Telecommunications: Characteristics and Competitiveness of the Internet Backbone Market
Published: 2001-10-16T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: 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 Internet's core are many high-capacity, long-haul "backbone" networks that route data traffic over long distances using high-speed fiber lines. Internet backbone providers 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 with which 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.

section_title: Letter
paragraphs: 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 high- capacity, long-haul "backbone" networks operate in a somewhat  paradoxical context.  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 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).
subsections: section_title: Background
paragraphs: 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— such as through a cable television line—are becoming increasingly  common.  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.
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).
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 and many other regional backbones.   Approximately five to eight of these national providers are considered to be  “Tier 1” backbone providers.  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.
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.  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.  Additionally, the act  provided FCC and states the authority to take actions to encourage the  deployment of advanced telecommunications capability.
section_title: Facilities and Financial Arrangements of Interconnection Among Backbone Providers Vary
paragraphs: 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  provider to another for the mutual exchange of traffic and for the delivery  of traffic to other providers, have become more common with time.
subsections: section_title: Internet Data Are Exchanged Among Backbone Networks at Two Types of Interconnection Facilities: NAPs and Private Interconnection Points
paragraphs: A NAP facilitates the interconnection of multiple backbone providers.  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.  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).  For example, one backbone provider told  us that the loss of packets at some NAPs had sometimes reached 50  percent.
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.  The parties interconnect their  networks at any feasible location, such as a facility of one of the  providers.  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, 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 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  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.
section_title: Interconnection Among Internet Backbone Providers Occurs Under Two Types of Financial Arrangements: Peering and Transit
paragraphs: 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.  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.
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.
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.
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.
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.
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.
section_title: Despite Competitiveness of the Backbone Market, Various Concerns Exist
paragraphs: 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  networks may be limited, creating problems for providers of Internet  services.
subsections: section_title: Little Economic Data Are Available on Internet Backbone Networks
paragraphs: 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.  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.  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.
section_title: Internet Backbone Market Appears Competitive; Many Market Niches Filled
paragraphs: 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.
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.
section_title: Despite Competitiveness of Backbone Market, Several Market Participants Expressed Various Concerns
paragraphs: 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.
subsections: section_title: Tiering of Internet Backbone Providers
paragraphs: 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  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.
section_title: Companies Purchasing Backbone Connectivity in Rural Areas May Have Fewer Providers From Which to Choose
paragraphs: 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  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.  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.
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.
section_title: Many ISPs and End Users Feel Tied to Their Backbone Provider Because of IP Address Allocations
paragraphs: 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.  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.
section_title: Assuring High Level of Quality for Internet Services is Difficult
paragraphs: 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.  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  agency, there was little participation in the program by Internet providers  through the first half of 2001.
section_title: The Internet Backbone Market Does Not Exist Independently—Lack of Competition for Local Telephone Services Affects Connectivity to Internet Backbone Networks
paragraphs: 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.  Additionally,  some companies we spoke with expressed concern about slow or limited  deployment of high-speed Digital Subscriber Line (DSL) service in  residential areas.  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.
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.
section_title: The Introduction of New Services Over the Internet May Be Constrained by Limits in Capacity
paragraphs: 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.
subsections: section_title: Two New Types of Services Are Expected to Be Introduced in the Coming Years; These Services May Challenge the Capabilities of Communications Networks
paragraphs: 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  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.
section_title: The Rollout of Time- Sensitive Service Will Require Some Changes in the Way Data Traffic Is Routed
paragraphs: 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 “packet-  switched” networks.  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.
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.
section_title: The Rollout of Broadband Content May Be Constrained by a Lack of Capacity in Local Telecommunications Infrastructure
paragraphs: 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  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.  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.
section_title: Conclusion
paragraphs: 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  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 Internet- based 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.  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.
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 to evaluate whether they are providing sufficient  information about key developments in this industry.
section_title: Recommendation
paragraphs: 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.
section_title: Agency Comments
paragraphs: 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  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.
section_title: Scope and Methodology
paragraphs: 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   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.
section_title: Internet Protocol Addresses and Backbone Routing
paragraphs: 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.
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: 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.
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section_title: Public Affairs