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Brazil's anti-spying Internet push could backfire, industry says

By Esteban Israel and Alonso Soto

SAO PAULO/BRASILIA (Reuters) - For tech companies in Brazil, the government's decision to target their operations in response to U.S. spying is about as smart as sending an angry email in the heat of an argument.

President Dilma Rousseff's plan to force Internet companies to store user data inside the country will not fix Brazil's security concerns and could instead send costs soaring and hurt future investments in a key emerging market for companies like Google, Facebook and Twitter, industry executives and analysts say.

"It could end up having the opposite effect to what is intended, and scare away companies that want to do business in Brazil," said Ronaldo Lemos, a professor at Rio de Janeiro State University who has helped draft Internet legislation in Brazil.

Rousseff was outraged after documents leaked by former U.S. intelligence contractor Edward Snowden showed the National Security Agency spied on ordinary Brazilians, the country's biggest company Petrobras and even her own communications.

In response, the left-leaning president helped put together legislation that would require big Internet companies to house locally gathered data on servers inside Brazil. Otherwise, they will be barred from doing business in one of the world's fastest growing markets for technology and social media.

The bill has not yet been made public, and the number of companies in the government's sight is unclear.

However, Alessandro Molon, a congressman with Rousseff's Workers Party who is leading efforts to get the legislation approved in the lower house, recently said the number of companies affected could be counted "with two hands."

In what was interpreted by the industry as another sign of hostility, communications minister Paulo Bernando recently suggested tech companies were not paying enough taxes.

An industry source, speaking on condition of anonymity due to the sensitivity of the subject, said many companies are still waiting to see the fine print of the legislation, and how it is implemented, before deciding whether to go ahead with investment plans, and some might even consider pulling the plug on Brazil.

"It's a terrible idea," said the source. "And even if the government knows it, they feel they need to press ahead and send a strong political signal."

Even if data were to be kept in Brazilian data centers, it would still be replicated in servers abroad, experts say. Having entire databases in one single country would make the information more vulnerable to cyber attacks.

MARKET SIZE MATTERS

But the government has so far refused to back off its plans, essentially betting that Brazil is too big a market for companies to ignore.

"I don't believe these companies will stop their profitable activities in Brazil," said congressman Molon. He said building local centers would be a "small cost" for such large companies.

Virgilio Almeida, a senior official at the ministry of science and technology, which is also involved in the issue, cited Facebook as a company that should be required to have a greater physical presence in Brazil.

"Brazil is (Facebook's) second biggest market in terms of users and yet the company has zero infrastructure in the country. It would be natural, even from the business point of view, to have part of it here," Almeida said.

A study commissioned by the telecommunications industry group Brasscom recently found that the operating costs of a data center in Brazil can be up to 100 percent higher than in the United States. That is mostly due to the high cost of electricity and heavy taxes on imported technology.

Installing a data center in Brazil would typically cost $61 million dollars compared to $51 million in Chile and $43 million in the United States, the study showed. Brasscom estimates if Brazil were more competitive it could attract up to $22 billion in investments in data centers in the next five years.

"You first have to create the right market conditions for data hosting to be profitable," says Marilia Maciel, a digital policy expert with the think tank Fundacao Getulio Vargas in Rio de Janeiro. "Even Brazilian companies prefer to host their data outside of Brazil."

And that's why Almeida says the technology ministry is considering tax incentives for companies willing to manufacture servers in Brazil. Electricity subsidies, he said, could eventually be discussed with the finance ministry.

The idea of requiring local data hosting gained traction after Justice Minister Eduardo Cardozo tried to persuade U.S. authorities to run all further surveillance requests through Brazilian courts. He said his request was rejected during a recent trip to Washington.

Almeida suggested that the damage might not be as bad as some companies think.

"It is a view still under construction," he said. "I think the industry is taking this debate about the data centers in a very extreme way."

FORTALEZA-VLADIVOSTOK

The fallout from the NSA scandal could give a boost to other government Internet initiatives as well.

One project would link Brazil and its peers in the BRICs group of emerging powers through a 34,000 km fiber-optic cable bypassing the United States. The cable would go from Fortaleza along Brazil's northeastern coast all the way to Vladivostok in Russia, also hooking up South Africa, India and China.

The Internet is heavily centralized in the United States, meaning for instance that an email sent by Rousseff to her Russian colleague Vladimir Putin will be likely routed through a server in Miami.

"This is a fine opportunity to look at better connectivity options," said Leslie Daigle, Chief Internet Technology Officer at the Internet Society, a U.S.-based group advocating for an open Internet. "Where I think things go a little sidewise is the extent to which things are being decided out of reaction."

Experts say awareness is more critical than mammoth fiber optic cables or home-grown email or encryption services in a country where officials in charge of crafting the Internet policy sometimes have a poor understanding of the subject and often exchange confidential information through gmail or whatsapp, an instant messaging service for smartphones.

"By introducing more technology you are actually introducing more problems instead of addressing the issues," said William Beer, a cyber security analyst with the professional services firm of Alvarez & Marsal in Sao Paulo.

Rousseff has made the new Internet regulatory framework a top priority, meaning the lower chamber of Congress could vote on it as soon as the end of October. As for the data localization rule, congressman Molon sounds determined.

"Things cannot remain as they were," he said. "We need a political answer against a political act that violated our sovereignty."

(Reporting by Esteban Israel and Alonso Soto; editing by Brian Winter, Kieran Murray, Philip Barbara and Jackie Frank)

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