackbone customer (such as an ISP).
Second, when a backbone provider buys transit from another provider, it
obtains not only access to the ?supplier?s? backbone network,

but also access to any other backbone network with which its supplier peers.
Regarding physical locations, however, both transit and peering take place
at NAPs as well as at private interconnection points. Currently, there is a
segregation of backbone providers into ?tiers.? The top tier or ?Tier 1?
providers generally peer with each other and sell transit to smaller

backbone providers. However, we found that smaller providers often peered
with each other and were able, in some cases, to peer with larger providers.

The illustration in figure 3 shows backbone provider C as a transit customer
of backbone provider B and backbone providers B and A as peers. In this
case, traffic originating on backbone C can get to backbone

B?s network as well as to that of backbone A (with which backbone C does not
have an independent relationship) because B will pass C?s traffic off to A
as part of its delivery of transit service to C. Thus, a smaller backbone

provider generally need only buy transit from one or two large providers to
achieve universal connectivity.

Figure 3: Movement of Internet Traffic in Transit and Peering Relationships
Among Backbone Providers

Peering

Backbone Backbone

provider A provider B

) Transit

($

Backbone provider C

We found that it is generally not viewed as economical for a backbone
provider to peer with a less geographically dispersed backbone provider.
Thus, even if there were equal traffic flows, the larger provider will tend
to carry traffic a further distance- which, according to a larger backbone
provider we spoke with, ultimately means more costs are imposed on its
infrastructure- when it peers with a provider with a smaller or less widely
dispersed network.

Figures 4 and 5 illustrate this paradigm. In figure 4, backbone providers A
and B are of similar size, and traffic between the two could be carried
mostly by one backbone provider in one direction, but mostly by the other in
the opposite direction.

Figure 4: Routing of Internet Traffic Among Comparably Sized Backbone
Providers

Seattle

transfer End user to other transfer backbone

to other backbone Web page

Chicago New York San

Denver Francisco

Point of interconnection Backbone A Backbone B

In figure 5, backbone provider D is smaller than backbone provider C, with
more limited points at which traffic can be brought onto the network. When
backbones C and D exchange traffic, C must carry the traffic much farther on
the return path before it can hand off the data packets to D. Therefore, C
might consider D to be benefiting from C?s network investment and thus, C
would be more likely to view D as a customer purchasing access to its
network than as a peer in traffic exchange.

Figure 5: Routing of Internet Traffic Among Differently Sized Backbone
Providers Web page San

transfer to Francisco small backbone

Denver

St. Louis End user

Tulsa transfer to Los Angeles

large backbone End user

Atlanta

Dallas Point of interconnection Backbone C Backbone D

The ?tiering? of Internet backbone providers and the dual system of peering
and transit agreements have caused controversies. Several of the non- Tier 1
backbone providers with whom we spoke expressed concerns about their
inability to peer with the largest providers. In particular, we were told
that the inability of non- Tier 1 providers to peer with Tier 1 providers
puts

smaller companies- which must therefore purchase transit service- at a
competitive disadvantage. We were also told that peering policies should be
made public.

To some extent, market forces may be relieving some of these problems.
First, despite the view that smaller providers have no choice but to buy
transit, some backbone providers with whom we spoke stated that the market
is competitive, and transit rates have been decreasing. Second, eight of the
backbone providers with whom we spoke (some of which were Tier 1 providers
and some of which were not) said they already had posted or soon would be
posting their peering policies on their Web sites or otherwise making them
publicly available. 17

Perhaps most interesting, we found that some non- Tier 1 backbone providers
do not want to peer with the largest backbone providers. For example, one
provider spoke critically of the quality of peering connections and the
quality of service provided between peers. Some stated that it is difficult
to guarantee their own clients a certain level of service if they

receive few guarantees themselves- a common occurrence under peering.
Transit customers, however, do contract for a specified level of service for
such items as ?uptime?- the functioning of a network without impairment or
failure. Despite

No official data sources were identified that would provide information on
Competitiveness of the

the structure and competitiveness of the Internet backbone market. Market
participants we interviewed- Internet backbone providers, ISPs, Backbone
Market, and other end users- described the Internet backbone market as
Various Concerns Exist

competitive. Several characteristics were described by market participants,
such as increasing choice of providers and lower prices, as evidence of the
competitiveness of the market. However, officials also described to us
factors that may reduce competition in this market or cause other problems,
such as the limited number of Tier 1 providers, the limited choice of
providers in rural areas, the manner in which Internet addresses are
assigned, and the lack of control or knowledge about the movement of traffic
across backbone networks. We were also told that the choice of local
telephone companies providing access to Internet backbone

17 Making Internet backbone providers? peering policies publicly available
has been recommended by the current Network Reliability and Interoperability
Council (NRIC), a federal advisory committee that serves to develop
recommendations for the FCC and the telecommunications industry to assure
optimal reliability, interoperability, and interconnectivity of, and
accessibility to public telecommunications networks. Originally formed in
1992 and in its fifth term, NRIC V is comprised of senior representatives of
providers and users of telecommunications services and products.

