The future of connectivity in Latin America is at risk. In a world where, according to the ITU, 2.6 billion people remain unconnected a series of conversations have unfolded, originally in Europe but quickly spreading across emerging markets including in Latin America, through Anatel in Brazil,1 through the IFT in Mexico,2 in the Caribbean3 and in regional organisations such as the GSMA and ASIET.4 Dialogues about the investments needed to support current traffic, the rollout out of novel technologies like 5G as well as the ever-present need to increase coverage and connect those who are being left behind appear to be just the tip of the iceberg.
The fair contribution, ‘telco tax’ or ‘fair share’ as it has been referred to internationally, has gained traction following an exploratory public consultation carried out in February 2023 by the European Commission. Essentially, fair share involves a contribution to stakeholders associated with the content and applications that flow through the networks, in addition to the contributions network providers usually make to universal service funds.
As a reference, the consultation by the EC stated that internet traffic in Europe has grown by more than 34 per cent on an average interannual basis since 2015, adding constant pressure to the networks’ performance. Telecommunications operators have requested that content providers and applications (CPAs) and in particular large traffic generators, contribute to the costs associated with infrastructure deployment. The Commission expressed caution given that an additional regulation, ‘share’ or ‘tax’ could become counterproductive due to lack of clarity. Recently, the EC confirmed there would be no measures involving fair share introduced during 2024.5
More broadly, the conversation sparked a number of concerns for the telecommunications sector. These included the sustainability of infrastructure investments,6 the distribution of income,7 8 9 new technologies and services and their influence on internet traffic,10 and regulations or policies that not only create a new digital tax but reassess net neutrality.11 12 Arguments framed around these issues are driving the fair share debate from a telecommunications sector perspective.
The imposition of a fair share tax could result in immediate harmful effects such as eroding user spending and jeopardising digitisation.
Conversely, CPAs and the tech sector have stated that they do indeed contribute to the development of internet infrastructure13 through, among other things, increasing cloud capacity, network efficiencies, increasing economic returns through cost avoidance and enhancing subsea connectivity.14 15
In Latin America, the debate on fair share gained traction shortly after the EC consultation but started back in 2022.16 In early 2023, the Brazilian telecoms authority held its own consultation, framing it as part of an ‘internet gatekeeping revision’.17 It included an updated outline for network neutrality rules.
With governments and regulators actively watching developments in Europe and elsewhere, in a region where connectivity is not yet universal there are concerns that an ill-informed position on fair share could harm net neutrality, connectivity and digital inclusion objectives, as well as future investment by the telecommunications sector. The conversation seemed to be framed as a dilemma between two excluding options. The reality is that digital development in the region must reconcile interests and put users at the centre of the conversations or the future of connectivity will be at risk.
In this article we seek to highlight why the fair share debate is one of the most relevant discussions affecting connectivity and digital development in Latin America. We provide a brief outline of the internet value chain, a snapshot of the current state of connectivity in Latin America and the nature of users and content providers in this value chain. Finally, we propose a framework for this conversation under a ‘fair connectivity’ approach, which guarantees that all stakeholders have access to connectivity regardless of location or income level.
Setting the scene
Latin America’s connectivity landscape
According to data from regulators, governments, the World Bank, and Statista,18 nearly 466 million, or 73 per cent19 of Latin Americans have access to the internet (see figure 1).20 Brazil, Mexico, Argentina and Colombia are the countries with the highest number of people who access the internet, while Panama, Nicaragua, El Salvador and Uruguay have the lowest number of users.21
However, connectivity in Latin America varies widely. The average internet access rate in the region is 77 per cent, but the difference between the country with the highest (Uruguay) and lowest (Nicaragua) is 32 per cent. Additionally, the data indicates that at least seven countries have more than 80 per cent internet access, of which three have more than 90 per cent. On the other hand, four countries have yet to reach 70 per cent.
Figure 1. Internet access, population and relative access rates. Sources: ITU, World Bank and regulatory bodies
It should be noted that the region has progressed significantly compared to 2010, when only 27 per cent of Latin Americans had access to the internet.22
One possible explanation for this situation is the asymmetry between urban and rural coverage. By the end of 2022, the World Bank found that in all countries in the region, there is a marked fixed internet penetration gap in homes and that this is accentuated in countries such as Argentina, Colombia, Paraguay and Peru, where there are about two internet accesses in urban areas for each one in rural areas (figure 2).23
Figure 2. Fixed internet penetration rates in rural and urban areas, taken from Cenal, 2022. (L to R: Peru, Bolivia, Guatemala, Nicaragua, Argentina, Paraguay, Colombia, Uruguay, Chile, Latin America and the Caribbean, Honduras, Brazil, Mexico, Ecuador, Belize, Jamaica)
The internet value chain
It is useful to consider the value chain in the provision of internet services, identifying the stakeholders, processes and relationships, and the points at which economic value is generated.24 The broadly accepted components of the internet value chain can be described as follows:25 26 27 28
Users: The agent in charge of determining the destination and use of the data that will be sent through the network.
