---------- Forwarded message ---------- Distributed to TAP-INFO, a free Internet Distribution List (subscription requests to listserver@essential.org) TAXPAYER ASSETS PROJECT - INFORMATION POLICY NOTE May 3, 1994 This is a note about an important issue: the future pricing of Internet services. Please repost freely. - University of Michigan Economist Hal Varian says the Internet is likely to face some type of usage based pricing in the future. - Varian says increasing demands on Internet by multimedia applications and commercial bypass of telephone networks will lead to significant increases in demands on Internet resources, and create pressures for usage based pricing models. - Varian proposes a system of congestion based pricing, that will allow free off-peak usage, but speculates that other outcomes are possible, and - Predicts eventual demise of CIX model of flat rate (no settlements) pricing for Network Service Providers. NOTES ON PROFESSOR HAL VARIAN'S APRIL 21 TALK ON INTERNET ECONOMICS by James Love (love@essential.org) May 3, 1994 On April 21, the Telecommunications Policy Roundtable (TPR) held its first workshop on the future of democratic discourse on the Internet. Hal Varian, a professor of economics and finance from the University of Michigan, presented "Economic FAQs about the Internet," a paper co-authored with Jeffery K. Mackie-Mason. The Workshop was held at the Carnegie Institution in Washington, DC, and attended by about 60 persons. There was considerable interest in the topic. TAP had received more than 400 requests for copies of the paper (including about 350 requests by electronic mail). The paper is available for anonymous ftp, gopher, or World Wide Web at gopher.econ.lsa.umich.edu, or by sending an email message to ndaly@essential.org. Professor Varian's prepared talk followed the paper fairly closely, with a number of facts and antidotes thrown in to illustrate his main points. Among economists Varian is known as a superb expositor, and his presentation was as clear and accessible as the paper. Varian spent the first part of his talk describing such topics as who "owns" various components of the Internet (backbones, midlevel networks, etc), technical aspects of Internet routing, and the growth of traffic on the Internet. I won't bother to go over all the points which are explained in the paper, but a few items are worth mentioning. Varian disclosed that Internet data packets contain an unused "priority bit," that was originally designed to allow Military brass to assign priorities in data routing. The costs of routers (workstations) had fallen much faster than the long distance transport costs, and the long distance backbone facilities were often the bottleneck. Varian also spent a good amount of time explaining how Internet usage is changing, and that while electronic mail is the service most widely used, it constitutes only about 8 percent of the bits sent over the network. New applications, such as the multimedia Mosaic, Internet Fax, and Internet radio are rapidly becoming large users of Internet resources, and these new uses of the Internet are creating huge pressures to change the way Internet services are priced. To illustrate his point, Varian talked about the new Power PCs, which will allow a single user (a college student talking to his parents) to hook up a video camera, and send about 1 megabyte of data per second to the Internet, nearly tying up an entire T-1 line. Varian indicated that the power of workstations connected to the Internet is increasing much faster than the capacity of the Internet to carry traffic. Moveover, a number of commercial users of the Internet are rapidly finding ways to bypass the higher priced telephone networks, both domestically and internationally. Varian was focused largely on the increased congestion cause by the new demands on the Internet. Interestingly, his own research indicated that peak demands shifted from day to day, and peak and off-peak usage could not be easily predicted by the time-of-day, as it is for telephone service. In the United States the Internet is unregulated, and there are no internal prices for Internet usage. Network service providers typically buy bandwidth, or capacity, and face zero marginal costs for usage. End users face a variety of charges, depending upon how their service providers resell access to the network. Some foreign countries, such as New Zealand and Chile, charge Internet users for traffic, as measured by bits. Different uses for Internet services have different requirements in terms of routing priorities. Electronic mail generally does not require an immediate claim on network bandwidth, and can be managed to travel "off peak." On the other hand, some services, such as video conferencing, Internet "talk," or running Mosaic, generally allow the user to command bandwidth at a particular time. Varian was quite clear that he believes that the problem of congestion on the Internet will become a much larger problem as the Internet becomes used for a more diverse set of applications (and the growing power of desktop computers to generate data). Varian said that he believes there will eventually be prices for Internet usage, and the only real uncertainty will be which pricing system is used. A very difficult problem will be the development of accounting systems and other mechanisms to facilitate billing for Internet usage. Generally speaking, it is not simple to determine if data packets contain electronic mail, fax transmissions, video, or other data, making content based pricing problematic. There are also a number of complex issues relating to when or where traffic would be "charged" for internet usage, since users gain access to the Internet