networks may be limited, creating problems for providers of Internet
services. Little Economic Data Are

We found no official data source that could provide information to allow an
Available on Internet empirical investigation of the nature of competition
in the Internet Backbone Networks

backbone market. In particular, we found little in the way of official or
complete information on the relative size of companies- even the largest
companies- operating in the market. Neither FCC nor NTIA collect data on the
provision of Internet backbone services. 18 However, FCC does

solicit public comments on the deployment of underlying telecommunications
infrastructure that support backbone services for their report on advanced
telecommunications capabilities under section 706 of the Telecommunications
Act of 1996. 19 DOJ often collects data for merger- specific analyses- as it
did in two cases that involved an assessment of backbone assets- but such
data are not publicly available.

We also found that neither the Bureau of Labor Statistics nor the U. S.
Census Bureau currently collects data directly on Internet backbone
providers. In the case of both of these agencies, aggregate data on services
provided by telecommunications providers is collected.

18 In 2000, FCC discontinued a voluntary annual survey of telecommunications
providers on the deployment of fiber optic facilities and capacity. We asked
FCC whether it has the authority to collect data on capacity, traffic
volumes, other economic indicators, as well as on outages, from Internet
backbone providers. In a letter signed by FCC Chairman Michael Powell to
Susan A. Poling, Associate General Counsel, U. S. General Accounting Office
(July 17, 2001), FCC stated that ?The Commission has the legal authority to
collect data relevant to its regulatory mission. That mission covers ?all
interstate and foreign communication by wire or radio??.? The letter also
noted that ?the Commission has authority to collect

information about communications- related aspects of the Internet if
necessary.? 19 On the basis of nearly unanimous public comment, FCC
determined that it would not monitor or exercise authority over peering
arrangements of Internet backbone providers, as stated in its section 706
report on the deployment of advanced telecommunications

capabilities in January 1999. Further, FCC recognized that ??[ t] he
Internet and other interactive computer services have flourished, to the
benefit of all Americans, with a minimum of government regulation? and that
it is the policy of the United States to preserve the vibrant and
competitive free market that presently exists for the Internet and other

interactive computer services, unfettered by Federal or State regulation?.
?? CC Docket No. 98- 146, January 28, 1999, at paragraph 105.

Internet Backbone Market To investigate the degree of competition, we spoke
with an array of buyers Appears Competitive; Many

and sellers of backbone connectivity and asked questions that were Market
Niches Filled

designed to provide information about the competitiveness of the market. For
example, we asked questions about the availability of choice among providers
in the market, the viability of purchasing transport to a distant location
to connect to a backbone provider, the length of contracts for backbone
connectivity, the types of service guarantees buyers receive from

sellers, the ability of buyers to negotiate favorable contract terms, and
the factors that were important to buyers when choosing a backbone provider.

Representatives of ISPs and end users we interviewed throughout the country
described the Internet backbone market as competitive. Most of these
providers stated that they have several choices of backbone providers from
which to obtain services. Although a few ISP

representatives noted a relatively limited number of companies among the
Tier 1 providers, they nonetheless considered the market to be competitive
with greater choices across the entire range of backbone providers.
Similarly, most non- Tier 1 backbone providers stated that they can

purchase transit from a number of Tier 1 backbone providers. A few ISPs and
other purchasers of backbone services also noted that the extensive choice
of backbone providers enables them to engage in ?multihoming?-

purchasing backbone services from more than one provider- to provide
redundant access that enhances ISPs? assurances to customers of
uninterrupted Internet connectivity.

We found, based on our discussions with ISPs and other purchasers of
backbone connectivity, that several characteristics of the market show
evidence of its competitiveness. In particular:  Many ISPs noted that,
coincident with increased choice of backbone

providers throughout the country, the price of backbone connectivity had
declined significantly in recent years.  Representatives of several
companies told us that although they were

presented with standard contracts by backbone providers, they were able to
negotiate terms and conditions in their contracts that were important to
them.

 A few ISP representatives with whom we met said they receive frequent
sales calls from multiple backbone providers.  An ISP representative noted
that many backbone providers are working to increase the speed and decrease
the latency of transmissions of their networks to improve their
competitiveness in the market.

 Even though there have been bankruptcies and consolidation in this market,
a few new backbone providers have entered the market in the recent past. 
Some backbone providers are filling market niches by offering

customers additional or unique services to complement their backbone
services. 20 Despite Competitiveness of

The majority of market participants with whom we spoke expressed the
Backbone Market, Several

view that the Internet backbone market is competitive, if not highly Market
Participants competitive. At the same time, many of these respondents noted
factors Expressed Various

that might be reducing the level of competition or creating other problems
in this market. In particular, we were told that (1) a small number of large
Concerns backbone providers stand out as the premier providers, (2) choice
among backbone providers may be more limited in rural areas, (3) ISPs are
concerned about the way Internet addresses are assigned to users, and (4)

ISPs and other end users are frustrated by their minimal control and
understanding about how their traffic moves across Internet backbone
networks.

