“High prices exclude lower-income consumers and push them aside from the digital economy”
Latin America has highly developed regarding connectivity in the last years, however there is still much to do, what do we need to do in order to guarantee this growth? Are the current policies appropriate? Which should be the correct line?
Although a high level of convergence exists among countries, we cannot really talk about a “Latin-American regulation”. Each country has adopted different legislative options and, therefore, the results obtained vary from one another. Nevertheless, some trends do exist. I think that the first and most important one for the past 15 years has been that of keeping a relatively light regulation for the mobile telephony and Internet access business. The rare regulatory intervention has allowed a fast business outreach regarding competition, which has enabled mobile coverage overcoming 100% in almost all countries in the region. Those countries that have taken more time to liberalize – e.g. Costa Rica – have suffered a slight lag, however, once their markets were liberalized, they did not take much time to catch up or even to pass other countries. I have no doubt that the great regulatory success in Latin America is due to this openness to private investment, the bet for competition and the minimum regulatory intervention.
During the past five years, we can see however an opposite trend. Various countries have already increased their taxes to the sector, which have approved specific regulations that force operators to directly undertake public security costs (e.g. inhibition of jail signals) or which have limited commercial flexibility by banning some commercial bids. I am sure that those countries that will promote most competition and will avoid overcharging with no justification operators’ cost structure, will be the ones achieving better results. Although Latin-American operators’ incomes, margins and market capitalization have been growing in the last years, some governments have the unjustified feeling that the industry is particularly rich and that it will be able to withstand everything and that they can consequently increase taxes, charge more for spectrum and enforce higher operating costs to telecom companies, without resulting in adverse consequences. The evidence is proving that this idea is mistaken. Many operators have already gone bankrupt or have experienced financial problems and it is evident that, in the same way that it occurred in Mexico after the 2013 reform, some other telecom markets in Latin America will have to restructure themselves to continue being feasible.
Spectrum auction is an interesting example of the different political options regulators have to face. Most of our countries have chosen merely fundraising goals to assign this resource. Thus, in some auctions there have been players forced to abstain (e.g. Oi in Brazil) and others have even been foiled. These results are not good for consumers nor for the economy development. The Chili “beauty contests” strategy seems much more feasible and successful, in which resource competition is based in the greater coverage instead of the grater income for the State. Thus, service democratization is privileged. It is not surprising that Chili continues leading service coverage and competition rankings.
Countries such as Argentina are currently reframing their telecom policies. To where should these policies head? Is the current regulation obsolete?
The regulation is obsolete at a global level, although the lag is still bigger in some Latin American countries. The regulation obsolescence is a direct consequence of the Internet expansion and the fast development of the new digital services, which compete with the telecom services. It is unrealistic to observe that some countries are still regulating SMS service or establishing rules for this type of instant messaging through telecom operators’ interconnectivity, when this service was virtually eliminated from Earth by apps like WhatsApp or Telegram. Internet has allowed the emergence of voice innovative services (e.g. Skype) or audiovisual content distribution (e.g. Netflix). All of these services compete aggressively with telecom operators’ services. The problem is that some players (that normally play at a local level) are strongly regulated, while others (that play at a global level) have the capacity to completely avoid the regulation. This situation should be reviewed, since it is causing deep distortions in the market functioning, with potentially pernicious effects on national economies.
On September 14 of 2016, the European Commission published a set of regulatory measures to build a Digital Single Market in the European area. It is an interesting initiative, which we are managing in Latin America with great interest. This set of measures is sustained by two ideas. The first one is the idea that there is a need for deregulating o minimizing regulation regarding market access to encourage new investments in the infrastructure deployment, required to expand fiber coverage and the development of 5G mobile services. The second one is, there where regulation exists, this regulation should guarantee a level playing field between all players. On the whole, freedom and equality are the basis of this initiative. Although it is often in the detail that one encounters the devil, and there are many clear and dark ones in this proposal, I think that in general terms the European reform is heading in the right direction.
A similar evolution, based in the free market access and in the level playing field, is a must for the Argentinean regulation and – in general – in every regulatory reform accomplished in our countries. The rules that prevent some players (but not others) from offering some services – like it happens with the pay television – has no basis in the present. The only consequence arising from this type of measures is a restricted competition and limited options for consumers. Thus, they are putting the Argentinean economy at risk, with higher retail prices and an inhibition of new investments, needed to modernize the telecom networks. The gains for ones are transformed into losses for the country.
Deepening into the current regulation. The new network services, the so-called OTT, have changed our consumption patterns and our way of relating in society. Its way of entering in the competition as a substitutive and far from the regulation that applies to the traditional services has caused stir and some controversy (e.g. Uber, Airbnb) given the lack of regulation and the competitive discrimination that this situation is providing. How can we develop towards a reasonable solution for these controversies? Would the complete absence of a regulation end up ultimately harnessing the customer (rights, privacy, service quality)? In which equilibrium point should we establish regulation?
