Viewpoint The World Bank Group July 1997 Note No. 122 The Private Sector and the Internet Cai4Ios A, Pilmo Advances in telecommunications and informatics communication session. And, it increases the Braga and have transformed the Internet from an academic network's reliability. Carsten Fink experiment into a household name in most in- dustrial countries. The number of computers The resulting network, Arpanet, began opera- Powerful forces are connected to the Internet grew from 535,000 in tion in 1969, linking four sites. In the 1970s, recasting the business July 1991 to close to 16 million by January 1997 other government-supported networks emerged competitive formo (figure 1), and it is estimated that the number of in the United States, but access remained These forces, largely Internet users has already exceeded 50 million. restricted to the research community connected grouped around Although still concentrated in industrial coun- with the Department of Defense and other gov- informationl infra- structure and new tries, this "network of networks" is rapidly ex- ernment agencies. This changed in 1986 with communications panding in the developing world. Many now the creation of the NSFNet. Subsidized by the technologies, have believe that it provides a window into a future U.S. government, the idea of the NSFNet was to come to be known collectively as the in which access to information will be indepen- provide high-speed backbone services connect- information revolution. dent of geographic location and interactivity in ing regional networks as well as campuses and This Note is the fifth in a multimedia environment will be ubiquitous. research centers. The network of networks com- a series of five that looks at the information municating through the Internet protocol be- revolution and the This article briefly reviews the history of the gan to expand rapidly. future of telecom- Internet and its evolution from an academic ex- munications-and what theyimeanfor the periment into the main application behind the In the early 1990s, the management of the regulatory role of emerging global information infrastructure. It dis- NSFNet backbone was subcontracted to private government. cusses the role of the private sector in these firms, which were allowed to route commer- developments and the regulatory environment cial traffic through the Internet. The explosive required for the Internet to fulfill its promise. demand for network service in the 1990s- mainly from the private sector-led to the The rise of the Internet emergence of several commercial Internet back- bone networks (such as Alternet, PSNet, and The origins of the Internet can be traced to the SprintLink), and in October 1995, the NSFNet 1960s, when the U.S. Department of Defense backbone was shut down. U.S. government decided to fund the development of a packet- subsidies for the Internet have fallen to an in- switching data network that would allow significant amount, and almost all the costs of networked computers of different sizes and the Internet are now borne by its users. types to communicate efficiently. In packet- switching networks, data files are broken into Supporting the explosive growth of the Inter- small packages that are sent independently over net and of the demand for Internet services have the network and then reassembled at the final been the rapidly evolving network architecture destination. This permits efficient use of com- and user interfaces. This technology has ben- munications lines because, unlike circuit- efited from the decline in computing costs rela- switching, an architecture typically used for tive to transmission costs. On the user side, the voice telephony, it does not require an open, growth of the Internet has been promoted by or point-to-point, connection. Packet-switching the appearance of powerful programming lan- allows many users to share a circuit, with no guages, new network "tools," and user-friendly particular connection dedicated for a given interfaces. The World Wide Web, a sophisticated kia Industry and Energy Department * Finance, Private Sector, and Infrastructure Network The Private Sector and the Internet application that allows users to access any kind important. The development of a regulatory of digitized information (text, picture, sound, framework is critical in three areas: provision video) and configure it for display with a mouse of Internet backbone access; Internet service click, has given multimedia capabilities to the providers (ISPs); and information services. Internet. The growth of the Web has been as- tounding: betweenjune 1993 andJanuary 1997, The Internet backbone servers are the highest- the number of Websites leapt from 130 to level network servers-those to which ISPs pay roughly 200,000. Fostered by the improving connection charges. The basic regulatory options multimedia capabilities, commercial use of the are to provide public support for backbone Internet overtook research and educational use access to promote connectivity or to leave back- and has been growing exponentially in the 1990s bone service provision to the market. As men- (see figure 1). ByJanuary 1997, there were close tioned, the original backbone in the United States, to 4 million hosts in the .com domain.' The pri- NSFNet, was government-funded until rapid vate sector has clearly taken the driver's seat in growth in networking demand led to the emer- providing both the Internet's infrastructure and gence of commercial backbones. A similar pat- its content in the United States. tern can be found in other industrial countries. Regulation ISPs provide Internet services to the end users. In the United States, ISPs are competing private The Internet has blossomed in a relatively firms. In