Tiering of Internet Backbone ISPs and other end users indicated to us a
general perception that Tier 1 Providers

companies are ?different? or superior when compared with other backbone
providers. For example, 17 of the 24 ISPs and all 8 of the end users we
interviewed purchase backbone connectivity from at least 1 of the 5 Tier 1
backbone providers identified in a recent FCC Working Paper. Similarly, 11

ISPs and 3 end users we interviewed explicitly stated that it was important
to them to purchase service from a Tier 1 provider. Finally, many ISPs and
end users stated that it was important to them to purchase backbone
connectivity from a provider possessing certain network characteristics.
Commonly cited characteristics of importance were a network with a

broad geographic scope, many customers, significant capacity, and good
peering arrangements with other providers. These are all common
characteristics of Tier 1 backbone providers. Because Tier 1 providers are
viewed as a special class of backbone

providers, the existence of approximately 40 national backbone providers may
not fully reveal the competitiveness of this market. Instead, it appears 20
For example, some backbone providers offer customers an array of services
such as Web hosting, collocation, and network security in order to better
compete in the market.

that only the 5 to 8 Tier 1 backbone providers are viewed as competitors for
primary backbone connectivity. However, most of the ISPs and end users with
whom we spoke nonetheless stated that the market is competitive and they
have significant choice of provider. It appears that even if the ?relevant?
market for primary backbone connectivity is the Tier 1 providers, that
market segment may be viewed as competitive.

A remaining concern regarding the ?tiered? segmentation of the market is the
potential for the number of Tier 1 providers to decline or for one of these
providers to become dominant. For example, the recent economic downturn in
the communications sector may portend a further shakeout of backbone
providers. Several of the company officials we interviewed expressed concern
that there would be consolidation among the Tier 1 providers and thus noted
the importance of antitrust oversight of this industry. Moreover, both an
FCC Working Paper and the Antitrust Division of DOJ have noted that in
industries such as the Internet backbone market,

interconnection among carriers is critical to the quality of service
consumers receive. As such, a much larger provider may have less incentive
to have good interconnection quality with other providers because without
quality interconnection, customers may have an incentive

to buy service from the largest provider with the best- connected network.
This would give the larger provider a competitive advantage, which in turn
could cause the market to ?tip?- that is, more and more users would

choose connectivity from the larger network- risking a monopolization of the
industry. Because of this concern, both agencies have noted that if one of
the Tier 1 providers were to grow considerably larger than the rest, there
could be competitive concerns. 21

Companies Purchasing Members of Congress are often concerned about whether
Backbone Connectivity in Rural

telecommunications services reach rural areas. Several representatives of
Areas May Have Fewer Providers companies we interviewed noted that there are
less Internet backbone From Which to Choose

facilities running through rural areas and fewer points of presence in those
areas. As such, purchasers of backbone connectivity in rural areas may have
fewer choices among providers than their counterparts in more urban

locations. One point made by two rural providers is that rural areas
sometimes have subsidized networks (e. g., state networks or networks

21 A recent study suggests that ?tipping? in the Internet backbone market is
unlikely. See David A. Malueg and Marius Schwartz, ?Interconnection
Incentives of a Large Network,? Georgetown University, Department of
Economics Working Paper 01- 05.

funded, in part, by governmental subsidy) that may actually discourage
private backbone companies from entering and thriving in such markets.

Despite the view that rural areas have fewer choices among backbone
providers, most companies we interviewed in rural areas purchased
?transport? services to connect to an Internet backbone network. 22 That is,
they were able to transmit their traffic over fiber lines, most often owned
by one or more local telephone carriers, to a backbone provider?s point of
presence that was perhaps hundreds of miles away. 23 Eighteen of the 24 ISPs
and 3 of the 8 end users we interviewed used

transport from their location to another location for at least some of their
Internet traffic. Sometimes transport was used to move data traffic to a
nearby city that was not very far away- perhaps 30 to 50 miles. But in some
cases- particularly for ISPs in rural areas- traffic was transported a few
hundred miles to a point of presence of a backbone provider. The majority of
officials from these companies told us that the quality of Internet service
is not diminished by transporting traffic across such distances. Because
many ISPs and end users told us that distant transport was a viable option
for obtaining Internet backbone connectivity, even ISPs and users in more
rural areas told us that they generally had choice among

backbone providers that could receive traffic at varied distant locations.
The one disadvantage of distant transport noted by several providers,
however, was cost. Some company officials noted that it generally costs more
to purchase transport to a distant location than it does to connect to a
backbone at a local point of presence. Two companies specifically mentioned
that they had or were planning to move their facilities to more urban
locations because of the cost of distant transport.

