Due to the global shortage of IPv4 addresses, Internet Service Providers (ISPs) are working hard trying to utilise the IP address space available to them, in the most effective way possible. Hence, they usually dedicate a pool of IP addresses, to a section of their network, which sometimes covers a substantial geographical area. This method of dynamic address allocation significantly minimises the number of IP addresses required to serve the area because it effectively covers the active users rather than the entire clients base.
However, this means that any point-based IP Geolocation can only estimate where an IP address is likely to be accessed from, as it is servicing anywhere within the service area determined by its operator. Therefore, it is important to have an estimation of the service area or Confidence Area for better decision-making.
Also, when the number of active users is higher than the IP address pool available, ISPs often employ techniques such as network address translation (NAT) to share a single IP address amongst multiple users. Mobile internet users, for instance, almost always share a pool of IP addresses that is much fewer than the number of devices connected.
The Confidence Area is a critically important piece of information that can tell us where else the IP address of interest can potentially be allocated if it was assigned dynamically. We must consider if the resulting decision we make upon IP geolocation data is substantial. The longer the same IP address remains at the same physical location, the better chance that an IP Geolocation service provider can pick it up and locate it as accurately as a static IP address.
However, if the IP address we've just got was spotted previously at another location, the IP geolocation results will be off, and the maximum error we should expect is the maximum distance from our physical location to the outermost end of the boundary of that area. This is why the Confidence Area is crucial in determining the accuracy of IP geolocation data.