Network Working Group G. Huston
Request for Comments: 1744 AARNet
Category: Informational December 1994

Observations on the Management of
the Internet Address Space

Status of this Memo

This memo provides information for the Internet community. This memo
does not specify an Internet standard of any kind. Distribution of
this memo is unlimited.

Abstract

This memo examines some of the issues associated with the current
management practices of the Internet IPv4 address space, and examines
the potential outcomes of these practices as the unallocated address
pool shrinks in size. Possible modifications to the management
practices are examined, and potential outcomes considered. Some
general conclusions are drawn, and the relevance of these conclusions
to the matter of formulation of address management policies for IPv6
are noted.

1. IntrodUCtion

The area eXPlicitly examined here is the allocatable globally unique
IPv4 address space. Explicitly this includes those address groups
uniquely assigned from a single comprehensive address pool to
specific entities which are then at liberty to assign individual
address values within the address group to individual hosts. The
address group is handled by the technology as a single network
entity.

At present these addresses are allocated to entities on a freely
available, first-come, first-served allocation basis, within the
scope of a number of administrative grounds which attempt to direct
the allocation process to result in rational use of the space, and
attempt to achieve a result of a level of equity of availability that
is expressed in a sense of multi-national "regions" [1].

In examining the current management policies in further detail it is
useful to note that the IPv4 address space presents a number of
attributes in common with other public space resources, and there are
parallels in an economic analysis of this resource which include:

- the finite nature of the resource

This attribute is a consequence of the underlying technology
which has defined addressed entities in terms of a 32 bit address
value. The total pool is composed of 2**32 distinct values (not
all of which are assignable to end systems).

- the address space has considerable market value

This valuation is a consequence of the availability and extensive
deployment of the underlying Internet technology that allows
uniquely addressed entities the capability to conduct direct end-
to-end transactions with peer entities via the Internet. The
parameters of this valuation are also influenced by considerations
of efficiency of use of the allocated space, availability of end
system based internet technologies, the availability of Internet-
based service providers and the resultant Internet market size.

- address space management is a necessary activity

Management processes are requires to ensure unique allocation and
fair Access to the resource, as well as the activity of continuing
maintenance of allocation record databases.

Increasing rates of Internet address allocation in recent years imply
that the IPv4 address space is now a visibly finite resource, and
current projections, assuming a continuation of existing demand for
addresses predict unallocated address space exhaustion in the next 6
- 12 years (rephrasing current interim projections from the IETF
Address Lifetime Expectancy Working Group). There are two derivative
questions that arise from this prediction. Firstly what is the
likely outcome of unallocated address space exhaustion if it does
occur, and secondly, are there corrective processes that may be
applied to the current address management mechanisms that could allow
both more equitable allocation and potentially extend the lifetime of
the unallocated address space pool. These two issues are considered
in the following sections.

2. Outcomes of Unallocated Address Space Exhaustion - No change in
current Address Management Policies

As the pool of available addresses for allocation depletes, the
initial anticipated outcome will be the inability of the available
address pool to service large block address allocation requests.
Such requests have already been phrased from various utility
operators, and the demand for very large address blocks is likely to
be a continuing feature of address pool management. It is noted that
the overall majority of the allocated address space is very

inefficiently utilised at present (figures of efficiency of use of
less than 1% are noted in RFC1466, and higher efficiency utilisation
is readily achievable using more recent routing technologies, such as
Variable Length Subnet Masks (VLSM) and disjoint subnet routing).
Given the continuing depletion of the unallocated address pool, and
the consequent inability to service all address allocation requests,
it is a likely outcome of interaction between those entities with
allocated address space and those seeking address allocation that
such allocation requests could be satisfied through a private
transaction. In this situation an entity already in possession of a
sufficiently large but inefficiently utilised allocated address block
could resell the block to a third party, and then seek allocation of
a smaller address block from the remaining unallocated address space.
The implication is that both address blocks would be more efficiently
utilised, although it is the entity which has large blocks of
allocated address space which would be the primary beneficiary of
such transactions, effectively capitalising on the opportunity cost
of higher efficiency of address block use.