from a highly decentralized network of workstations and networks. Varian also talked about problems in determining if senders or receivers would pay for data transmissions, which he illustrated by talking about ftp or gopher servers (who was the "sender" of the data, the person sending the query, or the file server which returns data?). According to Varian, a number of persons are working on these problems, and many important decisions will be determined by engineers working on technical issues. He singled out the Internet Society's Internet Engineering Task Force as the most important forum for groups sorting these issues out. Varian said that any scheme to charge for internet usage would also involved non-trivial costs in terms of metering or accounting, and possibly significant changes in the culture of the Internet (the question on many persons minds is the future of the Internet Listserves), although on a more optimistic note, he said the costs of routing and backbone services should be low, if calculated on a per user basis. Varian said little about the Commercial Internet Exchange (CIX) in his prepared remarks, but in response to questions, he said that he did not believe the CIX pricing model (a flat fee for connectivity) was sustainable, and he thought that the new Network Access Point (NAP) providers (Ameritech, Pac Bell, Sprint, and MFS) would employ a usage based pricing approach. Varian also talked at some length about work underway to create mechanisms for charging for other types of transactions, using a variety of schemes to create "virtual cash" for use on the Internet, such as the services recently announced by Commerce Net using technology developed under NSF funded R&D. Varian said that government R&D in this area was welcomed, because it provided neutral non-proprietary systems that couldn't be controlled or manipulated by a single firm. Varian described the new Internet architecture, which is based upon four NAPs, each controlled by a telephone company, which Varian described as the new "cloverleaves" for the Internet (connecting various backbones and networks), and the new vBNS high speed backbone. Varian said the high interest in the vBNS contract was due largely to its strategic role in the development of new Internet technologies, including accounting and payment mechanisms, which may eventually be deployed to the entire Internet. (MCI "won" the recent NSF contract for the vBNS, but the award is being contested by Sprint. AT&T was also rumored to have been an unsuccesful bidder on the vBNS). Varian's own preference for Internet pricing is a system that only charges for priority routing. As described in several papers (written with MacKie-Mason), Varian would employ a system whereby users would "bid" for access when congestion was a problem, and routers would give priority to packets that had the highest willingness to pay. Users would pay the lowest price that was accepted in this routing "auction," so everyone would have an incentive to reveal their true willingness to pay. Under Varian's scheme, all Internet traffic which did not claim priority status would travel for free. Thus, for example, a large Internet mailing list such as Humanist, PACS-L or CPSR- Announce could mail for "free," with an off peak priority. For Varian's scheme to work, it would be necessary to have routers compare "bids" by packets, priority bidders would have to "pay" for access to someone, and there would have to be a high degree of consensus, so the priority packets would not face bottlenecks or delays anywhere on the Internet. Varian acknowledged that it was possible that the Varian (and MacKie- Mason) system of pricing might not be adopted, and some less elegant system, such as pricing by the bit, may be coming. A number of persons wanted to know who would decide these issues, and Varian was not too specific. The message (the "guess") seemed to be that the companies which controlled the NAPs and a critical mass of the backbones would have a lot to say about what was eventually adopted. Varian was asked to speculate about future telco investments in Internet providers, such as purchases of companies like PSI or UUNET, but he was reluctant to predict much, other than to emphasize the importance of competitive free entry into the market for Internet services, which would undermine monopolist practices. Varian was asked if it was possible that a coalition of Internet providers would have the power to implement a pricing scheme that would have an adverse impact on the future of Internet listserves (many of which "send" more than 100,000 messages per day), but he was reluctant to be very specific in his predictions, other than to say that many outcomes were possible. Note: On April 29, a follow-up workshop was held with Dr. Steve Wolff of NSF, Professor David Farber, and PSI CEO William Schrader. Notes from that workshop and other information regarding Internet pricing will be posted to tap-info. --------------------------------------------------------------------- TAP-INFO is an Internet Distribution List provided by the Taxpayer Assets Project (TAP). TAP was founded by Ralph Nader to monitor the management of government property, including information systems and data, government funded R&D, spectrum allocation and other government assets. TAP-INFO reports on TAP activities relating to federal information policy. tap-info is archived at ftp.cpsr.org; gopher.cpsr.org and wais.cpsr.org Subscription requests to tap-info to listserver@essential.org with the message: subscribe tap-info your name --------------------------------------------------------------------- Taxpayer Assets Project; P.O. 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