Is the transition to IPv6 a market failure? - Labs

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An Economic Perspective on
the Transition to IPv6
Geoff Huston
APNIC R&D
October 2010
The Fine Print: I am not a economist in terms of my
professional qualifications or by virtue of my work
experience. Worse still, I think I fit in to the category
of amateur economic dilettante! So most of what I
offer here I do so tentatively, as it probably needs a
little more rigor and precision in basic economic
A “conventional” view of IPv6 transition:
“The minister for communications and information technology does not
believe that regulatory intervention is appropriate. Adoption of IPv6 needs
to be lead by the private sector. The private sector must recognise that
adopting IPv6 is in their own best interests to protect their investment in
online capabilities into the future. Issues of advantages and
disadvantages, costs, risks, timing, methodology etc, have to be for each
enterprise to assess for itself.”
Statement by the New Zealand Minister for Communications
24 August 2009
In other words:
Self interest on the part of consumers and producers
will cause the market to sustain the transition to IPv6
This is not an instance of a “market failure”
There is no need for public sector intervention in the
operation of the Internet, nor in this transition in
particular
Lets explore these assertions with:
some data
some experience
some perspectives
and a little economic theory
The IPv6 Transition Plan
IPv4 Pool Size
Size of the Internet
IPv6 Deployment
IPv6 Transition – Dual Stack
Time
Obligatory IPv4 Exhaustion Slide
IPv4 Allocated Addresses
IPv4 Advertised Addresses
IANA Free Pool
IANA Exhaustion
June 2011
First RIR Exhaustion
January 2012
Measured IPv6 Deployment
3%
2%
2%
1%
2004
2006
2008
2010
Data from http://www.apnic.net
Measured IPv6 Deployment - 2010
7%
5%
3%
1%
April
June
August
October
From http://www.potaroo.net/stats/1x1
What is this telling us?
• If we want to avoid the “hard edge” of
exhaustion of IPv4 addresses we need to
complete the transition to IPv6 across most of
the network before we run out of the
unallocated pool
• We need to get end system and service IPv6
capability up from ~5% of the network today
to ~90 % by January 2012
The IPv6 Transition Plan - V2.0
IPv4 Pool Size
Size of the Internet
IPv6 Transition – Dual Stack
IPv6 Deployment
2004
2006
2008
18 months!
2010
Date
2012
The IPv6 Transition Plan - V2.1
IPv4 Pool Size
Size of the Internet
IPv6 Transition – Dual Stack
IPv6 Deployment
2004
2006
2008
12 months!
2010
Date
2012
Is this Plan Feasible?
Deploy IPv6 across some 1.7 billion users,
with more than a billion end hosts.
Is this Plan Feasible?
Deploy IPv6 across some 1.7 billion users,
with more than a billion end hosts, and
upgrade hundreds of millions of routers,
firewalls and middleware units.
Is this Plan Feasible?
Deploy IPv6 across some 1.7 billion users,
with more than a billion end hosts, hundreds
of millions of routers, firewalls and
middleware units, and audit billions of lines of
configuration codes and filters.
Is this Plan Feasible?
Deploy IPv6 across some 1.7 billion users,
with more than a billion end hosts, hundreds
of millions of routers, firewalls and
middleware units, audit billions of lines of
configuration codes and filters, and audit
hundreds of millions of ancillary support
systems.
Is this Plan Feasible?
Deploy IPv6 across some 1.7 billion users,
with more than a billion end hosts, hundreds
of millions of routers, firewalls and
middleware units, audit billions of lines of
configuration codes and filters, and audit
hundreds of millions of ancillary support
systems - all within the next 360 days.
What is Feasible?
What is Feasible?
What about if we remove the time constraint?
What if we let the unallocated IPv4 address pool run
out while we still remain critically dependant on IPv4
in the Internet?
What is Feasible?
What about if we remove the time constraint?
What if we let the unallocated IPv4 address pool run
out while we still remain critically dependant on IPv4
in the Internet?
Does adding the factor of a fully depleted IPv4
address pool make this transition harder or does it
provide additional incentive for industry players?
Added Impetus?
Will the potential pressure from IPv4 address
exhaustion provide sufficient pressure for transition?