Such reselling / trading opportunities which involve the use of the
unallocated address pool would in all likelihood be a short term
scenario, as the high returns from this type of trading would
increase the allocation pressure from the pool and act to increase
depletion rates as more pressure is placed to claim large address
blocks for later resale once such blocks are no longer available from
the unallocated pool.

Following exhaustion of the unallocated address pool a free trading
environment in address blocks is a probable outcome, where address
blocks would be bought and sold between trading entities. The
consequent market, if unregulated, would act to price address space
at a level commensurate with the common expectation of the market
value of addresses, trading at a price level reflecting both the
level of demand, the opportunity cost of more efficient address use,
and the opportunity cost of deployment of additional or alternate
internetworking technologies to IPv4. It is interesting to note that
within such an environment the registry (or whatever takes the place
of a registry in such an environment) becomes analogous to a title
Office, acting to record the various transactions to ensure the
continued accuracy of "ownership" and hence acts as a source of
information to the purchaser to check on the validity of the sale by
checking on the validity of the "title" of the vendor. This impacts
on the characteristic features of Internet address registries, which
effectively become analogous to "titles offices", which typically are
structured as service entities with "lodgement fees" used to fund the
action of recording title changes. Whether existing registries adapt
to undertake this new function, or whether other entities provide
this function is a moot point - either way the function is a

necessary adjunct to such a trading environment.

It is also anticipated that in an unregulated environment the trade
in address blocks would very quickly concentrate to a position of
address trading between major Internet providers, where a small
number of entities would control the majority of the traded volume
(market efficiency considerations would imply that traders with large
inventories would be more efficient within this trading domain). It
is also reasonable to expect that the Internet service providers
would dominate this trading area, as they have the greatest level of
vested interest in this market resource. This would allow the
Internet service provider to operate with a considerably greater
degree of confidence in service lifetime expectation, as the service
provider would be in the position of price setting of the basic
address resource and be able to generate an address pool as a hedge
against local address depletion for the provider's client base.
There is of course the consequent risk of the natural tendency of
these entities forming a trading cartel, establishing a trading
monopoly position in this space, setting up a formidable barrier
against the entry of new service providers in this area of the
market. Such a scenario readily admits the position of monopoly-
based service price setting. Compounding this is the risk that the
providers set up their own "title office", so that in effect the
major trading block actually controls the only means of establishing
legitimacy of "ownership", which in terms of risk of anti-competitive
trading practices is a very seriously damaged outcome.

Assuming a relatively low cost of achieving significantly higher
efficiency address utilisation than at present, then the resultant
market is bounded only by the costs of agility of renumbering. Here
renumbering would be anticipated to occur in response to acquisition
of a different address block in response to changing local address
requirements, and the frequency of renumbering may occur in cycles of
duration between weeks and years. Markets would also be constrained
by deployment costs, where local address trading within a provider
domain would have little cost impact on deployment services (as the
aggregated routing scenario would be unchanged for the provider and
the provider's peers) whereas trading in small sized blocks across
provider domains would result in increased operational service cost
due to increased routing costs (where efforts to create aggregated
routing entries are frustrated by the effects of address leakage into
other routing domains).

In examining this consequent environment the major technical outcome
is strong pressure for dynamic host address assignment services,
where the connection and disconnection of hosts into the Internet
environment will cause a local state change in allocated addresses
(which may in turn trigger consequent extended dynamic renumbering

from time to time to accommodate longer term address usage trends).
It is also reasonable to predict a strengthening market for dynamic
address translation technologies, as an alternate client strategy to
the purchase of large address blocks from the trading market (this
scenario is the use of a private, potentially non-unique address
space within the client network, and the dynamic translation of end
host addresses into a smaller unique Internet routed address pool to
support external end-to-end sessions), and also the strengthened
market for firewall boundary technologies which also admit the use of
private address space within the client domain.

While it is not possible to accurately predict specific outcomes, it
would appear to be the case that increasing overall efficiency of
address utilisation will be most visible only after unallocated
address pool exhaustion has occurred, as there is then a consequent
strong economic motivation for such activity across all the entire
Internet address space.

