Value-Added Services and the Future of Telecommunications : Empirical Evidence to Inform the Network Fees Debate in Brazil

This paper provides evidence to inform the discussions on the need of regulatory intervention in the hitherto market-driven relationships between Communications Service Providers (CSPs) and Value-Added Service (VAS) providers in Brazil. Firstly, we analyze the mainstream business model adopted in the telecommunications industry in the country and discuss how it is different from the two-sided business model adopted by digital platforms for the provision of VAS. Then, using publicly available, empirical data we investigate the profitability of CSPs in Brazil in the last 5 years to understand how the investment trends have affected their business performance. Also, we analyze the marketing strategies and retail offers of the CSPs to identify evidence of issues on their relationships with VAS providers. Following, we forecast the data traffic demand to be addressed by CSPs in the next 10 years, the investment needs to serve the forecasted demand, and their likely impact on profitability. Finally, we discuss likely efficiency impacts of a potential regulatory intervention, based on a review of the telecommunications industry structure in Brazil, and on early results of regulatory interventions adopted in other countries (e.g., South Korea). Our analysis does not support either the existence, or the expectation of constraining market conditions that justify a regulatory imposition of fees to be paid by VAS providers to CSPs as a contribution to network costs. First, because the operational margins of national and regional CSPs in Brazil are consistently high in recent years. Secondly, because of the growing adoption of market-led, symbiotic interactions between CSPs and VAS providers in Brazil. Finally, because the growth rate of data traffic demand in Brazil is declining in the next decade, ruling out the need of a strong acceleration in the CSPs’ investment rate. Overall, the evidence for the Brazilian economy suggest that a regulatory intervention in the current digital ecosystem could lead to a loss of system efficiency, and a deterioration of economic and social welfare