other countries, the major ISP is the regulation-free environment. Most regulatory state-owned telecommunications operator, often activity has concentrated on defining standards a monopoly. Regulatory options for ISPs depend for the formats and protocols necessary to on the market structure in telecommunications. operate the network. But as the commercial In many cases, the telecommunications opera- presence on the Net increases, regulatory issues tors are well positioned to provide Internet ser- relating to the provision of the network's infra- vices. But it is worth pointing out that OECD structure and services become increasingly countries with more competitive telecommuni- cations sectors tend to have greater Internet con- nectivity than countries with a monopoly. : t: FIGURtE 1 GRORWTH tOF THkE I0NTERdNET\\\\\\00\\0\\00\:0 $Policymakers have to decide whether telecom- In0; eternet hosts (mllions) : 00 0 ;0:0;0 3: munications network operators should be per- 16 mitted to offer information services in direct 1000 t00000000g4 tf 0 00000 fIDomain names$ ::0:0 0 000 000 0 \ competition with independent information ser- IN Other vice providers. As a rule of thumb, if a telecom- :12 edu munications operator has market power in the 1 ( .0co transportnetwork, structural or at least account- 1 - \ : 0 II .netXing separation should be required to avoid anti- competitive cross-subsidization. In other words. the Internet services unit of the operator should : 6 0 0 0 0 0 0 0 0 tV 00 00 ;t 00000:::0000 0 $00;00 0 D _1\; 00 be required to buy access to the transport net- work on an "arm's-length" basis. Another, very sensitive issue is voice telephony over the In- : 2 : j :\0 Xt1000; ternet, which may become a serious threat to . \ 0 ;: S 10003: the traditional circuit-switched network. Jul Jul Jul Jul Jul Jul0 Jan 91 92 93 94 95 96 97 Appropriability of content Nfote:An Internet host is a computer thatacts asan informationand communications server and has a direct connection to the Internet Top-level domain names identity Digitized information can be easilv reproduced hosts by type or origin-for example .com (commercial) edu (educational), and net and redistributed on the Internet, and providers (netvork), the three most frequently used. Others include .org (organization) -.gov (U.S. S. r i o government), and country domains such as.uk (United Kingdom) and .de)Gerany). of information find it difficult to charge users Buttop-level domain names can be misteading: a host mightinot be locatedinthe directly. Most private content providers recover county indicatedor might be either a public or a privateinstitution. Source: Netvork Wizards p costs indirectly: providing information to potential customers about other goods and ser- vices. But the conventional remedy for the cost recovery problem is intellectual property rights protection. Copyright, for example, protects an author's work-whether a hook, a performance, BOX 1 INTELLECTUAL PROPERTY IN CYBERSPACE authcording worka-compther aprok,apramforomaunce a recording, or a computer program-from un- The rise of the Intemet gives new relevance to the issue of extra- licensed copying. In principle, traditional copy- territoriality and increases the demand for convergence among national right law applies to the Internet environment. territual any ights t he d ntemenot ong new But such major industrial economies as the intellectualpropertyrightsregimes.Thelntemetnotonlyopensnew United States and those in the European Llnion possibilities for dissemination of information; it also expands the scope for have revised or are now revising their intellec- activities that may infringe on someone's intellectual property rights. With tual property rights laws to address specific a few keystrokes, an Internet user can download copyrighted material in needs of electronic networks. Moreover, the bulletin boards around the world anonymously. Prosecuting Internet global character of the Internet demands inter- service providers can discourage infringement, hut it may inhibitthe national legal governance (box 1). expansion of the value added services that make the Internet so powerful. The most important international treaty on copyright protection is the An important problem in legal protection for Berne Convention for the Protection of Literary and Artistic Works of copyright holders on the Internet is enforcement, 1886, which provides for national treatment of domestic and foreign given the speed and magnitude of data trans- given the speed and magnitude of data trans- copyright holders and sets minimum standards for copyright protection. mission. This is an area where digital rights man- amesint Technogiean breawherof hegialp ringen l , The World Intellectual Property Organization (WIPO-a specialized digital rights management technologies are hard- United Nations agency that administers the Berne Convention-held a ware and software devices that control access diplomatic conference in December 199 to revise the convention and to to information and the ability to use and further clarify the scope of copyright protection in the digital environment. The distribute it. In principle, these "encryption" tech- main outcome of this conference was the WIPO Copyright Treaty. This nologies are attractive because, unlike intellec- treaty makes clear that the reproduction rights of copyright owners tual property rights, they can provide digital encompass the right to make digital copies. But its language is broad protection across national boundaries. Increas- enough to allow national legislation to limit (or remove) liability at the ingly sophisticated digital rights management level of network providers with respect to, for example, temporary digital technologies