In 2024, Open Net contributed to a chapter to Open Internet Alliance (Brazil)’s study titled Network Fees and Digital Inclusion in Brazil: An Analysis of the Conexis Proposal where the Korean telecom sector’s change through the 2016 implementation of the sender pay rule was analyzed, encompassing the revenue, profit, service volume, and competition of that time. Please review this for the full economic analysis of the 2016 sender pay rule.
Executive Summary
Regulatory authorities have been discussing in many countries the sustainability of
telecommunications networks. The debate on the adoption of a network fee associated with
the data traffic generated by the use of Value-Added Services (VAS) by fixed and wireless
broadband subscribers has recently resurfaced in Europe and other countries, including
Brazil, although recent developments in Europe have so far toned down the discussions.1
Proponents of the adoption of a network fee in Brazil argue that this intervention is necessary
to avoid a congestion in the system as well as to obtain resources to expand the access to
digital services in the poorer and less populated regions of the country.
Brazil has experienced an intense massification of fiber optic broadband networks in
the last 10 years. But differently from other countries, the main drivers of investment in optic
fiber network growth in Brazil are the small Internet Service Providers (ISPs), while national
Communication Service Providers (CSPs) focus their investments mostly on development of
fixed broadband infrastructure in big and medium cities, and in the deployment of wireless
connectivity countrywide.
A concrete proposal for the establishment of a network fee was recently unveiled as
part of a proposal submitted by Conexis Brasil Digital in Anatel’s Public Consultation No.
26/2024. Conexis, representing the largest CSPs in Brazil, argues for a network fee regime to
offset the alleged market failure that threatens the sustainability of the system.
In this paper we assess this proposal. Through a detailed analysis of Brazil’s
broadband market, small ISPs’ growth, and national CSPs’ investment behavior, this paper
reveals the conceptual and methodological flaws in the Conexis proposal, warning of its
negative impact on competition and innovation.
In addition, we add an annex with an analysis of the South Korean case, where a fee
was introduced in 2016. While there are differences between what has been proposed in
Brazil and what happened in South Korea, their experience shows how a regulatory measure
that undermines the competition among ISPs stifles innovation and hinders broadband
expansion efforts.
The key findings of our assessment are:
- Flawed Economic Rationale: Conexis bases its argument on the assumption
of what they see as a market failure, stating that CSPs are not sufficiently
compensated for their infrastructure investments, while VAS providers benefit from the networks. However, the proposal fails in demonstrating the existence of a market
failure, or even the relationship between the alleged market failure and the end users
demand for VAS. The proposal also lacks economic grounding when it is analyzed
through the lenses of traditional institutional economics theories, and transparency
regarding key financial data on the CSPs’ Return on Invested Capital (ROIC) and on
the real impacts of the proposal on CSPs yearly revenues. Moreover, the assumption
that VAS providers should bear the cost of network traffic is misaligned with how
the digital ecosystem operates, as VAS providers already invest in infrastructure
(e.g., Content Delivery Networks – CDNs and distributed sites) reducing the
demand for network investments, as well as the transmission costs for ISPs and
CSPs. - Regulatory Framework Misalignment: The proposal is incompatible with
Brazil’s General Telecommunications Law (LGT). Under the LGT, CSPs in the
private regime are expected to operate without guaranteed returns, bearing the risks
of their investments. The suggestion to introduce a network fee undermines these
principles by shifting telecom business risks to VAS providers, creating an
pernicious subsidy scheme that would make CSPs dependent on VAS providers, and
keen on artificially generating traffic demand for securing extra rents. - Small ISPs as Key Players in Universal Broadband Access: The analysis
demonstrates that small Internet Service Providers (ISPs) have been crucial in
expanding high-speed broadband, especially in underserved regions of Brazil.
Unlike national CSPs that focus investments on profitable urban centers, small ISPs
have pioneered fiber optic deployments throughout the interior of Brazil, reaching
remote, peripheral and rural areas. But as we show in section 4, these small
providers would not benefit from the proposed intervention. Regulatory measures
supporting competition, rather than network fees, have been instrumental in
fostering innovation and bridging the digital divide. - Financial and Competitive Disparities: The financial simulation outlined
in Section 7.2 shows that implementing the proposed network fee would
disproportionately increase the earnings of large CSPs while further marginalizing
small ISPs. Most revenues from the fee would flow to national operators, who
already prioritize profitability and shareholder dividends over reinvestment in
infrastructure. Empirical data (Section 7.2) shows that larger operators have not
significantly increased their investments in underserved areas, further contradicting
Conexis’ claims that the network fee would spur necessary infrastructure
development. - In addition, the international experience available to date does not favor
this type of intervention. As shown in the Annex, the South Korean experience
with the sender pay rule of 2016 essentially made the network resources scarcer
within the country by making the network operators more reluctant to host the heavy
senders, directly stifling innovation, and incentivizing the network operators to
maximize their profit by investing less on building out the network upward and
last-mile.
Our main conclusion is that the network fee proposal presented by Conexis is based
on flawed economic arguments and is likely to result in harmful market distortions. Rather
than encouraging equitable growth and fostering infrastructure investment, it risks
concentrating market power among a few large players, undermining the progress in the
provisioning of fast, cheap, and high-quality Internet services to Brazilian consumers, deepening the digital divide. Policymakers should instead focus on regulatory measures that
promote competition and innovation, ensuring continued investment in broadband expansion
across all regions of Brazil.
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