The National Communications Authority’s
             Strategic Concept
 on Electronic Communications Regulation




      ...
TABLE OF CONTENTS



PREFACE.................................................................................................
PREFACE
The National Communications Authority of Hungary (NCAH) started last summer the
elaboration of a regulatory strate...
We are awaiting your comments, opinions and questions concerning the strategy before 31
March 2006 by e-mail to the strate...
EXECUTIVE SUMMARY
Background

1.   NCAH's regulatory strategy defined for the period 2006 to 2010 set various objectives. ...
EFFICIENT COMPETITION BASED ON A DEVELOPING SECTOR
                                          FULFILS MAJOR CONSUMER INTERE...
7.   Fulfilment of regulatory objectives in Hungary shows a varied picture. The mobile voice
     services market is chara...
FOUR BASIC SCENARIOS IDENTIFIED AS POTENTIAL MARKET
                     EVOLUTION PATHS IN HUNGARY UNTIL 2010

          ...
regulatory interventions is determined the current and expected medium-term outcome
     of competition in the given marke...
Potential interventions

19. Naturally, the application of regulatory means, specific interventions and introduction of
  ...
•   in the case of the ‘Intensifying competition’ scenario deregulation, i.e. elaboration
           of a method for gradu...
INTRODUCTION
26. NCAH's regulatory strategy defined for the period 2006 to 2010 set various objectives: it
    provides a ...
28. The strategy focuses on the electronic communications market, but interaction with
    other connected areas (e.g. IT,...
1 REGULATORY OBJECTIVES
1.1 Room for manoeuvre in NCAH's objectives
29. In the first phase of strategy elaboration – in th...
harmony between its defined objectives and the requirements and opinions of the
     Hungarian market players.


1.2 The r...
40. For that reason competition is the best way to fulfil consumer interests and drive down
    prices and have a positive...
48. The third group of consumer interests is rather indirect consumer interests: choice, i.e.
    the possibility to choos...
Figure 4: Interrelation between consumer satisfaction and penetration


            THE PENETRATION AND THE USAGE, AS THE ...
1.4 Measurement of objectives
54. The Authority applies a consistent measurement system in all three areas to monitor the
...
Figure 5: Marketplace relevant for the regulator


             THE REGULATOR’S ‘MAP OF COMPETITON’ SHOWS THE LEVEL OF
   ...
right corner of the realistic field of competition (in the upper part of the complete figure)
    there is ‘Infrastructure...
1.4.3   Measurement of fulfilment of sector interests

64. As it was mentioned above fulfilment of sector interests is ref...
2 EXPECTED MARKET EVOLUTION

2.1 Analysis of the current market situation
67. The Authority conducted the analysis of the ...
market definition based on consumer needs (which distinguishes for example peer-to-
     peer and broadcast services) can ...
play offer). Notwithstanding these facts Magyar Telekom remains a dominant size player
    in the communications market. M...
78. By European comparison in 2004 in the fixed voice market in Hungary the level of
    competition was among the lowest,...
bandwidths were rising. Cable modem based accesses are cheaper than DSL-based
    accesses.


2.1.3   Audiovisual content ...
Figure 9: Level of competition in the major sub-markets of electronic communications in Hungary in
2004


            THE ...
2.2 Market drivers and trends
92. Future evolution of the Hungarian electronic communications market depends on the
    ch...
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  1. 1. The National Communications Authority’s Strategic Concept on Electronic Communications Regulation Prepared with the involvement of the Boston Consulting Group February 2006 Disclaimer: This translation is an unofficial translation of the original Hungarian document. The Hungarian text is the leading version. NCAH accepts no responsibility for misunderstandings arising as a result of mis-translation.