Activities and applications: Those that partially or totally involve the use of software and the internet to carry out a specific task. They involve the use of data that has been transmitted and/or processed and include, for example, multimedia content.
Access technologies: The devices through which internet users interact with the network. They allow the entry and obtaining of data.
Constitutive technologies: Those that allow the structuring and interconnection between networks and the transmission of data through the TCP/IP protocol.
The relationships established between components are dynamic; that is, they interact in several ways between the constituent blocks. This interaction is highlighted below.
- For mobile internet, an access technology can be a cellular device through which both computing applications and data transmission to a point on the network (base station) are executed. However, for this data to reach its destination and generate a response to the user, it requires different network components additional to the mobile device, such as the routing that the base station performs within the core network of the mobile operator, which in turn directs the data of the communication within the internet cloud.29 Finally, data and communications are sent and processed according to the user’s specific application type, for example to download multimedia content or to transmit information via email.
- For fixed internet, the user device could communicate through an ethernet-type wired medium connected to fibre optics. From this given point, the data would be routed through the internet service provider’s (ISP) network, which could be connected through satellite, microwave, or fibre optic links, to distribution rings, internet exchange points and submarine cables.
The value chain described operates under network neutrality principles and could involve at least one economic transaction per component.30 This means that resources paid for by users can be redistributed through the rest of the agents of the chain. 31 Under the principle of network neutrality all traffic carried over the network must be treated equally, without discrimination. All the bits of a packet within the communication must be given the same prioritisation criteria, preserving not only their integrity and confidentiality but also allowing the traffic that is carried over the networks to be agnostic about the content – that is, without privileging any type of content over another.
Telecommunications companies typically need to conduct many transactions (mostly on capex) to have the minimum infrastructure necessary for the network to execute. The operations and maintenance (opex) of the network components, as well as the attention of users, involve various other types of economic transactions.32
Telecommunications operators that provide internet access may have different income channels, with income from users (measured as average revenue per user, or ARPU) predominant.33 34 35 36 A mobile internet provider will seek to generate income by providing the service, before using the income gained to invest in the deployment and operation of its own networks.37 This in turn satisfies its main business model, leading to reasonable financial returns.
Over-the-top platforms vs telcos
Although there is no firm definition in the specialised literature, we can infer from common factors that the digital economy involves the partial or total use of digital media for the development of economic activities that offer value to the user.38 39 The economic transactions involved reflect a logical premise – users pay to access the internet service and from these payments the providers satisfy their business models.40 This in turn implies the redistribution of an economic flow whereby different actors are involved in their own value chain, for example in the installation of sites, the cost of materials, equipment and radio spectrum, among others.
The need to generate value is precisely one of the reasons why digital platforms appear in the internet value chain. Simply put, digital platforms involve the use of some computing device to perform a task that may or may not involve access to the internet in real time. In any case, they assume that to satisfy the user’s needs, they need to interact with the internet.41
The generation of value due to the use of the internet implies a benefit for the entire value chain since it increases the propensity to spend throughout the different components of the chain. This can be examined in more detail using two logical assumptions.
First, there is a directly proportional relationship between data consumption and internet spending: the greater the use of digital platforms, the greater the communication of data, the greater the internet traffic, and the greater the spending by users. Secondly, the opposite : less usage of a digital platform results in lower data consumption and, consequently, reduced internet spending by users.
Thus, a relationship of dependency and complementarity is established in which the agent with the greatest power to influence the economic flow in the value chain is the user. Consequently, the generation of added value due to the use of digital platforms has allowed an increase in spending on the internet, but also the diversification of profits.42 43
Despite this, to maintain traffic service levels and increase coverage in remote or rural areas like the Andes, telecommunications operators must resort to investments that, due to the nature of the coverage profiles and demographic dispersion, are usually substantial. Nevertheless, user incentives for accessing the internet often come from the platform side.