Or will we need to encounter the reality of a fully
depleted environment and take on the additional risk
of added elements of supply disruption into the
transition scenario?
Risk Factors
Investors tend towards current risk aversion:
– will chose a lower risk alternative when presented
with otherwise equivalent choices
– willing to accept a lower return with a higher
degree of certainty
– willing to defer choosing a high risk strategy even
if deferral implies higher total cost
The IPv6 Transition Plan
What Happened?
This is a case of Risk Defe
IPv4 Pool Size
Size of the Internet
IPv6 Transition – Dual Stack
Time
IPv6 Deployment
Lessons from the Past
If this transition to IPv6 is proving challenging,
then how did we ever get the IPv4 Internet up
and running in the first place?
IPv4 Deployment Lessons
Technology: packet switching vs circuit switching
– lower network costs though pushing of
functionality and cost to end systems exposed a
new demand schedule for communications
services
Price
The Demand Schedule
Quantity
Price
The Demand Schedule: Consumers
demand(Circuits)
Quantity
Price
The Demand Schedule: Producers
supply(Circuits)
Quantity
Price
The Demand Schedule:
Equilibrium Point
d(C)
s(C)
Market equilibrium point of supply and d
p(Circuits)
q(Circuits)
Quantity
Price
Circuits to Packets:
The Demand Schedule Shift
d(C)
s(C)
reduced cost of supply
p(Circuits)
s(IP)
q(Circuits)
Quantity
Price
Circuits to Packets:
The Demand Schedule Shift
d(IP)
d(C)
s(C)
increased perception of value
p(Circuits)
q(Circuits)
Quantity
Price
Circuits to Packets:
The Demand Schedule Shift
d(IP)
d(C)
s(C)
reduced cost of
supply, and increas
perception of value
s(IP) resulting in a new
equilibrium point w
higher quantity and
lower unit price
p(Circuits)
p(IP)
q(Circuits)
q(IP)
Quantity
IPv4 Deployment Lessons
Technology: packet switching vs circuit switching
– lower network costs though pushing of
functionality and cost to end systems exposed a
new demand schedule for communications
services
i.e. packet switching was far cheaper than circuit
switching. This drop in cost exposed new
market opportunities for emergent ISPs
IPv4 Deployment
Business: exposed new market opportunity in a market that was
actively shedding many regulatory constraints
– exposed new market opportunities via arbitrage of circuits
• buy a circuit, resell it as packets
– presence of agile high-risk entrepreneur capital willing to exploit short
term market opportunities exposed through this form of arbitrage
– volume-based suppliers initially unable to redeploy capital and process
to meet new demand
• unable to cannibalize existing markets
• unwilling to make high risk investments
The Internet has often been portrayed as the
“poster child” for deregulation in the
telecommunications sector in the 1990’s.
The rapid proliferation of new services, the
creation of new markets, and the intense level
of competition in every aspect of the Internet
is seen as a successful outcome of this policy
of deliberate disengagement by the regulator.
But is this still true today?
Do we still see intense competition in this
industry? Is there still strong impetus for
innovation and entrepreneurial enterprise?
Will this propel the transition to IPv6?
Do we still see intense competition in this
industry? Is there still strong impetus for
innovation and entrepreneurial enterprise?
Will this propel the transition to IPv6?
Or is this industry lapsing back into a mode of
local monopolies, vertical bundling and strong
resistance to further change and innovation?
How “Balanced” is this industry?
OR
A diverse connection
of large and small
ISP enterprises
A small number of very
large enterprises and
some very small
independent players left
hanging on for the ride
What can IPv4 address allocation data tell
us about this industry?
How “Big” is this Industry?
IPv4 RIR Address Allocations
200 million
new service
per year
14
12
10
8
6
4
2
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
The Internet’s major growth has happened AFTER the Intenet
“boom” of 1999 to 2001
Who got all those addresses in 2009?
Ran
k
Company
IPv4 addresses (M)
1
CN
China Mobile Communications Corporation
8.39
2
US
AT&T Internet Services
6.82
3
CN
China TieTong Telecommunications Corporation
4.19
4
CN
Chinanet Guandong Province Network
4.19
5
KR
Korea Telecom
4.19
6
CN
North Star Information Hi.tech Ltd. Co.
