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Will obsolete media regulation keep holding back the future in Brazil?

AEIdeas

There is no reason why Brazil, a large country rich in natural resources and human capital, should not deploy world class communications technology, infrastructure, and services — except for its old fashioned, protectionist regulatory system. While Brazil may have had historical, political, and military reasons for technological protectionism, centralizing technological decision making within state institutions has not transformed the country to their expected level of global technological leadership. Case in point: Brazilians have long been subject to a whopping 42 percent tax on mobile service. Such a regressive tax on the poor is unthinkable in the modern world, but lacking a credible tax authority, it was the only way the government could collect revenue. While past governments have allowed change at the margin, in 2018 voters demanded top-to-bottom reform.

The new government recently enacted major telecom reforms, including the removal of rules requiring operators to surrender their hard assets to the government when their licenses expire and arbitrary limitations on the rollout of infrastructure. The new framework incentivizes investment in rural areas, the transition from copper lines to fiber, the transfer of spectrum licenses, and ease of approval for satellites. The question is whether these improvements can be brought to media policy. The vestiges of Brazil’s military dictatorship include rules protecting its homegrown entities from foreign competition and dictating how foreign media companies can operate in the country, including quotas on Brazilian content and restrictions on how “national artistic” talent can be hired. Brazil’s law prohibits Brazilian media and communications companies from merging, even though this would improve their ability to invest in Brazilian content. If Brazil wants to foster content diversity, allow new services for consumers, and promote the local audiovisual industry, then it should lift restrictions on cross-ownership.

Technological convergence, the simultaneous convergence and divergence of content, computing, and communications on diversified, integrated networks is inapposite to the statist model of government monopoly delivering a single service on a single network, such as television or telephony. Next generation broadband networks deliver correspondence, news, entertainment, enterprise services, healthcare, and so on. Consumers demand a global assortment of internet-enabled music, movies, and shows, not just what the government deems is acceptable on state-approved television.

Reform requires policymakers to recognize and allow technological change and regulatory modernization. Convergence also raises the challenge of what to do about the remaining regulatory bodies when technology has made the regulated industry obsolete. The law is slow to repurpose regulatory resources. As such, old agencies may attempt to re-regulate deregulated industries or impose old concepts on new enterprises. My new paper, The signs and symptoms of regulatory obsolescence in network industries, describes these challenges.

Convergence is driven by the value created as firms join complementary assets. Firms partner and merge because they believe they can create a new product or service at a better price or value. A classic, procompetitive combination is the vertical merger between a network provider and the content creator or aggregator. The network needs content, and the content needs distribution. That assets can be joined across borders adds dynamism and excitement. Simultaneously, firms divest assets, and employees leave to start new enterprises.

If Brazil could learn anything from US, it is the degree of freedom to which firms have been allowed to join their complementary assets, something that can be measured with investment and merger policy. As 2018 data (see page 85) from the International Telecommunications Union show, the US accounts for a staggering one quarter of the world’s total private investment in communications networks, now approaching $90 billion annually. With less than 5 percent of the world’s people, the US still invests more than China by a quarter; more than the EU by a third; and three times more than India. Brazil limps along with $6-7 billion annually — a pittance for the 210 million Brazilians — a sign that historical policy did not encourage adequate investment. This success in the US reflects the wisdom of the 1996 Telecommunications Act, which, while imperfect, incentivizes facilities-based competition, mergers, and joining of complementary assets.

Modern media policy must allow complementary assets to join in new and unexpected ways. Regulators do not have superior knowledge of which assets should be joined and frequently make mistakes, notably the Federal Trade Commission’s 2005 decision to block Blockbuster and Hollywood Entertainment’s attempt to merge and join forces against Netflix. Not only did both DVD firms go out of business, the decision probably delayed competition in the video streaming market for a decade. Now we are finally seeing competitors launching on a global scale to challenge Netflix: Apple, Disney, YouTube, Hulu, and various telecom providers with streaming video services.

Whereas mergers in other industries enjoy fast review and approval, mergers in media and telecommunications drag on for months, if not years, due to layers of historical bureaucracy and multiple competing regulators that manipulate the merger to deliver political outcomes to preferred constituencies. Consider the case of SkyBrasil and WarnerMedia, a merger approved in every country where antitrust and/or regulatory approval is required, except for Brazil. In fact, since CADE, the Brazilian antitrust agency, approved the merger two years ago, it has been held up by Brazil’s telecom regulator, ANATEL. However well-intentioned any one agency or official may be, the multiple points of failure created by arbitrary industrial distinctions is at odds with a rational, technologically neutral investment policy. Brazilians would be best served by common competition standards across all sectors without prejudice to which industries, technologies, applications, and services get to innovate and merge.

The US should applaud the telecom reform, but Brazil has much more to do. Countries in worse situations have evolved and moved forward, notably Colombia, almost a failed state which is now on track to enter the OECD and position itself as the IT hub of Latin America. Brazilians are tired of waiting for the future: It’s time for their government to deliver.