a

GAO

United States General Accounting Office

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

Page i GAO-02-16 Internet Backbone Market

Contents

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
Contents

Page ii GAO-02-16 Internet Backbone Market

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
Page 1 GAO-02-16 Internet Backbone Market

United States General Accounting Office

Washington, D.C. 20548

A

October 16, 2001 Letr

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. 
Page 2 GAO-02-16 Internet Backbone Market

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 
Page 3 GAO-02-16 Internet Backbone Market

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.
Page 4 GAO-02-16 Internet Backbone Market

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 Internet1

—

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.
Page 5 GAO-02-16 Internet Backbone Market

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

POP

POP

POP

POP

POP

New York

Denver

Seattle

Backbone A

Backbone B

Point of presence

Point of interconnection

Dallas

Atlanta

Los Angeles

Business

users

Business

users

Residential

users

ISP

ISP

Business

users

Residential

users

Chicago

San

Francisco
Page 6 GAO-02-16 Internet Backbone Market

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 network4

 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.
Page 7 GAO-02-16 Internet Backbone Market

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 

Arrangements of 

Interconnection 

Among Backbone 

Providers Vary

Two types of facilities are used for the exchange of data traffic by 

interconnected Internet backbone providers. The first type of facility, 

known as a “network access point” (NAP), enables numerous backbone 

providers to interconnect with each other at a common facility for the 

exchange of data traffic. Internet data traffic is also exchanged by 

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.
Page 8 GAO-02-16 Internet Backbone Market

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 

Exchanged Among 

Backbone Networks at Two 

Types of Interconnection 

Facilities: NAPs and Private 

Interconnection Points

A NAP facilitates the interconnection of multiple backbone providers.9 In 

the early to mid-1990s, the National Science Foundation designed and 

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

company. Since that time, other interconnection points have been 

constructed, and for purposes of this report, the term NAPs refers to 

approximately 10 major traffic exchange points that host backbone 

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. 

10In 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.

11When 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.
Page 9 GAO-02-16 Internet Backbone Market

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 

12However, three or more companies could decide to establish a private interconnection 

arrangement.

13Third-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.

14For 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.

15This analysis does not include one backbone provider with whom we spoke that was not 

yet providing service.
Page 10 GAO-02-16 Internet Backbone Market

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 

Internet Backbone 

Providers Occurs Under 

Two Types of Financial 

Arrangements: Peering and 

Transit

When the commercial Internet began, only a few major backbone providers 

of relatively similar size existed, each of which sent and received roughly 

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

them to view each other as “peers.” These providers elected to exchange 

traffic for free, rather than trying to measure the actual traffic exchanged 

and developing a payment method. In a peering arrangement, two 

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.

16A 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. 
Page 11 GAO-02-16 Internet Backbone Market

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

Providers

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 

Backbone

provider C

Backbone

provider A

Backbone

provider B

Peering
Page 12 GAO-02-16 Internet Backbone Market

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

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. 

Peering

Backbone

provider A

Backbone

provider B

Backbone

provider C

Transit ($

)
Page 13 GAO-02-16 Internet Backbone Market

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

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. 

Chicago New York

transfer

to other

backbone

transfer

to other

backbone

San Denver

Francisco

Web page

Seattle

End user

Backbone A

Backbone B

Point of interconnection
Page 14 GAO-02-16 Internet Backbone Market

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

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. 

transfer to 

large backbone

transfer to 

small backbone

Denver

Tulsa

Dallas

Atlanta

St. Louis

Los Angeles

San

Francisco

Web page

End user

End user

Backbone C

Backbone D

Point of interconnection
Page 15 GAO-02-16 Internet Backbone Market

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 

Competitiveness of the 

Backbone Market, 

Various Concerns Exist

No official data sources were identified that would provide information on 

the structure and competitiveness of the Internet backbone market. 

Market participants we interviewed—Internet backbone providers, ISPs, 

and other end users—described the Internet backbone market as 

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 

17Making 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.
Page 16 GAO-02-16 Internet Backbone Market

networks may be limited, creating problems for providers of Internet 

services.

Little Economic Data Are 

Available on Internet 

Backbone Networks

We found no official data source that could provide information to allow an 

empirical investigation of the nature of competition in the Internet 

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. 

18In 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.”

19On 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.
Page 17 GAO-02-16 Internet Backbone Market

Internet Backbone Market 

Appears Competitive; Many 

Market Niches Filled

To investigate the degree of competition, we spoke with an array of buyers 

and sellers of backbone connectivity and asked questions that were 

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. 
Page 18 GAO-02-16 Internet Backbone 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 

Backbone Market, Several 

Market Participants 

Expressed Various 

Concerns

The majority of market participants with whom we spoke expressed the 

view that the Internet backbone market is competitive, if not highly 

competitive. At the same time, many of these respondents noted factors 

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 

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 

Providers

ISPs and other end users indicated to us a general perception that Tier 1 

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 

20For 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.
Page 19 GAO-02-16 Internet Backbone 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 

Backbone Connectivity in Rural 

Areas May Have Fewer Providers 

From Which to Choose

Members of Congress are often concerned about whether 

telecommunications services reach rural areas. Several representatives of 

companies we interviewed noted that there are less Internet backbone 

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 

21A 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.
Page 20 GAO-02-16 Internet Backbone Market

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.

