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Do Internet Addresses Have a Value?

By Geoff Huston
gih@telstra.net

Within the Classless Inter-Domain Routing Protocol Deployment (CIDRD) Working Group of the Internet Engineering Task Force (IETF) during 1995 and 1996, the assertion has been made that Internet addresses are themselves without intrinsic value and that it is the addition of routing onto those addresses, within the context of the global Internet, that constitutes the process that adds value to the underlying numeric address. In other words, the address itself is just a numeric value, and as a numeric value it has no special significance or economic value.

The opposing view is that that assertion reflects an incomplete model of the role of the address space within the Internet domain and that it does not intrinsically match the wide diversity of demand for address components of the global Internet address space. The argument presented here is that Internet addresses drawn from the global Internet address space do have an intrinsic economic value and that the task of public distribution of this common resource should take that into account.

How Much Are IP Addresses Worth?

If the assertion of intrinsic value is accepted, then the immediate corollary is the quest to establish the particular value of a particular address component drawn from the global Internet address pool. It is not, however, possible to make such an assertion of economic value and map this to a constant unit value to which all parties will subscribe. The major point highlighted here is that each party's estimation of the economic value will vary depending on each party's ultimate requirement for the address space, given that address space is not an end in itself but a means to exploit the associated Internet technology and Internet connectivity environment, and the estimated value of that activity relates to the estimation of economic value of the address space itself for that party. Accordingly, the valuation of any particular address component will vary.

One way to express that valuation is by the relationship (Value of an Address Component) = [(Value of Uniqueness + the (Value of Routability) + (Value of Contiguous Size)] x (Perceived Utility Factor). This relationship attempts to capture the value components that must be considered, which include the following.

Value of Uniqueness: This is the value ascribed to the uniqueness attribute of the address block. Here uniqueness is not only uniqueness across the global Internet but also uniqueness across the global registry environment such that any two parties can interconnect privately or publicly and use distinct addresses as long as both parties are effective clients of the registries' service of the allocation of unique addresses.

Value of Routability: Recent discussions within the IETF CIDRD Working Group related to the identification of the critical resource of scaling the Internet have highlighted (1) the issue of the efficiency of the so called core-or perhaps more appropriately described as default-free-routers in undertaking both the support of a default-free address prefix forwarding table and (2) the support of allowing dynamic updates to the forwarding table through the actions of the deployed routing protocols. The conclusions from these observations are that it is no longer the case that any arbitrary address prefix can be routed across the global Internet from any arbitrary location and that there is a set of thresholds- defined by available technologies-that limits both the number of distinct address prefixes and that also limits the aggregate number of updates within a unit of time to the table of all such distinct prefixes. Thus the value placed on routing within the global Internet environment is dependent both on the importance, or value of connectivity to the global Internet while using the address block as the routed entity and on the capability of the Internet routing environment to add this entry into the global routing tables.

Value of Contiguous Size: The size of the address block also affects the Ultimate value calculation. A large contiguous block can be used to serve a large-end client base with relative ease, whereas sets of small discontiguous address blocks may entail continuous renumbering or the deployment of a significantly more complex routing environment in order to achieve comparable functional outcomes.

Utility Factor: The above-described value factors are concerned with the address space itself. For any party the ultimate value calculation also includes consideration of the nature of the ultimate function or service for which the address space is required, and this utility factor can be regarded as a multiplicative factor applied to the intrinsic value calculation for the address space itself.

The outcome of this examination of the value factors for an address component is that although a method of deriving the value of address space for any individual exists, there is no underlying constant value in the sense that many goods have a quantifiable cost of production that can be equated to an intrinsic value of the goods. In the case of Internet addresses there is no readily quantifiable cost of production, although there are quantifiable values of exploitation. Accordingly, the local circumstances of routing configurability, connectivity cost, utilization value, and similar deployment cost factors are what determine the value of a particular address component within that context, and either moving to another context with a constant address prefix or considering a different address prefix in a constant environment may well result in a different value outcome.

Thus these factors of valuation of an address component will vary for each party, and to assert that an address component has a particular value for one party does not imply the same valuation for all parties.

Market Determination of Value

The market approach to valuation of a commodity indicates that market value is established by selling the commodity within an open marketplace. The current value of the commodity is effectively determined by the selling price obtained at the market.