  2. 2. TABLE OF CONTENTS PREFACE............................................................................................................................................3 EXECUTIVE SUMMARY.................................................................................................................5 INTRODUCTION.............................................................................................................................12 1 REGULATORY OBJECTIVES.....................................................................................................14 1.1 Room for manoeuvre in NCAH's objectives...............................................................................14 1.2 The regulatory objectives system................................................................................................15 1.3 Social objectives system in broader sense...................................................................................18 1.4 Measurement of objectives.........................................................................................................19 2 EXPECTED MARKET EVOLUTION..........................................................................................23 2.1 Analysis of the current market situation.....................................................................................23 2.2 Market drivers and trends...........................................................................................................29 2.3 Potential market scenarios..........................................................................................................42 3 REGULATORY CHALLENGES..................................................................................................48 3.1 Scenario-dependent challenges...................................................................................................48 3.2 General regulatory challenges.....................................................................................................52 4 REGULATORY PRINCIPLES......................................................................................................56 4.1 Guiding principles......................................................................................................................56 4.2 Specificity principles..................................................................................................................63 4.3 Implementation principles..........................................................................................................65 5 POTENTIAL INTERVENTIONS..................................................................................................67 5.1 Interventions possibilities in 2006 and 2007 to be examined in both scenarios..........................68 5.2 Potential interventions in the period 2006 – 2007 in the case of the ‘Dominant player’ scenario ..........................................................................................................................................................72 5.3 Intervention possibilities in the period 2008 to 2010 to be examined in both scenarios..............76 5.4 Intervention possibilities in the period 2008 to 2010 depending on the scenario........................77 -2-
  3. 3. PREFACE The National Communications Authority of Hungary (NCAH) started last summer the elaboration of a regulatory strategy for the period 2006 to 2010. In this process a detailed breakdown is given of the means by which NCAH intends to promote the development of electronic communications markets which play an increasingly important role in the Hungarian economy contributing to the creation of the information society and consequent improvement of the country’s competitiveness. Communications is one of the sectors where technological development is rapidly integrated into everyday life, continuously impacting upon both the operation of other sectors, companies and the life of citizens. The communications sector is continuously undergoing changes world-wide – such as internet-based telephony, program delivery with new technologies, complex customised service packages – which any modern regulatory authority must consider. This strategic concept has been elaborated with the following approach: it analyses the market situation in order to define the regulator’s responses to the current trends and the resultant potential scenarios. With these responses the authority can always channel the sector towards an ideal situation with efficient competition whatever scenario is being realised. However, the elaboration of a strategy does not mean the same for a regulatory authority and a company in a competitive market since within the same process an authority has to face many more constraints than the companies. The national and international legal environment, various international agreements and covenants limit the regulator’s room for manoeuvre when a strategy is being elaborated. I am convinced that appropriate transparent and predictable regulation can positively contribute to a balanced operation of the market, encouraging investment readiness and innovation. For this reason our view is that it is very important to take into consideration the opinions of the sector’s players when our regulatory strategy is being elaborated. As the first phase of the strategy elaboration process we published a discussion document giving an analysis of the current situation and invited opinions by mid-September 2005 concerning the issues identified therein. The document, elaborated for wide public consultation intended to identify and interpret the problems and challenges which the regulator has to face and the basis on which a regulatory strategy can be elaborated. We have received 23 responses to the discussion document. Generally the respondents welcomed NCAH's efforts to elaborate a strategy, involvement of the market players and communicated their opinions to the Authority also beyond the said questions. The feedback and comments received from the sector, the consumers and other stakeholders in response to the discussion document helped the elaboration of the strategic concept. They were used to prepare this document which presents the draft regulatory strategy as defined by NCAH. I trust that – as in the previous phase – you will again share your opinions with us. Our view is that the following basic principles continue to remain important in the course of the elaboration of the strategy and the related consultation processes: • Objectiveness and evidence-based approach: objective wording of statements and their confirmation with evidence • Transparency and open communication with the participants: wording our train of thoughts and findings in a way that is understandable to everyone -3-