22 Purchase of transport to distant locations also occurred among companies
located in more urban areas. 23 Responding to a request by 10 senators, NTIA
and the Rural Utilities Service (RUS) issued a report in April 2000-
Advanced Telecommunications in Rural America- which states that access to
Internet backbone networks in rural areas is generally not a significant
problem. Similar to our finding, the NTIA- RUS report notes that while
dedicated Internet backbone networks primarily connect urban centers, there
are many indirect means of access to backbone networks in rural areas, such
as over leased facilities or through private connections (p. 9).

Many ISPs and End Users Feel Several ISPs and end users with whom we spoke
expressed concern about Tied to Their Backbone Provider the manner in which
Internet addresses are allocated. Most ISPs and other Because of IP Address
end users- except for fairly large organizations- do not directly obtain
Allocations

their own IP addresses, but they instead receive a block of IP addresses
from a backbone provider. In particular, when an ISP obtains an Internet
connection from a backbone provider, it also generally receives a block of
IP addresses from among the addresses that are assigned by ARIN to that
backbone provider. This method of IP address allocation was adopted for
technical efficiency reasons- that is, allocations made in this manner
reduce the number of addresses that need to be maintained for traffic
routing purposes. (See app. II for detailed information on IP address
allocations). While the method of allocating IP addresses in large blocks
enables backbone routers to operate efficiently, some of the ISPs and end
users with whom we spoke also told us that it makes it difficult for smaller
entities to switch backbone

providers. In particular, if an ISP were to change its backbone provider, it
would generally have to relinquish its block of IP addresses and get a new
block of addresses from the new backbone provider. Several ISPs and end
users with whom we spoke told us that changing address space can be time
consuming and costly. We found that the degree of difficulty in changing
address space depends on how an individual company?s computer network is
configured. 24 Two respondents expressed concern about the loss of customers
due to a change of IP addresses. A few also told us that it is not

uncommon for an ISP to retain a relationship with its original backbone
provider- paying for a minimal level of connectivity to that provider- in
order to avoid having to go through a disruptive readdressing process. It
appears, therefore, that customers? feelings of being tied to a provider may

lessen the effective level of competitiveness in this market. 24 Although IP
address changes can be disruptive and somewhat costly, businesses can
minimize the impact of the changes and reduce any readdressing costs by
using an Internet standard called dynamic host configuration protocol
(DHCP). With this protocol, the IP address settings for individual computers
are assigned dynamically from a central server. Thus, when an ISP changes
the IP addresses, all that a business has to do is change the address ranges
stored in a central server and change the IP configuration of a few
computers. However, businesses that do not use dynamic IP address
allocations do have to reconfigure the IP address settings for many more
computers if their ISP were to change backbone provider. Moreover, we were
also told that in the new IP address format that is to

be rolled out in the coming years, IP address changeovers will be less
difficult. However, there are some concerns that this new format may not be
implemented any time soon.

Assuring High Level of Quality A concern among several market participants
we interviewed was the

for Internet Services is Difficult difficulty of guaranteeing customers a
given level of quality for Internet services. We were told that this
difficulty is related to the way that the

Internet is engineered. In particular, several of those with whom we spoke
noted that Internet traffic is exchanged among providers on a ?best efforts?
basis- that is, Internet traffic is routed according to a set of protocols
aimed at providing the best routing possible at a given time. However, the

Internet was not engineered to enable extremely high quality service at all
times- as are telephone networks- and the quality of Internet services can
be compromised when high levels of traffic flow lead to congestion. Several
of the market participants we interviewed were particularly concerned about
their ability to understand where and why problems have occurred. These
company representatives told us that when they contact their backbone
provider to report service degradation they are sometimes

told that the problem is with another interconnected backbone network.
Because the Internet is a network of interconnected networks with little
data available or reported on service disruptions or outages, finding the

source, cause, or reason for a problem may be difficult. Thus, ISPs and end
users expressed frustration that accountability for traffic transmission
problems is lacking. Several ISPs noted, for example, that they receive
service level guarantees from their backbone provider but that collecting
remuneration for ?downtime?- the time that a network has failed or otherwise
is nonfunctional- is difficult because they are unable to prove that the
problem occurred on their backbone provider?s network. One

backbone provider with whom we spoke also noted that the quality problems
inherent in the Internet lead some customers- particularly business clients-
to purchase expensive private network services. One of the initiatives of
the current and fifth Network Reliability and Interoperability Council (NRIC
V) is a trial program for voluntary reporting of outages by providers not
currently required to make such reports to FCC, such as Internet backbone
providers. 25 A focus group of the Council will evaluate the effectiveness
of the program upon its completion and

analysis of trial data, and it will make a recommendation on outage
reporting of these networks. We were told that, due to concerns by some
Internet providers about reporting network outages to a governmental 25
Reporting of certain outages of wireline common carrier networks is
currently required by FCC. No required reporting currently exists for
outages in wireless, satellite, cable, and data networks (backbone providers
and ISPs).

agency, 26 there was little participation in the program by Internet
providers through the first half of 2001.

