Editor’s Note: Today, the Penny Sleuth’s newest contributor is here to fill you in on why the internet’s running out of addresses — And why that could mean big things for IT hardware vendor stocks in the coming quarters…

Earlier this week, the White House issued an advisory that the available pool of IP addresses is becoming exhausted. Some experts think that it could happen as early as this December, but just about everybody agrees that it will happen by the end of next year.

IP addresses identify unique nodes on the Internet, much like street addresses identify unique houses in a neighborhood. However, unlike street addresses, which in theory can have an infinite number of unique variations, IP addresses are limited. Because of its 32 bit binary addressing scheme, the maximum amount of addresses that Internet Protocol Version 4 (IPv4) can uniquely identify is approximately 4 billion.

Forty years ago, the early Internet was a relatively small defense network for militarily important U.S. research institutions. By the late 1970s, improvements in information technology led to the development of the core data protocols that route traffic on the Internet today. At the time, 4 billion was plenty of addresses. Few people would have predicted the exponential growth of private Internet use that gained steam in the 1990s.

The truth is we would have run out of addresses years ago if it wasn’t for modifications that helped conserve available addresses. In 1993, the implementation of classless interdomain routing relieved many of the wasted, unused addresses that were a problem with IP’s earlier addressing scheme.

Additionally, in the mid-1990s, network address translation (NAT) became common. This allowed Internet service providers as well as businesses running private networks to use different addressing schemes inside their organizations. This meant that even if a corporation had hundreds of computers on its internal network, all of them could share a single IP address on the public Internet.

However, these innovations have only staved off the inevitable. With the explosion of handheld devices and phones on the Internet, the available pool of unused addresses is quickly getting used up. A replacement for IPv4 is, therefore, necessary. That replacement is IP version 6.

IPv6 uses a 128-bit address space. Instead of 4 billion addresses, it can accommodate a whopping 340 trillion trillion trillion addresses. No, that isn’t a typo! As of today, only a small percentage of Internet traffic is carried by the new protocol. However, with the exhaustion of addresses under the old standard, we should expect that situation to begin to change over the next couple of years.

Despite the scariness that running out of IP addresses, I don’t think that IP address exhaustion is going to set us up for a Y2K-like scenario. Unlike the Y2K “fauxtastrophe,” the Internet is far readier to transition to a new protocol. Unlike Y2K, which had a sink-or-swim deadline, IPv6 migration can be done gradually. Both protocols can cohabitate on the same networks for a long time. There are even address translation schemes where IPv4 traffic can be changed to IPv6 or vice versa.

In addition, all modern operating systems support IPv6. In Windows Vista and 7, it is enabled by default. Even Windows XP, released in 2001, has IPv6 functionality. Linux has had IPv6 functionality since at least the mid-1990s. If you purchased your computer in the last five years, it already supports the new protocol. This is true for the backbone routers on the Internet as well. Most new consumer-level routers, like those used at home or for small businesses, also have IPv6 support.

There will, of course, still need to be some capital investment in new network equipment. ISPs, carriers and corporate networks that have older equipment that can’t be upgraded will have to be replaced with new IPv6-ready hardware. However, since the new IP standard has already been out for several years, much of what is out there already supports it, even if it is not enabled. For noncompliant devices that are still under vendor support, it will just be a firmware upgrade or software patch.

Nonetheless, the transition may present some investment opportunities in hardware vendors. It could possibly even create openings for new players to capture market share, especially if they have otherwise novel technology. We’ll be watching this space closely.

[Editor’s Note: There are more than a few small-cap hardware stocks worth watching as a result of the shift to IPv6. A couple of these include Radvision Ltd. (NASDAQ: RVSN) and Numerex Corp. (NASDAQ: NMRX).]

Ad lucrum per scientia (toward wealth through science),
Ray Blanco
Penny Sleuth

October 4, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

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Ray Blanco

While other eighth graders were out playing soccer, Ray Blanco was in his basement learning how to build what’s called a “Wilson Cloud Chamber” – a supercooled device for detecting particles of ionizing radiation. Now, he is an expert in advanced robotics, avionics, genomics, and biotechnology. Blanco was raised in Miami, FL, after his family fled Cuba in the 1960s. He is co-editor of Technology Profits Confidential and contributes to Breakthrough Technology Alert.

View articles by Ray Blanco