  4. 4. We are awaiting your comments, opinions and questions concerning the strategy before 31 March 2006 by e-mail to the strategia@nhh.hu address. Would all interested parties please complete the cover sheet downloaded from NCAH's website. The public consultation amongst the sector players of the strategic concept shown here will be followed by the third phase of strategy elaboration. Whereby in the first half of 2006 we will prepare on the basis of the strategic concept and publish the finalised strategy and the related implementation plan. Dániel Pataki President -4-
  5. 5. EXECUTIVE SUMMARY Background 1. NCAH's regulatory strategy defined for the period 2006 to 2010 set various objectives. It provides a general framework and identifies the key regulatory paths to promote predictable regulation and a strengthening of communication between the regulator and the sector. The Authority will also leverage the elaborated strategy as guidance when determining specific regulatory decisions in the future. Additionally the document enables co-ordination with other governmental bodies of the strategies focusing on the common target area and contributes to the elaboration of the EU’s basic documents concerning electronic communications, such as – among others – active participation in the review of the framework regulation initiated in 2006. 2. The strategy focuses on the electronic communications market, but interaction with other connected fields (e.g. IT, media) was also analysed due to the intensifying convergence processes. The findings connected with the goals, market evolution scenarios, guiding principles and potential interventions defined in the strategy primarily concern the electronic communications market. Regulatory objectives 3. The Authority has elaborated the objectives on which the strategy is based in harmony with its existing mission and vision. The objectives were determined in the context of the relevant EU laws and directives, international commitments and the legal environment in Hungary – in particular the Act on Electronic Communications (Eht.) and other relevant acts and decrees. The primary direct objective is ensuring the existence of efficient competition1. Another objective is the fulfilment of consumer interests, which incorporates affordable price, high value and wide choice of products / services offered. The third objective consists of sector interests reflected by three factors: level of innovation, investments and financial stability. 1 Efficient competition means competition of high intensity between the market players both at the level of (access) infrastructures and retail services. When efficient competition is in place there is no player which could in itself or in co-operation with others significantly impact upon the market dynamics. -5-
  6. 6. EFFICIENT COMPETITION BASED ON A DEVELOPING SECTOR FULFILS MAJOR CONSUMER INTERESTS Regulatory objectives of the NCAH Consumers’ interests: price, value, choice Enabling viable competition Penetration / usage is the only possible approach to fulfil Efficient competition consumers’ interest Competition is only sustainable and efficient Sector interests: with a developing and Financial stable sector Innovation Investment stability The competition cannot ensure other social objectives related to electronic communications, The competition cannot ensure other social objectives related to electronic communications, like universal services like universal services 4. The regulator’s final objective is fulfilling consumer interests, but its primary direct objective is, notwithstanding, ensuring the existence of efficient competition. When contradictions arise among the fulfilment of given objectives competition goals will be given first priority against the fulfilment of other objectives. However, the Authority will consider the advantages generated by the fulfilment of a given objective and compare them to the disadvantages resulting from the less satisfactory fulfilment of another objective according to the principle of net benefit. Additionally, when analysing sector level interests the Authority will consider minimum thresholds for financial stability indicators which enable sustainability of competition. 5. In order to ensure fulfilment of the above described consumer and sector interests (and other social and national economy objectives in a wider sense), it is important that infocommunication purpose public policy and general economy development actions are also implemented simultaneously and in co-ordination with the implementation of the Authority’s strategy. Due to its powers defined by law the Authority has limited means to directly impact upon the fulfilment of these objectives and can exert positive influence primarily through ensuring the fulfilment of the direct regulatory objectives to the greatest possible extent. Expected market evolution path Current market situation 6. The Hungarian electronic communications market has shown a stable growth in the period 1999 to 2004 and both its growth and weight within the GDP reflected an evolution similar to that of the other countries in the region. Within the internal structure of the market the weight of wholesale revenues increased, while within retail communications revenues the share of fixed voice market was slowly declining while growth was driven by the mobile voice market and the data market. An increasing share of market players provide voice, data and audiovisual services as well which is also reflected by the distribution of revenue sources and launch of new services. Notwithstanding these trends Magyar Telekom remains a dominant size player in the electronic communications market: the company’s share in revenues is nearly 60% although this figure is continuously decreasing. -6-