The Internet Backbone Although the Internet backbone market appears to be
competitive, another

Market Does Not Exist market that is essential to the functioning of the
Internet may be less so.

Independently- Lack of Most ISPs and other end users connect to a backbone
provider?s point of

Competition for Local presence through the local telecommunications
infrastructure. These

systems are typically owned and operated by incumbent telephone Telephone
Services Affects

companies- those providing local telephone service prior to enactment of
Connectivity to Internet

the 1996 act. Many of the market participants with whom we spoke noted
Backbone Networks that local telephone markets are, in their view, close to
monopolistic; and some noted that several companies attempting to compete
against incumbent local telephone carriers have recently gone out of
business. Based on our interviews with market participants, it appears that
a limited choice of local carriers may affect the providers of Internet
services. In particular, interviewees stated that incumbent telephone
carriers take a long time to provision or provide maintenance on special
access services

and other high speed access lines- which are often used to link businesses
(such as an ISP) to an Internet backbone point of presence. 27 Additionally,
some companies we spoke with expressed concern about slow or limited

deployment of high- speed Digital Subscriber Line (DSL) service in
residential areas. 28 Some backbone providers and ISPs said that these
problems were more severe or more limiting in rural areas. For instance, we
were told that rural areas are least likely to have competitors to the local
carrier, and the incumbents were less likely to roll out DSL in their more
rural markets.

26 Outage reports by companies are made to the National Communications
System/ National Coordinating Center for Telecommunications and, maintaining
the confidentiality of the provider, passed on to NRIC V.

27 This would include high capacity lines such as T- 1s, T- 3s, and DS and
OS fiber lines. FCC issued a notice for public comment in January 2001 to
determine how competition for the provision of these special lines can be
best accomplished. Three of the four Bell Operating Companies submitted a
joint petition to FCC in 2001 seeking a determination that the market is
competitive and the special lines need not be subject to regulations under
the

Telecommunications Act of 1996. 28 For a discussion of the development and
deployment of DSL technology, see Telecommunications: Issues Related to
Local Telephone Service (GAO/ RCED- 00- 237, Aug. 31, 2000).

Incumbent local carriers, on the other hand, have stated that there is
considerable competition in the provision of special access service. One
such carrier with which we spoke noted that any delay in its own
provisioning of these lines is due to the high expense of deploying the
necessary infrastructure and to technical difficulties in rolling out DSL,
especially in more rural areas. This carrier also noted that FCC found the
percentage of all local lines served by competitors had doubled to
approximately 8 percent in 2000. 29

The Introduction of New Internet services, such as video streaming and voice
telephone calls New Services Over the

over the Internet, are expected to become increasingly common in the coming
years. Both Internet backbone networks and local Internet May Be
communications infrastructure must have sufficient bandwidth and Constrained
by Limits

technical capabilities to support such services. In response to problems of
in Capacity

latency and packet loss associated with Internet transmissions, various
initiatives and efforts are under way to make improvements in the
functioning of the Internet and to build alternative networks that are more
robust and reliable. We found that most of those with whom we spoke were
optimistic that backbone capacity and technical features would adapt

to new needs, but concern was expressed that limited broadband capabilities
in local telephone markets could stall certain new applications. Incumbent
local telephone companies have stated that the rollout of DSL service is
hampered by the cost of reengineering parts of the network and existing
regulations that require them to sell piece parts of their networks to
competitors at cost- based rates.

Two New Types of Services A variety of the company representatives with whom
we spoke told us that Are Expected to Be new services and some services that
were traditionally regulated (such as Introduced in the Coming telephone
calls) are expected to become more commonly provided over Years; These
Services May the Internet in the coming years. Many companies are developing
technologies to enable voice services to be provided over IP networks. At
Challenge the Capabilities

present, however, many backbone networks are not well designed to of
Communications

provision such ?time- sensitive? services. Specifically, real- time services
Networks such as IP telephony and interactive video require ?bounded
delays?- that is, these services require very low and uniform delays between
sender and

29 See FCC?s report Local Telephone Competition: Status as of December 31,
2000, issued May 21, 2001.

receiver in order for the service to be of adequate quality. Also, more
broadband content is expected to be transmitted over the Internet. Before
such broadband content can be provided, both the backbone and the local
communications infrastructure must have sufficient bandwidth. The Rollout of
TimeSensitive Many industry representatives with whom we met told us that
latency and