As perhaps a cautionary comment regarding evolutionary technologies
for IPv4, it would also appear to be the case that evolutionary
technologies will not assume a quantum increase in economic viability
simply because of unallocated address pool exhaustion. Such
technologies will only lever additional advantage over IPv4 once the
marginal cost of increased IPv4 address space deployment efficiency
exceeds the marginal cost of deployment of new technologies, a
situation which may not occur for some considerable time after
unallocated address pool exhaustion.

3. Modification of Current Internet Address Management Policies

The three major attributes of the current address allocation
procedures from the unallocated pool are "first come first served"
(FCFS) and allocation on a "once and for all" (OAFA) basis, and the
absence of any charge for address allocation (FREE).

As noted above, the outcomes of such a process, when constrained by
the finite quantity of the resource in question, ultimately leads to
a secondary market in the resource, where initially allocated
resources are subsequently traded at their market valuation. This
secondary trade benefits only those entities who established a
primary position from the unallocated pool, and it is noted with
concern that the optimal behaviour while the unallocated pool exists
is to hoard allocated addresses on the basis that the secondary
market will come into existence once the pool is exhausted. Such a
market does not benefit the original address management operation,
nor does it necessarily benefit the wider community of current and
potential interested parties in the Internet community.

It is also noted that the outcome of a free address allocation policy
is the vesting of the management of the address space to the larger
Internet Service Providers, on the basis that in the absence of end
client address allocation charging policies which have the capability
of ensuring an independent address management function, those
entities who have the greatest vested interest in the quality of the
address allocation and registration function will inevitably fund
such an operation in the absence of any other mechanism. The risk
within this scenario is that placing the major asset of any
communications medium into the sphere of interest of the current
entities trading within that medium acts to increase the risk of
anti-competitive monopolistic trading practices.

An alternate address management strategy is one of allocation and
recovery, where the allocation of an address is restricted to a
defined period, so that the allocation can be regarded as a lease of
the resource. In such an environment pricing of the resource is a
potential tool to achieve an efficient and dynamic address allocation
mechanism (although it is immediately asserted that pricing alone may
be insufficient to ensure a fair, equitable and rational outcome of
address accessibility and subsequent exploitation, and consequently
pricing and associated allocation policies would be a normative
approach to such a public resource management issue).

It is noted that pricing as a component of a public resource
management framework is a very common practice, where price and
policy are used together to ensure equitable access, efficient
utilisation and availability for reallocation after use. Pricing
practices which include features of higher cost for larger address
blocks assist with equitable access to a diversity of entities who
desire address allocation (in effect a scarcity premium), and pricing
practices can be devised to encourage provider-based dynamic address
allocation and reallocation environments.

In the same fashion as a conventional lease, the leasee would have
the first option for renewal of the lease at the termination of the
lease period, allowing the lease to be developed and maintain a
market value. Such pricing policies would effectively imply a
differential cost for deployment of a uniquely addressed host with
potential full Internet peering and reachability (including local
reachability) and deployment of a host with a locally defined (and
potentially non-unique) address and consequent restriction to local
reachability.

It is also observed that pricing policies can encourage efficient
address space utilisation through factors of opportunity cost of
unused space, balanced by the potential cost of host renumbering
practices or the cost of deployment of dynamic address allocation or

translation technologies.

There are a number of anticipated outcomes of a management mechanism
which including pricing elements for the IPv4 address space

Firstly current address space utilisation projections (anticipated
useful lifetime for the pool of unallocated addresses) would extend
further into the future due to the factors of cost pressure for more
efficient address utilisation, and the additional cost of issuing a
local resource with a globally unique address and the opportunity
cost of extravagant use of global addresses with purely local
domains.

Secondly dynamic host address binding technologies, and dynamic
network address translation technologies would be anticipated to be
widely deployed, based on the perceived cost opportunities of using
such technologies as an alternative to extensive static host address
binding using globally unique addresses. Use of such technologies
would imply further extension of the lifetime of the address pool.

Such pricing practices could be applied on a basis of all future
address allocations, leaving those entities with already allocated
address blocks outside of the lease mechanism. Alternatively such
previous allocations could be converted to leases, applying a single
management policy across the entire address space and accordingly
levering the maximal benefit from such pricing policies in terms of
maximising the lifetime of the address space and maximising the value
of the address space. In such a situation of conversion some level
of recognition of previous implicit OAFA allocation policies can be
offset through delay of conversion to lease and also through
conversion of such previously allocated addresses to the lease,
waiving the lease purchase costs in such cases.