  7. 7. 7. Fulfilment of regulatory objectives in Hungary shows a varied picture. The mobile voice services market is characterised by very strong and intensifying competition and there is medium intensity competition also in the data services (internet services) market although this is mostly attributable to service-based competition. However, there is limited competition in the fixed voice services and audiovisual content delivery markets. This dichotomy is reflected also in the fulfilment of consumer interests. In respect of the sector interests the current market is characterised by financial stability, but relatively low and decreasing level of investments. Drivers and trends 8. Future evolution of the Hungarian electronic communications market depends on the changes in supply-demand drivers and the general electronic communications market trends and their local implications. Understanding these trends assists in determining the potential market evolution scenarios. 9. The Hungarian market evolution scenarios were established along the trends which are the most important from a regulatory perspective and whose outcome remains uncertain. Accordingly the potential scenarios were determined by three major questions: • Technological dimension: To what extent will a dominant infrastructure player be present in the market which can provide the majority of the electronic communications services more efficiently? • Service dimension: To what extent and how quickly will various electronic communications services converge and furthermore to what extent will bundled services including various communications services be used by consumers? • Value chain dimension2: How much will the market players’ scope of activities diverge (be separated) or converge along the value chain? Market evolution scenarios3 10. There are four realistic scenarios for the evolution of the Hungarian electronic communications market until 2010 along the above three questions: • ‘Battle of platforms’: there is no dominant player with significant competitive advantage at the infrastructure level, widespread use of bundled services is limited, while the value chain remains generally integrated. • ‘Dominant player’: Magyar Telekom plays a dominant role and has significant competitive advantage at the infrastructure level, bundled services will have a significant impact, while the value chain remains generally integrated. • ‘Intensifying competition’: there is no dominant player with significant competitive advantage at the level of infrastructures, bundled services will have a significant impact, and the value chain will disintegrate to a considerable degree (several players enter the market along the various value chain elements). • ‘Service layer separation’: Magyar Telekom plays a dominant role and has significant competitive advantage at the infrastructure level, bundled services will have a major impact, but the value chain will disintegrate to a considerable degree. 2 Value chain elements: content creation, content aggregation, service/application, transmission, access, terminal equipment, consumer relations 3 The scenarios assume that the current regulatory environment remains unchanged to show the potential paths of ‘organic’ market evolution. -7-
  8. 8. FOUR BASIC SCENARIOS IDENTIFIED AS POTENTIAL MARKET EVOLUTION PATHS IN HUNGARY UNTIL 2010 Service layer Intensifying separation competition Many Role of bundled services Players in the value chain Dominant player Not Significant significant One/ few Battle of platforms Exists Does not exist Dominant infrastructure provider 11. The ‘Dominant player’ and ‘Intensifying competition’ scenarios were selected for in- depth analysis based on the estimated probability of realization, the extent of departure from the current situation and the substantially differing nature of regulatory challenges posed. Thus these two scenarios were used to identify and describe potential regulatory interventions in this strategic concept document. Regulatory principles 12. Regulatory objectives, various market evolution trends and scenarios (and challenges resulting from their comparison) determine the principles for the use of regulatory tools. In addition to the strategic objectives these principles ensure a future-proof strategic approach as they are not connected to any given market evolution paths and in this way can support the Authority’s decisions in the following years independently of the specific market scenarios. Guiding principles 13. Certain bottlenecks exist due to the nature of electronic communications markets, the current trends and the market evolution paths experienced so far. These bottlenecks distort and hinder the creation of competition and therefore their existence necessitate ex ante market regulation. The Authority has a double duty: on the one hand its objective is to eliminate the bottlenecks, on the other hand while these bottlenecks exist it must hinder the way that control over the bottlenecks can abuse their resultant market dominance. In the short term the major bottleneck exists at the level of the access infrastructure primarily due to the very high market entry barriers. Another bottleneck along the value chain is the size of the existing customer bases. In the medium term the objective is to hinder that bottlenecks are created at the level of applications and content and that the current SMP operators can leverage their market dominance to vertically connected markets. 14. The final objective of the Authority is to ensure the existence of efficient competition in the electronic communications services market. Consequently when the nature of -8-