The scenario of market-determined value is not uncommon for many marketed commodities. The value determined in a trading market shows some variation in line with individual trading transactions, when an individual transaction exhibits some of the valuation factors as seen in the circumstances of the seller and the buyer. In such an environment, overall average trading price levels have some relationship to perceived levels of supply and demand within the market. In general, current price of a commodity is determined by the dynamic trading environment. In a truly open and nonmanipulated market, price exhibits the basic cost of production and also reflects the secondary factors of demand over supply and possibly exhibits scarcity factors. In such a marketplace, rising demand is initially reflected in high prices, which then trigger increased supply, which in turn brings the price back to the basic trading cost, which is directly related to the production cost of the commodity. Within that environment there is no set price for a commodity; the market transactions set a level of expectation for the trading price of future transactions, but the ultimate determinant of value is the closure of a transaction at a nominated price.

So if I could sell addresses, maybe I should hoard them instead?

In a finite resource market with escalating demand, the market price starts to exhibit a scarcity premium, in which the scarcity premium is related to the level of demand over supply.

The major characterization of the Internet address space is the visibly finite nature of the resource. Some 25 percent of the address space has been allocated to serviced entities, and with the exponential nature of the demand for the resource, some administrative control is essential to prevent a perceived, scarcity-induced hoarding run on the remaining resource.

Hoarding takes the form of buying early and of controlled selling of the commodity when the market rises. Such market manipulation is by no means a novel practice, and various attempts to control market supply have met with various levels of success and failure among other commodities in the past. Hoarding and speculative buying can be used to establish a monopoly position and thereby exert complete control over supply and hence control over market price. For example, this has been a historical feature of the wholesale diamond market. However, the Internet address market would be somewhat resilient against this type of attempt to exert control over supply. The relevant feature of the Internet environment is that the use of a single IP address can be multiplexed across multiple systems and applications through the deployment of application gateways and address translation technologies.

Such alternative approaches also have a cost and do not admit to the same level of functional flexibility. However, for potential purchasers in an Internet address market, if the market valuation of address space exceeds the valuation of the cost of deployment of alternative technologies, then the alternative access technology will be used. This then establishes an upper bound on the market price of Internet addresses and renders the practice of hoarding a suboptimal approach.

And yet there is no market in Internet addresses today. However, this market-based approach to the issue of fair distribution of public Internet address space is certainly at odds with the current administrative structures used within the Internet. Three registries-in North America, Europe, and Asia-assign addresses to applicants without direct cost to applicants. From a market perspective that practice essentially prevents the formation of a market in addresses and, perhaps oddly, leads to suppression of the use of alternative technologies through this administrative structure. But, as the address pool managed by the registries shrinks through their allocation of addresses to applicants, the inevitable result after increased demand is one of inevitable exhaustion of the registries' pool of allocatable addresses. Once that occurs, a market in Internet addresses will inevitably open, and there will arise a turbulent period while the market stabilizes into a steady state of trading supplemented by more widespread use of alternative address translation technologies.

The transitional instability could be eased, or possibly completely circumvented, by graduated introduction of a market approach to address distribution by using components of the currently allocated address space as the initial market pool.

Will the next version of the Internet protocol get around this problem?

Of course there is the view that the efforts to transition to the next version of IP-version 6-will circumvent these issues through the use of a significantly larger address pool (as the address space is a 128-bit numeric value) in which exhaustion of address space is a highly remote possibility. Such may be the case, but the issue remains that in the current Internet market this version of the Internet protocols is effectively yet another alternative technology, and, as pointed out earlier, the market for alternative technologies will not mature sufficiently for broad deployment until current Internet address space has a more rational basis for economic valuation.

And although it may appear to be contradictory at first glance, widespread adoption of the next generation of Internet protocols will probably be more dependent on addressing current weaknesses in the existing administrative mechanisms related to distribution of current Internet addresses than on the market's perception of the maturity and robustness of this next generation of Internet technology.

Postscript

The topic of Internet addresses and routing protocol has been the subject of a number of Internet documents and related activity within the IETF. The Internet Request for Comment document RFC 1744 discusses the issues in greater depth, and the IETF Internet Registry Evolution Working Group is working on them at present.

Geoff Huston was an inaugural trustee of the Internet Society and currently serves as the society's secretary. He has been an active participant in the IETF for some years and has been closely involved in the development of the Internet in Australia, where he resides.

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