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A business guide to the IPv6 transition

commentary Analysts at the Berkeley Research Group offer a blueprint for managing your company through the shift.

Internet Society

(Editors' note: This is a guest post by analysts at the Berkeley Research Group.)

As IPv6 Day heralds the enormous success of the Internet in commercial and social settings, the Internet community faces a need to meet unanticipated demand for IPv4 addresses.

During the transition from IPv4 to IPv6, a considerable number of agreements will be executed to ensure that the available supply of addresses is effectively matched with corresponding demand. However uncertainty may arise surrounding the time, cost, and potential disruption of Internet commerce. IPv4 purchase agreements must incorporate terms and conditions that address this risk. In this article, we aim to guide the Internet community toward intellectual property agreements that can successfully manage such risks.

The last IPv4 address is expected to be assigned in late 2014, an event referred to as "IPv4 Exhaustion Countdown" or "IPv4 doomsday.". Current projections indicate a shortfall of at least 800 million IPv4 addresses worldwide by the end of 2014.

This projected shortfall is driven by the accelerated demand for IPv4 addresses from the rapidly growing market for mobile and wireless devices, movement to cloud-based computing services, and continued expansion of Internet commerce.

IPv4 was established as the Internet's communication protocol in 1981, a decade before anyone realized just how successful Internet commercialization would turn out to be. No one anticipated that 4.3 billion IPv4 addresses would be insufficient. In the 1990s, work began on the adoption of IPv6, which was expected to meet the world's future Internet connectivity needs. While the obvious solution to the shortage of IPv4 addresses is the conversion to IPv6, the reality is more complex.

No cross-compatibility or effective workarounds exist between the two address formats. That means that until a central mass of Internet activity transfers to IPv6, there will still be a need for IPv4. Some have suggested that the complete transition to IPv6 may take three to five years (some suggest it may take decades). This level of uncertainty and the complicated business factors impacting the timing of the transition point to the risk that a gray market may emerge for unused IPv4 addresses.

IPv4 addresses were previously allocated for free based on demonstrated need by "gatekeepers" such as the American Registry for Internet Numbers (ARIN). Now, IPv4's market value is being driven by current and expected demand exceeding available supply, the slow transition to IPv6, and the inability of ISPs to resolve technical challenges and difficulties in managing business risk.

Internet-capable devices require dedicated IP addresses to communicate, and thus wireless carriers, ISPs, and other providers of service (such as cloud computing) need to have sufficient IP addresses for their customers. The current alternative to having sufficient IPv4 addresses is to use Network Address Translation Systems (NATs), which pool IP addresses between and among a group of users. This alternative, while sometimes acceptable, is not a long-term solution, and its limitations are becoming more obvious.

The current dwindling supply of IPv4 addresses is likely to cause a restriction in the growth of the Internet, and the potential to degrade the quality and reliability of services delivered over the Internet. In this environment, ISPs' demand for IPv4 addresses will rapidly exceed what ARIN will be able to supply. The current market price for an IPv4 address is about $12. As the shortage in available addresses becomes more acute in this uncertain environment, we expect the price per IPv4 address to rise in the short run to at least $100 to $300. In the longer run, under certain facts and circumstances, IPv4 addresses could reach considerably higher prices.

Any agreement to purchase IPv4 addresses involves a level of uncertainty and business risk that is frequently encountered when parties enter into a license agreement to transfer intellectual property rights. For example, parties should study and reach judgments regarding technological obsolescence. In a license agreement, parties need to reach agreement regarding the length of time that the technology will continue to generate benefits that justify the agreed-upon price. In this particular instance, when the Internet community makes the transition from IPv4 to IPv6, IPv4 will become obsolete.

In order to manage the risk and uncertainty surrounding technological obsolescence, parties could agree to a periodic rental payment, or royalty rate, rather than to a one-time fully paid-up price. For example, if a buyer purchases one dedicated IPv4 address for $12--in effect a fully paid-up license to use that IPV4 address in perpetuity--and if the transition to IPv6 does not take place for a decade or more, then the buyer did quite well. On the other hand, if the transition to IPv6 occurs only one month after the license agreement is executed, the seller did quite well.

The parties need not "lock-in" such business terms and conditions. To illustrate, the buyer and the seller could reach an agreement whereby the buyer would pay the seller a rental rate of $12 for the IPv4 address for each year that the buyer intends to and indeed uses the subject address. When the transition from IPv4 to IPv6 is complete, or the buyer of the right to the address no longer needs it, the buyer may return the right without having to make more payments.

When license agreements are negotiated, terms and conditions are often not as simple as a fully paid-up lump sum. Therefore, parties to purchase agreements--where dedicated IPv4 addresses are the rights being transferred--should spend the time and effort necessary to frame legal and business terms and conditions that address everyone's concerns. If such an effort is expended on a best-efforts basis to manage risk and uncertainties, more agreements will be reached, and the parties' levels of satisfaction will be evident as the business terms and conditions stand the test of time.

Importantly, there are no substitutes for experience and the comprehensive and sophisticated study of the economics that is incorporated into the business terms and conditions of such license agreements.