  9. 9. regulatory interventions is determined the current and expected medium-term outcome of competition in the given market must be taken into consideration. 15. To ensure the emergence of efficient competition the regulator must even in the short term create the conditions for efficient choice and switch by the consumers. Some of these consumer rights can be ensured by competition itself, but the Authority has numerous means to contribute to the creation of the underlying conditions if the market mechanisms themselves cannot guarantee them. 16. It is important to take into consideration the sector interests in the process of regulation; out of them the level of investments and financial stability are particularly critical. For this purpose the Authority will only intervene if it does not result in any drastic short-term change at the level of specific players and SMP operators. Additionally, the Authority will monitor the financial stability of the whole sector and avoids that it is endangered by its measures. Specificity principles 17. The Authority • Should regulate without technological preferences, i.e. implement regulation that is technology-neutral, but technology-specific due to the features and characteristics of the electronic communications market. • Identifies competition, consumer and sector objectives and principles which are beyond specific markets and services, and are applicable to them in general. However service-specific regulation may be identified at the level of specific interventions. • May apply distinct regulatory interventions depending on the relevant market positions of the SMP operators operating on non-overlapping but similar markets. • May apply distinct interventions taking into consideration the local geographical particularities. • Considers only the launch of new services as emerging market which it does not want to regulate in the early phase. • Continuously revises the necessary extent of specificity of regulation on the basis of market and technological trends, also taking into consideration the EU directives. Implementation principles 18. The Authority • Follows the principles of transparency, long-term predictability and consistency in its regulation. Regulation is based on predefined and communicated objectives, principles and methodologies. • Examines the impact of alternative means and ensure the efficiency of regulation through compliance with the principle of proportionality and net benefit before intervention decisions are made. It takes into account the pace of evolution of sustainable competition and the time and cost requirements of implementing regulatory interventions. • Intends to co-operate with players involved in the electronic communications market. Therefore, the Authority elaborates the necessary details of regulation based on the behaviour of SMP operators and other market players and their commitment to efficient competition. • Is aware that efficient regulation is based on requiring compliance and if necessary applying strict punishment the Authority always strives to act in a predictable while resolute way. -9-
  10. 10. Potential interventions 19. Naturally, the application of regulatory means, specific interventions and introduction of obligations will continue to be carried out fully in compliance with the applicable national and European legal and regulatory environment in the future as well. Notwithstanding, the Authority will take into consideration the fulfilment of regulatory objectives, in particular the pace of emergence of efficient competition when determining its future interventions. Since the fulfilment of regulatory objectives will differ across the various paths of market evolution, i.e. the market scenarios identified, the specific interventions derived from the defined regulatory principles may also differ. 20. As part of the regulatory strategy the Authority only identified intervention possibilities and investigation areas, which do not necessarily translate into interventions that will be implemented. The Authority will conduct more detailed scrutiny and impact analysis on the most serious intervention possibilities, while specific obligations may be imposed in a manner defined by Eht. 21. Detailed analysis of certain intervention possibilities will be necessary in the period 2006 to 2007 irrespective of the market evolution path and the market scenario to be realised. However in the case of different market evolution paths (scenarios) the same intervention may be applied with different focuses and weights. The Authority identifies the following potential interventions as irrespective of the market evolution path: • revision of termination fees, with special regard to further reduction of mobile termination fees • ensuring the conditions of competition in the market of audiovisual content delivery • active support to increase the level of information available to consumers 22. For the period 2006 to 2007 the Authority also sets the objective to conduct a detailed analysis of the potential regulatory interventions applicable to the ‘Dominant player’ scenario. The underlying reasons are that on the basis of the current market evolution trends there is a significant probability of realisation of this scenario and this market evolution path is the least supportive in the fulfilment of regulatory objectives, in particular the emergence of efficient competition. For the period 2006 to 2007 the Authority identifies the task to conduct a detailed analysis of the following potential interventions related to the ‘Dominant player’ scenario: • mapping the interaction of fixed and mobile voice markets to the level of regulatory means • development of wholesale products connected to the investment ladder • strengthening the competition in broadband internet services through improving DSL wholesale conditions • promote emerging technologies • reduction of cross-ownership of parallel infrastructures 23. For the period 2008 to 2010 two key areas of change in the regulatory environment must be taken into consideration irrespective of the scenario realised (naturally the preparations needed to address these areas must be started as soon as possible): • Liberalised spectrum policy • NGN-specific regulation 24. In the period 2008 to 2010 scenario-specific regulation beyond the common areas may also be needed depending on the evolution of efficient competition: • in the case of the ‘Dominant player’ scenario management of potential bottlenecks connected with content service - 10 -