Regulation is, by definition, an obligation to comply with certain requirements for service providers (e.g. establishing customer care offices or implementing a geo-localization system) that generate additional costs for the regulated companies. The problem comes when, the more expensive providing a service is, the less companies are willing to offer it. Paradoxically, the more regulation there is, the less potential competition there will be. I am sure that, in the same way that it was a good idea in the late 80s and early 90s for Latin American governments to eliminate telecom legal monopolies and to allow access to alternative suppliers, today, the whole of the existing regulatory obligations (which occupy various ages in certain countries) need to be reviewed, as well as eliminating the irrational requirements which overcharge the cost structure in our sector. A good way for enabling price reduction and to face the Latin American economic deceleration cycle is eliminating the unnecessary costs. At the end of the day, regulations are a sort of “hidden tax” that consumers pay with limited options and higher prices. High prices exclude lower-income consumers and alienate them from the digital economy.
Our governments would do well in considering aggressive deregulating programs. This path can be considered as a feasible way of retaking growth by countries such as Argentina or Brazil. Freer markets, in which business creativity can be developed without restrictions, can increase productivity and contribute more efficiently to growth in Latin America.
However, deregulation cannot only benefit some, because then it would create more problems that it aims to solve. Let’s take Uber case. Of course I believe that it does not make sense to ban market access to such an innovative taxi service competitor. Maybe quite a lot would think it would be better to eliminate most of the regulations that apply to traditional taxis in our countries. Some would disagree and think that at least some rules must be obeyed. But we all agree that it would be really unfair if these regulations would only apply to some and not to others. ¿What would justify Uber, a player that many times is not even domiciled in the region, having a letter of marquee that the State is not willing to give to other player in the market in which it competes? How to sustain this difference between “traditional” players (worthy of the regulation) and “innovative” players (worthy of the exception)?
In order to solve this issue, there are two possible paths. The first one is deregulating, i.e. reframing regulation to the strictly necessary for all players. The second one is leveling, i.e. – once the “optimal” regulation level has been defined – the rules should be applied equally to all players, traditional and innovative, from the real world and from the virtual world, local and foreign. This type of approach requires a level playing field for all: those that were already in the market and the new ones. The difficult issue is defining the specific strategy to be followed in order to execute the deregulation program. Today, we should debate about the following questions: how much privacy should all players guarantee? How many taxes should all players pay? Which service guarantees should all players offer? How should all players cooperate with the countries’ security authorities? Of course, solving these problems will need addressing structural issues (e.g. extraterritorial concerns). As it always happens with the complicated issues, the devil is in the detail. What would certainly not be acceptable would be giving up and building a world in which Internet players are immune to local laws.
Latin America is an intensive Internet services consumer, especially regarding social networks, however the majority of these services are developed abroad. Which are the biggest challenges that Latin America has to face in order to develop its own services, i.e. a thriving digital economy?
The development of digital entrepreneurship in Latin America does not depend exclusively on the governments nor is it a regulation consequence. In the same way as it occurs in all economic activities, a solid service demand, capital availability and innovative businessmen are needed.
In Telefonica we have invested time and efforts in deeply studying the elements that should be put in place in order to move the digital economy apparatus, and we are sure that it is a great opportunity for the region to abandon the adverse macroeconomic cycle in which it is immerse and to boost the economy. It is important that the productive processes of the main economic activities throughout the different countries in the region adopt the required technologies and digitalize their processes, continue reducing the digital gap and encouraging network and technology investments, and encourage and innovative environment.
Despite the efforts taken by many of our region’s countries to develop the supply and to encourage digital innovation through hubs, the financial support and the scope that governments can offer is limited. Moreover, accessing venture capital funds is not easy for consolidated startups in Latin America. Telefonica is encouraging digital entrepreneurship through its OpenFuture program, which has accelerated more than 1360 startups, and which includes not only accelerating projects, but accessing venture capital funds as well, through Amerigo and Telefonica Ventures.
Regarding services demand, the region’s great challenge is education for the poorest. Certain Latin American countries occupy relatively low positions in the PISA tests that OECD applies. These tests evidence insufficient education in mathematics and comprehensive reading. With such deficiencies, it is extremely complicated to introduce the big majority to the digital economy. Telefonica is working hard in this front with its Profuturo program belonging to Telefonica Foundation and with Telefonica Educación Digital. The goal is encouraging equal opportunities through a quality and equal education, using digital tools with a local deployment.
Finally, rethinking public policies is a must, since it is undeniable that fiscal and extraterritoriality issues are playing against digital entrepreneurship in Latin America. The great Internet platforms are located outside the region and its commercial transactions are not recorded, in the majority of cases, in Latin American countries but in places with favorable tax regimes. Moreover, we have seen cases in which some of these global Internet platforms have refused to comply with local norms regarding communication interceptions (ordered by judges). On the other hand, every startup developed in any Latin American country will have to comply with the national legislation regarding taxes and security, which generated an important imbalance facing global companies.
This interview has originally published in the ASIET website.