4. Internet Environment Considerations

Pricing for IPv4 addresses as a component of the overall address
management framework is by no means a novel concept, and despite the
advantages such pricing policies may offer in terms of outcomes of
efficiency of utilisation, fair and equitable access, security of
allocation and consequent market value, and despite the address pool
exhaustion time offsets such policies offer, it is the undeniable
case that no explicit pricing policies have been successfully
introduced into the Internet address allocation processes to date.

There are two predominate reasons offered in this analysis. The
first is the somewhat uncertain nature of the exact origin of primary
ownership of the IPv4 address space, and the unallocated address pool
in particular. The address pool has been administered according to

policies drafted by the Internet Assigned Numbers Authority (IANA).
The policies drafted by IANA are effectively policies which are the
outcome of the same consensus seeking approach used within the
Internet Standards process, and it is noted that within such an
environment unilateral declarations of ownership and related
assertions of policy control have difficulty in asserting an
effective role within the Internet community and such declarations
are generally incapable of gathering consensus support (It can be
argued that "ownership" is not a relevant concept within this domain,
as the essential attribute of such address elements are their
uniqueness within the global domain, and such an attribute is only
feasible through common recognition of a coordinated and reliable
management environment rather than the historical origin of the
resource in question). Secondly there is no formal recognition of
the address space as being a shared international resource which sits
within the purview of national public resource management policies
and administrative entities of each nation, nor is there a
recognition of the address space as a private resource owned and
administered by a single entity.

Recent policy changes, whereby large segments of the unallocated
address pool have been assigned to international bodies on a regional
basis, with further assignment to bodies within national contexts,
have been undertaken with a constant address allocation policy of
FCFS, OAFA and FREE, and although some effort has been made to
increase the deployment efficiency through explicit allocation policy
enumeration, the general characteristics of address allocation are
unchanged to date (those characteristics being of course FCFS, OAFA
and FREE).

One potential scenario is to speculate that pricing processes imposed
by the address allocation agency are not feasible within the current
Internet environment to the extent that any such policies could
significantly motivate increased address deployment efficiency to the
levels required for longer term unallocated address pool lifetime
extension. The lack of capability to employ pricing as a managerial
mechanism, even to the extent of cost recovery of the allocation and
subsequent registry maintenance function has a number of possible
longer term outcomes:

a) such functions will be restructured and operated from duly
authorised national administrative bodies for each nation.
Here the observation that the address pool delegation sequence
within the current Internet environment has not to date been
aligned with recognised national public communications resource
administrative entities is an expression of the major problem
that the unallocated address pool is not recognised as being
intrinsically the same public resource entity as the radio

spectrum or the telephone number space. The consequence of
this mismatch between existing public resource management
structures and IPv4 address space management implies that
public operation for this activity on a national basis
is not a commonly observed attribute. The competency of such
established public resource management structures in managing
what continues to be a remarkably vibrant and dynamic
technology-influenced domain must be questioned. Potential
outcomes may possibly include a rational and equitable address
space management mechanism, but would also in all probability
include a cost of a heavy damping factor on further
technological innovation and refinement of the underlying
technology base upon which the address space is sited as a
longer term outcome.

b) such functions are operated (and/or funded) by Internet Service
Providers. This is a more common scenario at present in the
Internet IPv4 environment, and although such an operational
environment does admit the potential for adequate funding for
competent administration of the operation, the strong
association of these entities who have established interests in
the operation of enterprises based on the provision of services
across the address space (i.e., strong interest in exploiting
the address space) has a natural tendency to express domination
of the market by established interests, threatening fair access
to the common resource and threatening the open market of
deployment of the technology. It is reasonable to suggest that
such alignments are undesirable from a public policy
perspective.

c) such functions are inadequately funded to service the level of
activity, and / or administrated informally and consequently
managed poorly, and the essential attribute of reliable address
space management is not achieved.

It is noted that these issues are largely unresolved within the
Internet community today, and tensions between established and
incoming Internet Service providers over equitable access to the
unallocated address space pool are a consequent risk.