  11. 11. • in the case of the ‘Intensifying competition’ scenario deregulation, i.e. elaboration of a method for gradual and optimal reduction of sector-specific ex ante interventions 25. This means that the extent and focus of potential regulatory interventions significantly depend on the market and competition evolution path, i.e. the commitment of sector players to create conditions for efficient competition. POTENTIAL KEY REGULATORY INTERVENTIONS WILL BE EXAMINED IN DETAIL Time horizon of possible regulatory 2006- 2007 2008-2010 interv ention • Determi ning in teracti on of fixed a nd mo bile marke ts o n • Liberalise d spec tru m p olic y regulati on mea ns’ lev el • NGN re gula tio n • Dev elopin g wholes ale pro du cts c on necte d to inv estme nt ladder • Issues of co nte nt prov idin g • Enha ncin g bro adban d In ternet serv ice compe titi on b y further dev elopment o f DS L wholesal e pro duc ts ‘Dominant player’ • Promo tin g emer gin g tec hnolo gies • Decreasin g cross ownershi ps o f parallel i nfras truc tures • Furt her decreas e of mo bile IC -fees • Enha ncin g co mpe titi on i n AV marke ts • Increase o f co nsu mer tra nspare nc y • Furt her decreas e of mo bile IC -fees • Liberalise d spec tru m p olic y ‘Intensif ying • Enha ncin g co mpe titi on i n AV marke ts • NGN re gula tio n competition’ • Increase o f co nsu mer tra nspare nc y • Deregula tio n inde penden t o f scenari o • • Determination of con crete interventions should b e preced ed b y d etail ed mar ket r eview and impact Determination of con crete interventions should b e preced ed b y d etailed mar ket r eview and impact assessment assessment • • The focus and weight of same intervention can differ according to the scenar ios The focus and weight of same intervention can differ according to the scenar ios - 11 -
  12. 12. INTRODUCTION 26. NCAH's regulatory strategy defined for the period 2006 to 2010 set various objectives: it provides a general framework and identifies the key regulatory directions to promote predictable regulation and strengthening communication between the regulator and the sector. The Authority wants to use the elaborated strategy as guidance when later specific regulatory decisions will be adopted. Additionally the document enables co- ordination with other governmental bodies of the strategies focusing on the common target area and contribution to elaboration of the EU’s basic documents concerning electronic communications, such as – among others – active participation in review of the regulatory framework started in 2006. 27. The strategic concept is elaborated in five steps. In the first step the regulatory objectives were identified, the second step included the elaboration of potential market evolution scenarios, in the third step generally applicable and market evolution path specific regulatory challenges could be identified through comparison of regulatory objectives and market evolution scenarios. The fourth step was the definition of principles for the application of regulatory means which set forth generally applicable principles with regard to the regulatory objectives and the potential market evolution paths. Finally in the fifth step the regulatory principles were translated into potential regulatory interventions.4 The chapters of this document address these five steps. Figure 1: The structure of the regulation strategy THE STRUCTURE OF THE REGULATION STRATEGY Generally applicable Market evolution dependent 1 3 2 Regulatory objectives Market scenarios Regulatory challenges 4 5 Potential regulatory Regulatory principles interventions 4 The findings in this document are only indirectly connected with the market analysis required by Hungarian communications laws, do not follow its defined methodology and the findings should be interpreted independently. - 12 -
  13. 13. 28. The strategy focuses on the electronic communications market, but interaction with other connected areas (e.g. IT, media) was also analysed due to the strengthening convergence processes. The findings connected with the objectives, market evolution scenarios, guidelines and potential interventions defined in the strategy basically concern the electronic communications market. - 13 -
  14. 14. 1 REGULATORY OBJECTIVES 1.1 Room for manoeuvre in NCAH's objectives 29. In the first phase of strategy elaboration – in the strategic document: ‘Discussion material in preparation of the electronic communications regulation strategy’ offered for consultation – NCAH's earlier defined mission and vision that contained both regulation related and institutional objectives were used to elaborate the Authority’s overall objectives. These were used to determine the regulatory objectives which will be the starting point for the regulatory strategy. 30. NCAH's defined mission: ‘The NCAH, as modern regulatory authority promotes the development of the communications markets, stimulating competition and supervising the operation of the markets in order to make sure that everybody in Hungary has quick and easy access to the most up-to-date communications services at affordable prices’. 31. NCAH's defined vision: ‘The NCAH is a decisive independent communications authority in the Central and Eastern European region, possessing up-to-date regulatory powers and enjoying considerable esteem in society through its efficient, successful and flexible operation’. 32. NCAH's defined overall objectives: • Promote / strengthen competition • Promote the spread of broadband electronic communications services and the internet • Create up-to-date competence as an authority • Modernise the NCAH. 33. Hungarian electronic communications regulation is based on the European Union’s regulatory framework. The objective of this strategy elaboration is to determine the strategic paths of the further implementation of the currently applicable framework system in Hungary. 34. The European Union’s regulatory framework system consists of the following key components: • Framework Directive (2002/21/EC), • Authorisation Directive (2002/20/EC), • Access Directive (2002/19/EC), • Universal Service Directive (2002/22/EC), • Directive on privacy and electronic communications (2002/58/EC) and • Directive on competition in the markets for electronic communications networks and services (2002/77/EC). 35. The national legal framework of the Authority’s regulatory objectives and means system is the Electronic Communications Act (Eht., Act C of 2003) elaborated in compliance with European Union directives. 36. In addition to laws and directives the Authority's regulatory operation is governed also by international obligations, such as the ITU Constitution, WTO agreements or the CEPT Agreement. In addition to these constraints the Authority takes into consideration also the relevant international recommendations (see OECD) when determining the regulatory objectives. Finally the Authority wishes to offer consultation to ensure - 14 -