Service Will the loss of data packets due to traffic congestion is a
consequence of the Require Some Changes in

current protocols for transmitting Internet traffic. As transmissions of the
Way Data Traffic Is time- sensitive applications over the Internet become
increasingly common

in the future, these problems may become particularly acute. A few of Routed

those we interviewed noted that these applications can run well across one
backbone network, but when traffic must transverse across more than one
network, quality cannot be assured given current routing protocols. We found
that participants in Internet markets have begun to address latency and
reliability problems in Internet backbone networks. For example:  In
addition to its experimental outage reporting initiative, NRIC V is in the
process of evaluating and will report on the reliability of ?packet-
switched? networks. 30 The council is also examining issues related to
interconnection and peering of Internet backbone providers and the

sufficiency of the best efforts standard for Internet transmissions as more
time- sensitive services are provided over the Internet.  Companies have
emerged to build and provide services over networks

that do not rely as much on traffic exchange across networks. For example,
we found that a few providers are building and relying on private data
networks- rather than the Internet- for the transmission of voice services.
 Similarly, some companies are building ?virtual private networks?-
networks configured within a public network for data transmissions

that are secured via access control and encryption.  Companies reduce
reliance on backbone service- and thus increase transmission speed- by
caching frequently used content on their

servers. In addition, companies have emerged that specialize in caching
frequently accessed content and storing it in varied geographic locations,
thus making it more quickly accessible to customers.

30 Packet- switched networks employ a message delivery technique in which
data is split into packets- small pieces of information- and transmitted
separately over the most efficient pathway to their destination point where
they are reassembled.

 Because the Internet is not viewed as conducive to supporting research
capabilities of high- speed technologies and other advanced functions,
alternative methods for such research have emerged. For example, ?Internet2?
is a partnership of universities, industry, and government formed to support
research and the development of new technologies and capabilities for future
deployment within the Internet.

The Rollout of Broadband According to many of the company officials we
interviewed, there appears Content May Be to be ample deployment of fiber
optic cable in Internet backbone networks

Constrained by a Lack of to support high bandwidth services. Similarly, we
were told that capacity

Capacity in Local continues to be built by backbone providers and others and
that backbone networks? capacity will not be a bottleneck for the deployment
of

Telecommunications broadband applications. However, concerns were expressed
to us that Infrastructure

shortcomings in the local telephone market were likely to intensify in the
future due, in part, to the increase in demand for broadband applications
and content. We found that some companies are offering services to address
this problem by attempting to bypass incumbent telephone companies?
facilities and bring services directly to customers. However, the majority
of these efforts are focused on business customers in urban

areas. For example, we found:  Metropolitan fiber rings- fiber optic cables
encircling central business

districts of urban areas- are being constructed as an alternative to using
incumbent carrier services. Business customers purchase a direct connection
to the fiber ring, which is connected directly to the backbone point of
presence.  Wireless direct access is also becoming available that will
enable a

company?s data traffic to bypass local telecommunications infrastructures.

While solutions such as these hold promise for greater choice for business
customers in urban areas, market forces may not naturally address
constraints in capacity of local telecommunications infrastructure in
certain areas, particularly in rural, residential locations. Instead,
representatives expressed concern that the deployment of broadband telephone
facilities in residential and rural areas may not keep up with demand. Some
of those we spoke with gave the example of limited DSL deployment in many
areas.

An incumbent local telephone provider we spoke with stated that they are
aggressively rolling out DSL service, but that the service is costly to roll
out

and often requires significant reengineering of their networks. These
providers also have noted publicly that DSL rollout is hampered by certain
regulations that require incumbents to sell parts of their network
(including DSL lines) to entrants at cost- based rates. Legislation is
pending in the 107 th Congress that would address these concerns, and
proponents of this legislation have stated that this will advance the
deployment of broadband

in residential and rural areas. 31 Opponents of the legislation believe the
bill will not foster increased deployment of broadband services and may
stifle competition in the local telephone market. Other bills have been
introduced in Congress proposing various other approaches and strategies to
accelerate the deployment of high- speed data services. 32

Conclusion In the 6 years since the federal government ended its sponsorship
of a key backbone network, the Internet has changed the way people of the
world

live, work, and play. Its rapid growth is seen in the substantial
investments made by private sector firms in backbone networks and
interconnection facilities, by the proliferation of interactive applications
and content, and by the exponential increase in the connectivity of end
users. These developments are particularly noteworthy in light of the
dynamic nature of

the Internet backbone marketplace- Internet backbone providers not only
compete with each other for customers but also cooperate for the exchange of
traffic. The success of the Internet, as evidenced by its growth, evolution,
diversity, and cooperative structure, has occurred with minimal government
involvement or oversight.