4.19
7
JP
NTT Communications Corporation
4.19
8
US
Verizon Internet Services Inc.
3.78
9
US
Sprint Wireless
3.54
10
CN
China Unicom Shandong Province Network
2.10
11
CN
Chinanet Jiangsu Province Network
2.10
12
CN
Chinanet Zhejiang Province Network
2.10
13
FR
LDCOM Networks (France)
2.10
14
IT
Telecom Italia
2.10
15
US
Comcast
1.90
Who got all those addresses in 2009?
Ran
k
Company
IPv4 addresses (M)
1
CN
China Mobile Communications Corporation
8.39
2
US
AT&T Internet Services
6.82
3
CN
China TieTong Telecommunications Corporation
4.19
25% of all the IPv4 addresses
allocated in 2009 went to just
15 ISP enterprises
4
CN
Chinanet Guandong Province Network
4.19
5
KR
Korea Telecom
4.19
6
CN
North Star Information Hi.tech Ltd. Co.
4.19
7
JP
NTT Communications Corporation
4.19
8
US
Verizon Internet Services Inc.
3.78
9
US
Sprint Wireless
3.54
10
CN
China Unicom Shandong Province Network
2.10
11
CN
Chinanet Jiangsu Province Network
2.10
12
CN
Chinanet Zhejiang Province Network
2.10
13
FR
LDCOM Networks (France)
2.10
14
IT
Telecom Italia
2.10
15
US
Comcast
1.90
How “Balanced” is this Industry?
Largest 1% of ISPs
60
% of Allocated Addresses
50
40
30
20
10
0
1999
2000
2001
2002
2003
2004
2005
Year
2006
2007
2008
2009
2010
How “Balanced” is this Industry?
Largest 1% of ISPs
60
% of Allocated Addresses
50
40
30
20
10
0
1999
2000
2001
2002
2003
2004
2005
Year
2006
2007
2008
2009
2010
Massive consolidation in this industry appears to have been in place since 2
How “Balanced” is this industry?
A small number of very
large enterprises and
some very small
independent players left
hanging on for the ride
Size of the Internet
IPv4 Deployment Then
~1990
Small ISP
(Entrepreneur
Sector)
Time
~1995
High Volume
Provider
Industry
(Telco
~2000
Sector)
IPv4 Deployment
Business: exposed new market opportunity in a market that
was actively shedding many regulatory constraints
– exposed new market opportunities via arbitrage of circuits
• buy a circuit, resell it as packets
– presence of agile high-risk entrepreneur capital willing to exploit
short term market opportunities exposed through this form of
arbitrage
– volume-based suppliers initially unable to redeploy capital and
process to meet new demand
• unable to cannibalize existing markets
• unwilling to make high risk investments
• the maturing market represented an opportunity for large scale
investment that could operate on even lower cost bases through
economies of scale
Size of the Internet
IPv4 Deployment Now
~1990
Small ISP
(Entrepreneur
Sector)
Time
High Volume
Provider
Industry
(Telco
Sector)
~2005
Back to IPv6 Transition…
What about IPv6 Transition?
Will the same technology, cost and regulatory
factors that drove the deployment of the IPv4
Internet also drive this industry through the
transition from IPv4 to IPv6?
IPv6 vs IPv4
Are there competitive differentiators?
✗ cost4 = cost6
✗ functionality4 = functionality6
no inherent consumer-visible difference
no visible consumer demand
no visible competitive differentiators other
than future risk
Price
IPv4 to Dual Stack:
The Demand Schedule Shift
DV4
SV4
PV4
QDualStack
QV4
Quantity
Price
IPv4 to Dual Stack:
The Demand Schedule Shift
Supply
side cost
increase
due to
Dual
Stack
operation
DV4
SDualStack
SV4
PV4
QV4
Quantity
Price
IPv4 to Dual Stack:
The Demand Schedule Shift
Supply
side cost
increase
due to
Dual
Stack
operation
DV4 / DualStack
SDualStack
SV4
PV4
QV4
No
change in
perceptio
n of value,
so
demand
schedule
is
Quantity
unaltered
Price
IPv4 to Dual Stack:
The Demand Schedule Shift
Supply
side cost
increase P
due to
Dual
Stack
operation
DV4 / DualStack
No
change in
S
perceptio
n of value,
S
so
demand
schedule
is
Q
Q
Quantity
unaltered
Equilibrium point is at a lower quantity if
Dual Stack supply costs are passed on to
DualStack
DualStack
V4
PV4
DualStack
V4
“Market Failure”
Wikinomics:
“In economics, a market failure exists when the production or use of goods and services by
the market is not efficient. That is, there exists another outcome where market participants'
overall gains from the new outcome outweigh their losses (even if some participants lose
under the new arrangement). Market failures can be viewed as scenarios where individuals'
pursuit of pure self-interest leads to results that are not efficient – that can be improved
upon from the societal point-of-view. The first known use of the term by economists was in
1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick.”