  15. 15. harmony between its defined objectives and the requirements and opinions of the Hungarian market players. 1.2 The regulatory objectives system 37. Among the objectives of NCAH's regulatory strategy the key objective to be primarily achieved is the ensuring of efficient competition in the electronic communications markets. Efficient competition means competition of high intensity among the market players both at the level of (access) infrastructures and retail services. When efficient competition is in place there is no player which could in itself or in co-operation with others significantly impact the market dynamics. Another component of the objectives is fulfilment of consumer interests incorporated by low price of products / services, high value content and wide choice offered. The third component of the objectives is the interest of the whole industry which means the totality of implementing three components: high level of innovation ensured in the sector, high intensity of investments made in the sector and financial stability of the sector. Figure 2: The regulatory objectives system EFFICIENT COMPETITION BASED ON A DEVELOPING SECTOR FULFILS MAJOR CONSUMER INTERESTS Regulatory objectives of the NCAH Consumers’ interests: price, value, choice Enabling viable competition Penetration / usage is the only possible approach to fulfil Efficient competition consumers’ interest Competition is only sustainable and efficient Sector interests: with a developing and Financial stable sector Innovation Investment stability The competition cannot ensure other social objectives related to electronic communications, The competition cannot ensure other social objectives related to electronic communications, like universal services like universal services 38. The final objective of the regulator is to fulfil the consumer interests (price, value, choice), however its key primer objective is the ensuring of efficient competition because in Hungary this is the only real guarantee for achievement of the final objective, fulfilment of consumer interests at the highest level. For this purpose the major primer objective of regulation is the ensuring of efficient competition which consequently can be interpreted as a means for fulfilment of consumer interests. 39. Theoretically we can envisage such centrally intensively regulated markets where the level of market competition is low, but as a result of the regulator’s direct intervention prices are still low, but it cannot be realistically achieved in the European market economy model. - 15 -
  16. 16. 40. For that reason competition is the best way to fulfil consumer interests and drive down prices and have a positive impact on value and choice. Numerous national and international examples show that comparison of the historical or a specific date related figures of a market there is a negative correlation between market concentration and price level, i.e. lower price level is reached in less concentrated markets with higher level of competition. 41. The third component of the objectives system, i.e. consideration of sector interests is also indispensable, just to ensure sustainable competition. Permanent non-fulfilment of sector interests – such as financial uncertainty, reducing investments and lack of innovation – finally endanger the fulfilment of consumer interests. Consequently the Authority must take into consideration in its objectives system the interests of the whole sector since only a developing and stable sector can ensure sustainable efficient competition. 42. Contradictions may arise among the processes of fulfilment of certain objectives: for example between reduction of consumer prices and maintaining the financial stability of the sector or between widening the choice through competition among operators and payback of investments. In such cases the Authority seeks a compromise solution for regulatory intervention where first priority is given to competition against the fulfilment of the other objectives. However when an impact analysis of a given intervention is conducted and contradiction arises the Authority considers the advantages generated with the fulfilment of a given objective and compares them to the disadvantages resulting from the fulfilment of another objective according to the principle of net benefit. In accordance with the principle of net benefit the Authority decides on intervention only in the case when the benefits can considerably counterbalance the arising disadvantages. 43. Additionally when the sector level interests are concerned the Authority considers minimum thresholds for financial stability indicators not to be exceeded in a negative direction as a result of the intervention. This can ensure that potential interventions aiming at promoting competition will also in the long term have the expected impact. Of course it does not mean that the regulator will ensure financial stability also for companies which do not operate efficiently and slow down transformation of these companies and the sector. Furthermore the regulator cannot protect efficiently operating companies from the consequences of potentially bad business decisions. 1.2.1 Consumer interests 44. The numerous consumer interests and aspects identified as indirect but final objectives can be classified basically in three groups with certain overlapping (see Figure 3). 45. The first consumer interest is affordable price. This includes in electronic communications the access price, usage price, entrance-fee, total price and partly the cost of switching to another operator and supply transparency, namely the comparability of consumer prices. 46. The second group: value. This includes quality, functionality, novelty, rich content, adequate customer care, stability, safety, consumer rights and transparency as consumer interest included in all groups. In economic terms value describes the level of utility to the consumers offered by the service. 47. The combined perception of these first two groups reflects the consumers’ price/value perception, i.e. customer satisfaction. - 16 -