Despite the Internet?s success and the competitiveness of the Internet
backbone market, several issues of concern regarding this market were raised
to us during the course of our study. Market participants noted the
importance of Tier 1 backbone providers and the potential for reduced
competition if consolidation were to occur at the Tier 1- provider level.
The

inability of backbone customers to ascertain the causes of service 31 See H.
R. 1542, the ?Internet Freedom and Broadband Deployment Act of 2001.? In
addition, this bill would allow the Bell Operating Companies (BOC) to
provide Internet backbone services within their service regions without
prior approval of the Commission as currently required in section 271 of the
Communications Act of 1934. BOCs can currently provide out- of- region
service. 32 For example, H. R. 1697 and H. R. 1698 would ensure the
application of antitrust laws against incumbent local telephone companies;
and S. 88 and H. R. 267 propose tax incentives for the deployment of
broadband services in low income and rural areas.

degradation or traffic disruptions was also expressed to us, along with
concerns about the adaptability of the Internet to new services. These and
other concerns underscore the need for adequate information on such items
as, for example, the geographic scope of backbone networks, the number of
backbone providers? customers, the number of IP addresses assigned to
providers, traffic flows, and outages. In the absence of adequate
information, it is difficult to fully ascertain the quality of service, the
reasons for problems when they occur, and the extent of market concentration
and competition in the Internet backbone market.

The adaptability of backbone networks for new services, such as
Internetbased voice and video services, foretell a trend commonly identified
as ?convergence? in the broader communications sector and the increasing
importance of the Internet to the U. S. economy. This expectation of

greater convergence was widely shared by the market participants we
interviewed for this study and for other studies we have conducted at your
request over the past 3 years. 33 There is a strong expectation that
traditionally regulated services- such as voice telephone and video

services- are already migrating to the Internet and will soon become common
applications used by residential and business Internet users. Moreover,
advances in technology are changing the very nature of the Internet. In the
last half decade, the Internet has evolved from a nascent but promising
information tool to a 21st century medium central to commerce and
communications for Americans and citizens the world over. The implications
of convergence and greater future reliance on the Internet are at present
largely unknown.

33 See Telecommunications: The Changing Status of Competition to Cable
Television (GAO/ RCED- 99- 158), July 1999; Telecommunications: Development
of Competition in Local Telephone Markets (GAO/ RCED- 00- 38), January 2000;
Telecommunications: Technological and Regulatory Factors Affecting Consumer
Choice of Internet Providers (GAO- 01- 93), October 2000.

No evidence came to light in the course of this study to suggest that the
long- standing hands- off regulatory approach for the Internet has not
worked or should be modified. Further, FCC said it believes that the
appropriate means to collect information on Internet backbone networks at
the present time is through informal and experimental efforts, which are

currently under way. Because of the trend towards convergence in the
communications marketplace and the nation?s increasing reliance on the
Internet, however, FCC may need to periodically reassess its data collection
efforts 34 to evaluate whether they are providing sufficient information
about key developments in this industry.

Recommendation FCC should develop a strategy for periodically evaluating
whether existing informal and experimental methods of data collection are
providing the

information needed to monitor the essential characteristics and trends of
the Internet backbone market and the potential effects of the convergence of
communications services. If a more formal data collection program is deemed
appropriate, FCC should exercise its authority to establish such a program.

Agency Comments We provided a draft of this report to the FCC, NTIA of the
Department of Commerce, and DOJ for their review and comment. FCC and NTIA
officials stated that they were in general agreement with the facts
presented in the report. Technical comments provided by FCC, NTIA and DOJ
officials were incorporated in this report as appropriate. As agreed with
your office, unless you publicly announce its contents earlier, we plan no
further distribution of this report for 14 days after the date of this
letter. At that time, we will send copies to interested congressional
committees, the Chairman, FCC; the Assistant Secretary of Commerce for
Communications and Information, Department of

Commerce; the Assistant Attorney General, Antitrust, DOJ; and other 34 In
its 2001 report, The Internet Coming of Age, the National Research Council?s
Committee on the Internet in the Evolving Information Infrastructure also
recommended that the ?present policy of nonregulation of the Internet should
be accompanied by close monitoring of the Internet?s structures and
operations by government, the Internet industry, and

Internet users to ascertain enduring trends and identify what problems, if
any, are due to persistent- as opposed to transient- phenomena.?

interested parties. We will also make copies available to others upon
request. If you have any questions about this report, please call me at 202-
512- 2834. Key contacts and major contributors to this report are listed in
appendix IV.

Peter Guerrero Director, Physical Infrastructure Issues

Appendi Appendi xes x I

Scope and Methodology To obtain information about the characteristics and
competitiveness of the Internet backbone market, the Chairman and the
Ranking Member of the Subcommittee on Antitrust, Business Rights and
Competition, Senate Committee on the Judiciary, asked us to report on (1)
the physical structure and financial arrangements among Internet backbone
providers, (2) the nature of competition in the Internet backbone market,
and (3) how this market is likely to develop in the future. To respond to
these objectives, we gathered information from a variety of sources,
including government officials, industry participants, and academics
familiar with the functioning of this market.