5. Concluding Observations

In the absence of the capability to price the management of the
Internet address space at administrative cost levels, let alone the
capability to set pricing of address leasing at prices which reflect
the finite nature of the resource and reflect (even in part) the
market value of the resource, as a component of overall common
address management practices, the most likely scenario is a

continuation of the FCFS, OAFA and FREE address management policies
until exhaustion of the unallocated address pool occurs.

It is perhaps a sad reflection of the conflict of short term
objectives and longer term considerations that the evident short term
motivations of ready and equitable access to the IPv4 address (which
were the motivational factors in determining the current Internet
address allocation policies) run the consequent risk of monopoly-
based restrictive trade and barrier-based pricing as a longer term
outcome of unallocated address space exhaustion.

While free address allocation and the adoption of policies which
include pricing components both ultimately produce an outcome of
strong pressure for increased address space utilisation efficiency,
the removal of the neutral presence of the unallocated address pool
does induce considerable risk of open market failure within the
Internet itself if free address allocation policies continue until
pool exhaustion has occurred.

Further strengthening of the current FCFS, OAFA and FREE address
allocation policies, in an effort to induce higher address
utilization efficiencies across the remaining address space is not a
viable address management strategy refinement, in so far as the
trading market will then commence before unallocated pool exhaustion,
trading in large address blocks which are precluded from such
strengthened address allocation policies.

The most negative ASPect of this are is that these processes will
erode levels of confidence in the self regulatory capability of the
Internet community, such that significant douBTs will be expressed by
the larger community the Internet process is one which is appropriate
for effective formulation of common administrative policy of one of
the core common assets of the Internet.

These outcomes can all be interpreted as policy failure outcomes.

The seriousness of these outcomes must be assessed in the terms of
the anticipated timeframe of such policy failure. Current
expectations of unallocated address pool lifetime of 6 - 12 years
does allow the Internet community some time to revisit their methods
of administrative process definition, but this observation is
tempered by the IPv6 process and by increasing levels of pressure on
the address space in terms of growth in address demand through growth
of deployment of the Internet itself.

It is perhaps an appropriate conclusion to acknowledge the
impediments of existing processes to admit any significant process or
policy change that would produce a more efficient and effective

address space management regime.

However it is this policy failure to efficiently utilise the IPv4
address space through inadequate address pool management policies,
rather than the exhaustion of the pool per se which is perhaps the
driving force to design and deploy an evolutionary technology to IPv4
which possesses as a major attribute a significantly larger address
space.

It is also appropriate to conclude that any outside observer of the
IPv6 refinement process will look to see if there is any evidence of
experiential learning in address management policies. If there is to
be a successor technology for IPv4 it would be reasonable to
anticipate that associated address pool management mechanisms show a
greater degree of understanding of public resource space management
capability in the light of this experience. If no such evidence is
forthcoming then there is no clear mechanism to instil sufficient
levels of consumer and industry confidence in such technologies in
such a way which would admit large scale public deployment,
irrespective of the technical attributes of the successor technology.
Such potential mechanisms may include pricing components irrespective
of the actual size of the address resource, given that the number's
uniqueness is a resource with inherent market value irrespective of
whether scarcity pricing premiums are relevant in such an address
space.

It is also appropriate to conclude that continuation of current
address space management policies run a very strong risk of
restrictive and monopoly-based trading in address space, with
consequence of the same trading practices being expressed within the
deployed Internet itself.

The immediate action considered to be most appropriately aligned to
both the interests of the Internet community and the broader public
community is to examine Internet address space management structures
which include pricing as well as policy components within the overall
management mechanism, and to examine the application of such
mechanisms to both the existing IPv4 address space, and to that of
any refinement or successor Internet technology base.

6. References

[1] Gerich, E., "Guidelines for Management of IP Address Space", RFC
1466, Merit Network, Inc., May 1993.

7. Security Considerations

Security issues are not discussed in this memo.

8. Author's Address

Geoff Huston
Australian Academic and Research Network
GPO Box 1142
Canberra ACT 2601
Australia

Phone: +61 6 249 3385
Fax: +61 6 249 1369
EMail: Geoff.Huston@aarnet.edu.au