are becoming available on the storage. The treaty thus achieves a balance between the concerns of WVorld Wide Web. But national security reasons content providers and those of content carriers. have been invoked to limit the dissemination of cryptographic capabilities. The United States has Note-For further discussion of the economics of intellectual property rights in been trying to address the national security issue cyberspace, see C.A. Primo Braga and C. Fink, 'The Economic Justification for the Grant by promoting data encryption standards that can of Intellectual Property Rights: Patterns of Convergence and Conflict," in E Abbot and D. be broken by intelligence agencies and by con- Gerber. eds., Public Policy and Global Technological Integration (London: Kluwer,19971. trolling the export of encryption technology, re- strictive measures that may inhibit widespread commercial use of these technologies. in July 1996, roughly 96 percent of all Internet A third way to recover costs is through the sale hosts were in OECD countries. Most develop- of advertising space on information pages. Al- ing countries are connected to the Internet-if though this step toward pure commercial use only through email-though penetration is still of the Internet initially met with strong resis- low (figure 3). In 1996, there was on average tance from the research and education commu- only 0.5 Internet host per 10,000 inhabitants in nities, growth has been rapid, and advertising developing countries, compared with 101 in revenues are estimated to have exceeded US$250 industrial countries. The low penetration is due million in 1996. mainly to the poor information infrastructure in developing countries. Average teledensity (tele- Internationalization phone lines per person) is thirteen times lower, and average PC density thirty-eight times lower, Although the Internet is still most dominant in than in industrial countries. the United States, the 1990s have been marked by its rapid internationalization. The share of For developing countries, establishing the right non-U.S. hosts increased from 20 percent in July regulatory environment is as critical as it is for 1991 to 36 percent in July 1996. But most non- industrial countries-though the relevance of the U.S. hosts still reside in industrial countries, and regulatory experience of industrial economies The Private Sector and the Internet 0 FIGURE/ 2\\ GLBA INERE DESTY, 1996 0<0 D 4 _ w liAit implz,~~~~~~~~~~~~~~~~f, onthe pr fteWorld Bank Viewpoint is an open forum intended to discussed above is open to debate for countries the predominance of English-language content encourage disserrina- with poor telecommunications networks, low may deter local researchers or local firms that tion of and debate on computer penetration, and inefficient, state- could use the Internet to add value to their goods ideas, innovati0,000inhabtant beast practices, for owned telecommunications monopolies. But a and services. The critical bottleneck, however, expandirng the private few developing countries have managed to rap- continues to be the weak information infra- sector. The views idly expand Internet connectivity despite weak structure of developing countries. Government published are those of the authors and sliould information infrastructure, such as Brazil, Chile, activism to promote Internet connectivity at the not be attributed to the the Czech Republic, Mexico, l Malaysia, and South level of the research and education communi- World Bank or any of its Africa. Brazil, for example, successfully adopted ties may help jump-start the national informa- affiliated orSanizations. Nor do any of the con- a model of public-private partnership to diffuse tion infrastructure. And governments should clusions represen o the Internet, and it has increased Internet support community access in public libraries and official policy of the connectivity notwithstanding its dominant community centers. But an increasingly impor- xesractie D frectors state-owned telecommunications operator. The tant role for governments in fostering the Interet orethedcountriesvthey Brazilianfgovernmentsupports anInternet back- revolution is that in the regulatorm arena. Most represet. bone open to commercial connectivity and traf- important here is to promote a competitive To order additioulal fic while limiting the dominant carrier's activity environment for Internet service providers, copies please call 202- in the direct provision of Internet services to establish adequate rules of the game for elec- 458-1111or contac:t the public. The number of Internethtosts in Brazil tronic commerce, and ensure effective incen- Suzann G8105, Te ktorld (.br domain) grew from 300 in January 1992 to tives for the provision of content-essential Bank, 1818 H Street, more than 50,000 in July 1996ce of which some measures for attracting private investment in the NW, Washington, D.C. 20,000 are commercial (.com.br domain). Bv the infrastructure and in content generation. N03,or d ny fthre ton o~ O address ssmith7e mid-1990s, Brazil had a higher ratio of Internet supportacommunity ccin public libraries nd worldbank.org. hosts to PCs than such economies as France, lThsudr e tenmrILhosadsreofheclt' The sepies Is also Germany, Hong Kong, and Singapore. domains a so include commercial hosts. avlailable on-line (www.worldbank. orEehtiel/fpd/notes/ There are, of course, many obstacles to the dif- Carlos A. Primo Braga (cbragai world tank. notelist.html). fusion of the Internet in developing countries. org), Principal Economist, anr d Carsten Fink, Printed on recycled National laws regarding privacy and intellectual Consultant, Telecomi unications and paper. proper2ty rights protection must be refined. And Inforst atics Division