Figure 3. Internet access process for a mobile communication network. Source: the authors, 2023
Although people continue to pay for internet access, the additional user spending is directed to actors in the value chain that are not responsible for internet access. Thus, the total profit resulting from user spending is diversified, leaving a percentage in the hands of traditional telcos that allow internet access, but also a percentage in the hands of digital platforms (in this case the over-the-top provider).
In sum, there is a clear dilemma over who is responsible for the provision of the investment associated with internet infrastructure – traditional telco players or the digital platforms that use the networks to provide value-added services. In reality, both are already contributing to connectivity from different angles as part of a symbiotic relationship.
Findings and recommendations
Achieving fair connectivity in Latin America requires consideration of the needs of the different stakeholders involved in the digital ecosystem. The debate surrounding fair share surpasses the mere imposition of a contribution associated with internet infrastructure. It involves a diversity of discussions associated not only with the costs of telecommunications infrastructure, but also the provision of public infrastructure, the levels of digitalisation of societies, user consumption decisions and the sustainability of internet connectivity. Governments and the private sector need to address such matters with a long-term vision.
Those discussions must consider the region-specific constraints derived from the digital gap, lower ARPU compared to developed countries and the use of universal service funds to increase coverage, to name but a few issues. Replicating Europe’s practices will not work in a connectivity landscape as challenging as the one in Latin America.
The key findings of our analysis are:
- The imposition of a fair share tax could result in immediate harmful effects such as eroding user spending and jeopardising digitisation. Both ISPs and digital platforms derive their income from the same user base, which already pays for internet access. It could result in possible duplications of payment for a cost-sensitive item that lacks a direct technical substitute (traffic per capita assuming a traffic-differentiation scheme). As a result, fundamental principles of the internet such as network neutrality could be put at risk.
- Arguments regarding traffic generation are debatable, for instance regarding large traffic generators. It is the user who determines the volume of traffic, not the digital platform, and user traffic will be directly proportional to the value that the user perceives from each platform. As an illustration, a user who has a greater tendency for multimedia content consumption will represent greater traffic from platforms that provide these types of services, compared to an occasional user of the same platforms
- If some type of discrepancy and control were established over the large traffic generators, the neutrality of the internet would be put at risk since, prima facie, a distinction would have to be made between which traffic is, and which is not, subject to a contribution. This would erode the user’s freedom of choice and would put at risk fundamental principles of the internet.
- Nonetheless, within the conversation about fair share different pressures coexist that are more complementary than antagonistic. The financial pressure associated with expanding coverage is precisely one of the challenges the region faces: connecting people in areas where there is no profitable market. There is not enough evidence to conclude whether the imposition of an additional contribution would solve this overarching problem. On the contrary, it implies cross-industry engagement and a profound revision of current contributions throughout the value chain associated with internet provision. It’s not clear that there are any short-term benefits for the agents involved in the value chain.
- In Latin America, the technical, regulatory and financial determinants that put pressure on the sustainability of connectivity, particularly in areas where the size of the market is fragile, should be reviewed. Analysis should include alternative connectivity models, assessment of the effectiveness of universal service funds, the social conditions that determine internet access and the targeting of policies and regulations for different coverage environments
The debate surrounding fair share allows for a more in-depth analysis of connectivity, not just from the financial viewpoint but from a holistic policy perspective. We propose the following recommendations for studies related to fair connectivity, as a first approach to help steer the conversation and maximise the opportunities for connectivity in Latin America:
- Analysis of internet service delivery models, including identification of alternatives for greater efficiencies per user, total cost of ownership reduction, as well as the use of complementary technologies that could alleviate the financial pressure of current business models, for example, by identifying 5G network monetisation models according to different types of economic need by country or region (intra-country).
- Determination of the socioeconomic impact of digital platforms (OTTs), and its influence over digitalisation and social inclusion in Latin America. Does digitalisation drive connectivity investment from users or does connectivity drive digital platform investment from users?
- Analysis and design of policies to promote financial sustainability throughout the internet value chain, including the design of specific regulations for both rural and urban coverage environments, focusing on technology complementarity measures, community networks, dynamic quality of service frameworks, revision of non-ICT contributions, dynamic access and sharing of radio spectrum, passive infrastructure sharing and the combination of technologies to allow traffic offloading.
- Impact assessment of universal service funds under criteria of effectiveness, inclusion (in non-coverage areas) and capacity (in densely populated areas). This assessment could involve the design of tailored strategies for short-term and mid-term investment plans.
This article is also available to read in Spanish. bit.ly/3RK1IXu