Digital Product Distribution in Brazil

The sales of products through digital distribution have expanded over the last few years in Brazil. In this article we will look at the current status, regulations and bottlenecks for this sales channel in the country.

Current Status and Regulation for Digitally Distributed Products

Digital distribution currently serves as one of the primary sales channels for the software market in Brazil, which is valued at close to BRL 10.9 billion according to data from the country’s Software Companies Association.

Some aspects of Brazilian regulation, such as what is applied for DRM, may serve as incentives for the purchase of digitally distributed products. The legislation in the country follow the United Nations WIPO Copyright Treaty, which does not condemn the breaking of DRM for uses that do not violate Intellectual Property rights, although piracy and counterfeiting remain illegal. This means that software bought and downloaded in Brazil are able to be modified legally, a factor that increases the appeal of digital sales channels.

Bottlenecks for Digital Distribution in Brazil

The growth in sales of digitally distributed products can be attributed to some historic bottlenecks that have gradually been overcome in the country, such as the quality of internet connections and the ubiquity of piracy. In recent years, the quality and availability of connections in Brazil increased significantly and while piracy is still an issue, the market for digitally distributed products has found room to expand in the country.

Connection speeds

The average connection speeds of Brazilian broadband access are low when compared to other territories. A study from Q3/2014 published by cloud computing company Akamai revealed that Brazilian internet connections had an average speed of 2.9 Mbps, having increased by 11% since the previous year but still remains lower than those found in markets such as Mexico, Uruguay, Argentina and Peru.

Products distributed through large-sized file downloads may encounter resistance from Brazilian consumers who may seek to obtain these products through alternative means. This is especially true in mainland cities far away from large centers and capitals, which present minimal competition in terms of internet service providers and have limited capacity to provide high-speed broadband connections. In large city centers, however, there are much higher rates of high-speed connections, as these are the areas where consumption of digitally distributed products is growing significantly.

Counterfeiting

The question of counterfeiting may still be a cause for concern to software vendors that intend to start operations in Brazil, although many recent researches suggest that this issue may not be as profound as imagined and may actually become less prevalent in the near future. One of the main causes for the spread of counterfeiting in Brazil, the limited availability of sales streams for software, has changed considerably over the last few years with the introduction of online retailers.

A study by global association Business Software Alliance from 2013 indicated that at that point 50% of software on Brazilian computers was not legally licensed, the lowest rate in developing markets, and a drop from the rates found in previous years. The same study showed that software counterfeiting in all covered global territories grew from 42% to 43% in two years, a sign that Brazilian users may be more receptive to purchasing software licenses than other competing markets.

Taxation

The taxation for retail software sold in Brazil may have been one of the reasons for the spread of counterfeiting in the country and has the potential to be one of the main drivers for the increased adoption of digitally distributed products.

This is related to the taxation systems in Brazil, which applies more burdening measures to the trade of physical goods, and also taxes their transportation, storage and commercialization. None of these taxes on physical goods are applicable to products distributed online, which results in lower prices offered to customers through this medium.

The regulation for digitally distributed software in Brazil, however, remains largely underdeveloped and can be cause for confusion for consumers of these products. Most of the policies regarding this sector have been established in recent years and may be subject to changes in the near future.

For one, the taxation policies for downloaded software requires non-customized or “off the shelf” products to be charged the ICMS, the Brazilian Tax on the Circulation of Goods, Interstate and Intercity Transportation and Communication Services. However, the country’s policies hardly apply specific measures for the many types of subscription and licensing models for software, which can be charged a whole range of taxations regarding services.

Licensed software which charges monthly fees and SaaS for example, can be subject to ISS, PIS and COFINS, as companies are usually advised to describe these products in depth on declarations in order to be charged the taxation deemed necessary by Receita Federal, the Federal Revenue Service.