http://en.wikipedia.org/wiki/Market_failure
The Transition to IPv6
Alternatively, is this transition an instance of a
market failure?
Individual self-interest leads to inefficient
supply outcomes, as self-interest does not
lead the installed based of consumers and
suppliers to underwrite the cost of dual stack
operation within the transition
IPv6 Transition as a Public Good?
Is the transition to IPv6 is non-excludable and non-rivalrous?
In which case this transition issue parallels that of a public good
With an implication that conventional market dynamics in a
deregulated environment will not lead to this transition being
undertaken
And a corollary that if this transition is considered to be
necessary or essential then some form of public good solution
needs to be considered
Public Good “solutions”
There are a number of conventional approaches
to the distribution of a public good:
– Assurance contracts
– Coasian solutions
– Government enterprise provisioning
– Tariffs
– Subsidies
– Taxation remedies
– Regulatory impost
Regulatory Impost
• A regulatory constraint is placed on the ISP
carrier licence holders that IPv6 services are to
be provided by a given deadline
– as has happened with digital television in many
regulatory regimes.
• This regulatory constraint acts a form of a
assurance contract, where all providers are in
effect bound to produce a particular solution
Government Purchase Contracts
• Where the public sector collectively require the provision in
IPv6 in all their service contracts.
• This is a form of a coasian solution where a group of potential
beneficiaries pool together their willingness to pay for the
public good.
– We have seen this approach in the past with the Government OSI
Profiles (GOSIP) of the late 1980's when the approach proved
ineffectual.
– There is no assurance that such collective actions on the part of the
public sector have sufficient mass and momentum to create a broader
sustainable market that will impel the private sector to undertake the
transition.
Subsidies and Incentives
• Where the production of the good is subsidised in some
fashion by public funds
– This can be in the form of direct payments to service providers, or in
the form of vouchers to consumers which can be redeemed only in
exchange for the supply of a specified service.
• Related incentive measures include the use of taxation
incentives related to infrastructure investment, where the
investment in a certain class of infrastructure or in a certain
sector can be provided with advantaged taxation treatment.
Public Provision
• Where the service is provided by a publically-owned
enterprise.
• The funding for such an enterprise can be provided by
government-backed investment bonds, or directly from public
revenues, and operating losses are underwritten by the public
purse.
– This measure was used for most national telephone service providers
for a significant part of the twentieth century, so it is not exactly a
completely foreign concept for this industry.
Price
Post-Exhaustion:
Adding CGNs to IPv4
DV4
DCGNs
Supply
side cost
increase
due to
Dual
Stack
operation
SCGNs
PCGNs
SV4
PV4
QCGNs
QV4
CGNs reduce
functionality
and
impair the
performance
of some
applications
Quantity
CGNs represent higher cost and lower
value for customers
Price
IPv4/CGNs + Dual Stack
The Demand Schedule Shift over Time
DV4
DCGNs
As NAT
compressio
n becomes
more
intense the
IPv4 CGN
approach
become
decreasingl
y viable
SCGNs
IPv4
SV4
CGN
QCGNs
QV4
Quantity
What is Happening Here?
• Given that Dual Stack requires IPv4, and IPv4 is the critically
scarce good here, are we wedging ourselves?
• Are there alternate directions for this industry that represent
lower risk and/or increased opportunities for the larger class
of actors?
• What factors will determine the common direction of
providers and consumers?
• Is IPv6 a stable point of relative compromise between
individual aspirations?
Your Thoughts?
Thank You
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