22Purchase of transport to distant locations also occurred among companies located in more 

urban areas.

23Responding 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). 
Page 21 GAO-02-16 Internet Backbone Market

Many ISPs and End Users Feel 

Tied to Their Backbone Provider 

Because of IP Address 

Allocations

Several ISPs and end users with whom we spoke expressed concern about 

the manner in which Internet addresses are allocated. Most ISPs and other 

end users—except for fairly large organizations—do not directly obtain 

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.

24Although 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.
Page 22 GAO-02-16 Internet Backbone Market

Assuring High Level of Quality 

for Internet Services is Difficult

A concern among several market participants we interviewed was the 

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 

25Reporting 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).
Page 23 GAO-02-16 Internet Backbone Market

agency,26 there was little participation in the program by Internet providers 

through the first half of 2001.

The Internet Backbone 

Market Does Not Exist 

Independently—Lack of 

Competition for Local 

Telephone Services Affects 

Connectivity to Internet 

Backbone Networks

Although the Internet backbone market appears to be competitive, another 

market that is essential to the functioning of the Internet may be less so. 

Most ISPs and other end users connect to a backbone provider’s point of 

presence through the local telecommunications infrastructure. These 

systems are typically owned and operated by incumbent telephone 

companies—those providing local telephone service prior to enactment of 

the 1996 act. Many of the market participants with whom we spoke noted 

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. 

26Outage 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.

27This 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. 

28For 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).
Page 24 GAO-02-16 Internet Backbone Market

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 Services Over the 

Internet May Be 

Constrained by Limits 

in Capacity

New Internet services, such as video streaming and voice telephone calls 

over the Internet, are expected to become increasingly common in the 

coming years. Both Internet backbone networks and local 

communications infrastructure must have sufficient bandwidth and 

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

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 

Are Expected to Be 

Introduced in the Coming 

Years; These Services May 

Challenge the Capabilities 

of Communications 

Networks

A variety of the company representatives with whom we spoke told us that 

new services and some services that were traditionally regulated (such as 

telephone calls) are expected to become more commonly provided over 

the Internet in the coming years. Many companies are developing 

technologies to enable voice services to be provided over IP networks. At 

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

provision such “time-sensitive” services. Specifically, real-time services 

such as IP telephony and interactive video require “bounded delays”—that 

is, these services require very low and uniform delays between sender and 

29See FCC’s report Local Telephone Competition: Status as of December 31, 2000, issued 

May 21, 2001.
Page 25 GAO-02-16 Internet Backbone Market

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 Service Will 

Require Some Changes in 

the Way Data Traffic Is 

Routed

Many industry representatives with whom we met told us that latency and 

the loss of data packets due to traffic congestion is a consequence of the 

current protocols for transmitting Internet traffic. As transmissions of 

time-sensitive applications over the Internet become increasingly common 

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

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 “packetswitched” 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.

30Packet-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. 
Page 26 GAO-02-16 Internet Backbone Market

• 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 

Content May Be 

Constrained by a Lack of 

Capacity in Local 

Telecommunications 

Infrastructure

According to many of the company officials we interviewed, there appears 

to be ample deployment of fiber optic cable in Internet backbone networks 

to support high bandwidth services. Similarly, we were told that capacity 

continues to be built by backbone providers and others and that backbone 

networks’ capacity will not be a bottleneck for the deployment of 

broadband applications. However, concerns were expressed to us that 

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 
Page 27 GAO-02-16 Internet Backbone Market

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 

107th 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 

31See 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.

32For 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.
Page 28 GAO-02-16 Internet Backbone Market

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.

33See 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.
Page 29 GAO-02-16 Internet Backbone Market

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 efforts34 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 

34In 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.”
Page 30 GAO-02-16 Internet Backbone Market

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
Page 31 GAO-02-16 Internet Backbone Market
Page 32 GAO-02-16 Internet Backbone Market

Appendix I

Scope and Methodology ApApenednxidexiIs

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;
Appendix I

Scope and Methodology

Page 33 GAO-02-16 Internet Backbone Market

• 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.
Page 34 GAO-02-16 Internet Backbone Market

Appendix II

Internet Protocol Addresses and Backbone 

Routing ApendxiI

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 
Appendix II

Internet Protocol Addresses and Backbone 

Routing

Page 35 GAO-02-16 Internet Backbone Market

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

address allocation. 
Page 36 GAO-02-16 Internet Backbone Market

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

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) Letr
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