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University of Illinois at Urbana-Champaign
University of Illinois at Urbana-Champaign 

U Illinois Law & Economics Research Paper No. 00-18 


Scholars have neglected the privatization of the Internet, despite the
obvious significance of the U.S. Government turning control over a powerful
new communication medium to the private sector. This article provides a
detailed historical study on the transition from a government sponsored
backbone network to multiple commercially owned backbone networks. Next we
document a number of problems that occurred during these privatizations.
Not only have these problems led to a lack of competition in the backbone
industry, but also the same types of problems are reoccurring in the
ongoing privatization of Domain Name System (DNS).

The three types of problems that occurred in both privatizations, and will
likely occur again in future Internet privatizations, unless recognized,
can be categorized as follows: problems with procedural fairness in the
processes adopted by the government; the government's management of
competition during the privatizations; and problems related to the
management of the technological infrastructure. In response, we have
developed a series of proposals to address existing problems and to prevent
these problems from reoccurring in future privatizations.

The specific proposals for the backbone industry are twofold. First, there
must be an interconnection policy that ensures all networks
non-discriminatory access to the Internet. Second, the government should
support the development and use of standardized technologies, which
contribute to interconnection, through a new Code-based technological
interconnection policy. Such a policy is informed by a guiding principle
that new technologies should not amplify network effects and should instead
facilitate competition. Thus, we wish to place a discussion of network
effects squarely within the discourse on Internet privatization.

To increase competition for the ongoing privatization of the DNS, we have
three main proposals. First and most importantly, the U.S. Government must
ensure that ICANN is accountable to the Internet community as a whole and
not just business interests. Second, the U.S. Government must ensure that
there is more transparency and public input into ICANN's decision-making.
Finally, it must be remembered that a privatization is a means to achieve
desirable public purposes, such as the creation of competition, and not an
end all by itself since privatization does not, in and of itself, guarantee
competition in the relevant market. Without multiple competing firms, the
proper use of interconnection agreements to counter network effects in the
DNS, and fair treatment by ICANN, there will continue to be problems with
the privatization of the DNS.

In analyzing the privatizations of the Internet, our analysis is steeped in
the theoretical construct of "Code." Throughout this work, we explained how
Code could regulate behavior, for example, by affecting competition between
backbone providers. However, Code all by itself cannot create competition;
instead there must be put into place the requirement of policies that all
parties shared common ground rules for all competitors. Thus our analysis
shows that both Code and policies are necessary to bring competition to the
Internet. Additionally, the privatizations have also highlighted two
important roles for the government with respect to Code. First, government
must be vigilant in ensuring Code is not implemented which is contrary to
our societal interests, such as the maintenance of competition in the
marketplace. Second, the government should consider encouraging or
mandating the development of Code for vindicating certain societal
interests, especially in those areas that the private sector has little
interest in.

The results of this study provide insights and evidence about the
appropriate role of government in regulating the Internet. While most
rulemaking on the Internet is conducted in a decentralized "bottom-up"
manner, this approach has its limitations. Some of these limitations
include the private sector acting as top-down rule makers; the limited
mobility of most individuals to switch between different rule sets; the
role of network effects; and how "bottom-up" rulemaking could be contrary
to our society's values. Similarly, the history of the privatizations
demonstrates the problems the government had with their use of "top-down"
rulemaking. The overarching lesson is that both "top-down" and "bottom-up"
modes of regulations have their limitations and problems.

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