We interviewed officials and obtained documents from the Federal
Communications Commission, the Department of Justice, the National
Telecommunications and Information Administration of the Department of
Commerce, the National Science Foundation, the Bureau of Labor Statistics,
and the Census Bureau. We also interviewed two national

Internet industry trade associations and three academics with expertise in
this area. To obtain information from a wide variety of participants within
the Internet backbone market, we visited locations in 12 states with varying
characteristics. We included large and small cities and rural areas from
various regions of the country. Other criteria used for selection of areas

were proximity to Internet points of presence, which are access points to
the Internet, and proximity to network access points (NAP), which are points
where Internet backbones interconnect. Also considered were the presence of
other features, including regional backbone networks, statewide educational
or government networks, state Internet Service Provider (ISP) associations,
or Native American reservations.

In the selected localities, we conducted 55 semistructured interviews with
participants in the Internet backbone market between January and June 2001.
For these interviews, we used interview guides containing questions
concerning background information about the company, connectivity to
backbone networks, business relationships in the backbone market, service
quality issues, and views on competition in this market and on other public
policy issues. We interviewed

 eighteen Internet backbone providers of varying size;  two miscellaneous
Internet companies that provide backbone- like services;

 twenty- four Internet service providers of varying size;

 eight end users of backbone services, including a college, a state
government, corporations, and providers of content and Web hosting;  two
state- level ISP associations;  one Internet equipment manufacturer; and 
one incumbent local telephone company.

Responses from interviewees were evaluated and general themes were drawn
from the aggregated responses and from the aggregated responses of relevant
subsets of respondents. These themes are presented in this report. We
contacted an additional 32 market participants and industry representatives
for purposes of conducting interviews to support this study. In these
instances, we were not able to schedule an interview. In some cases, our
request for an interview was declined, our telephone contacts were not
returned, or we were unable to schedule an interview after repeated
discussions with company officials.

In addition to the information collected through interviews, we also
conducted technical, legal, and regulatory research on the characteristics
and competitiveness of the Internet backbone market.

Internet Protocol Addresses and Backbone

Appendi x II

Routing Each individual network or node that is connected to the Internet is
identified by an Internet Protocol (IP) address- a number that is typically
written as four numbers separated by periods, such as 10.20. 30.40 or
192.168. 1.0. When information is sent from one network or node to another,
the packet of information includes the destination IP address.

Because the IP deals with inter- networking- the exchange of information
between networks- the IP address is based on the concept of a network
address and a host address that uniquely identifies a computer connected to
the Internet. The network address indicates the network to which a computer
is connected, and the host address identifies the specific computer on that
network. Devices known as ?routers? send data packets from one network to
another by examining the destination IP address of each packet. In its

memory, the router contains a ?routing table? which contains information
specifying all of the IP addresses of other networks. The router compares a
packet?s destination IP address with the information contained in the
routing table to determine the network to which the packet should be sent.
In order to ensure that packets from one network can reach any other
network, the router must include an entry for each possible network. As more
and more network addresses come into use, there is concern about the growth
in the number of routing tables entries.

Historically, IP addresses were organized into three commonly used classes-
Classes A, B, and C. For Class A, there are 126 possible network addresses,
each with nearly 17 million hosts. Slightly more than 16, 000 networks may
have a Class B address, each with over 65, 000 hosts. Finally, there can be
approximately 2 million networks with a Class C address, each

with a maximum of 254 host addresses. As the Internet grew, engineers
quickly identified the problems associated with exhaustion of class B
addresses and the increasing number of Class C address entries in routing
tables and developed a solution known as Classless Inter- Domain Routing
(CIDR). CIDR treats multiple contiguous Class C addresses as a single block
that requires only one entry in a routing table. This method of IP address
allocation was adopted for technical efficiency reasons- the

number of IP addresses that must be maintained in each router for traffic
routing purposes is substantially reduced. However, this method of IP
address allocation presents unique problems for smaller ISPs and other
entities. If an entity seeking IP addresses cannot utilize a large block of

address issued by ARIN, the entity must obtain their addresses from among
the allocations made by ARIN to their Internet backbone provider. ISPs

and end users with whom we spoke expressed concern about method of IP
address allocation.

Appendi x II I GAO Contacts and Staff Acknowledgments GAO Contacts Peter F.
Guerrero, (202) 512- 2834 Amy Abramowitz, (202) 512- 4936 Dennis Amari,
(202) 512- 2512

Acknowledgments In addition to those named above, Naba Barkakati, John
Karikari, Faye Morrison, Lynn Musser, Madhav Panwar, Ilga Semeiks, and Mindi
Weisenbloom made key contributions to this report. (385880) Lett er

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GAO United States General Accounting Office

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Contents

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Appendix I Scope and Methodology

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Appendix II

Appendix II Internet Protocol Addresses and Backbone Routing

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Appendix III

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Correction Requested Presorted Standard

Postage & Fees Paid GAO Permit No. GI00
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