  17. 17. 48. The third group of consumer interests is rather indirect consumer interests: choice, i.e. the possibility to choose. This group includes service choice, infrastructure choice (i.e. coverage), legal and administrative possibility to switch and consumer rights partly included also in the ‘value’ group and cost of switching partly included in the ‘price’ group and transparency which is included in all groups. Figure 3: The consumer interests THE CONSUMER INTERESTS CAN BE DIVIDED INTO THREE GROUPS: PRICE, VALUE AND CHOICE Price Choice Possibility to switch Access price Service choice Usage price Access to Entrance-fee Charge of universal the switch services Total price Coverage Transparency Consumer rights Functions Safety Rich Stability content Novelty Adequate Quality customer care Value The consumer satisfaction is shown by the price value ratio, and its final measurement tools are the The consumer satisfaction is shown by the price value ratio, and its final measurement tools are the penetration and the usage penetration and the usage 49. Some regulators identify as an objective a level of spreading the use of certain services, i.e. penetration as a target indicator. In particular the spreading use of broadband technologies, i.e. broadband penetration is often set as regulatory objective. 50. The indicator on usage better reflects penetration and widespread use of services in certain markets but it is not a primary consumer objective in the regulatory strategy’s objectives system, while it is a consequence of fulfilment of consumer interests, therefore it is a good measure of the former. As it is shown in Figure 4 consumer satisfaction and lower prices result in higher penetration and wider usage. This means that penetration and usage indicators are considered to be the indicators which reflect the best the fulfilment of consumer objectives. - 17 -
  18. 18. Figure 4: Interrelation between consumer satisfaction and penetration THE PENETRATION AND THE USAGE, AS THE INDICATORS OF THE CONSUMER INTERESTS’ REALIZATION Trend of the Demand and the Supply Producer market Price Price Supply "A" 1 Supply point 1 Supply "B" x 2 x Demand "B" 2 Demand "A" Demand Quantity Quantity (Penetration/Usage) (Penetration/Usage) 1 If the value grows, the quantity follows – 1 Due to the lack of supply, there are only according to the new demand curve. few supply points 2 If the prices decrease, the quantity grows again 2 Penetration and price deficits occur due to the – according to the new supply curve. lack of switching possibility. 1.3 Social objectives system in broader sense 51. In addition to the three groups in the objectives system there are other social and national economy objectives in broader sense which must be integrated into the regulatory objectives system. These objectives are raised generally in relevance to the information society and were defined among the EU’s horizontal objectives, the Lisbon objectives and the i2010 objectives, as well as the Hungarian Information Society Strategy (MITS, Government Resolution 1126/2003. (XII.12.)) and the National Development Plan. 52. The i2010 objectives include ‘Creating an information society’, ‘Promoting wider access to information and services’ and ‘Increasing innovation and investment in the ICT sector’. Similarly the most relevant EU horizontal objectives are ‘Equality of chances’, ‘Revenue’ and ‘Rural development’, while from the National Development Plan ‘Roll-out of the information society’, ‘Increasing competitive knowledge and education’ and ‘Permanent improvement of the economy’s competitiveness’. 53. According to the Authority's view achievement of the above listed social and national economy objectives are critical and it takes them into consideration during both its regulatory strategy and everyday activities. However due to its powers defined by law NCAH has limited means to directly impact on the fulfilment of these objectives and can have positive influence largely through ensuring fulfilment of the direct regulatory objectives to the greatest possible extent. In order to ensure the fulfilment of the interests of the consumers and the sector (and other social and national economy objectives in a wider sense) as identified among the objectives, it is highly important that in co-ordination with the implementation of the Authority’s strategy infocommunication purpose public policy and general economy development actions are also implemented. - 18 -
  19. 19. 1.4 Measurement of objectives 54. The Authority applies a consistent measurement system in all three areas to monitor the fulfilment of the objectives through a strategic controlling process. It includes cyclically conducted measurements and evaluation and analysis based on comparison with international and historical data. Finally the analyses are fed back for interventions. 55. The Authority monitors in respect of the direct objective (efficient competition) the competition indicators, in respect of fulfilment of consumer objectives, the evaluation of prices, value, choice and penetration/usage, while in respect of the sector interests the level of investments, innovation and financial stability. Additionally it considers critical minimum levels for the financial stability indicators of the whole sector and monitors their fulfilment. 56. The specific indicators and measurement methodologies to be applied for the measurements are elaborated in detail in the implementation phase, but basically they are the following: 1.4.1 Measurement of efficient competition 57. Measurement of competition is of high importance since the Authority can indirectly promote maximisation of consumer satisfaction (price/value) through competition and choice. 58. Several methods are available for measurement of competition, the Authority wants to use the Herfindahl-Hirschman index (HH-index) which calculates a concentration index for the given market on the basis of market shares.5 Out of different methodologies and indices the Authority selected the HH index because it can relatively robustly present the achievement of efficient competition and the information needed for its calculation is readily available. Interrelation between the evolution of market concentration and efficient competition could be harmed in the case of collusion among the market players but the Authority monitors this on the basis of the applicable national legislative environment. 59. However to clearly understand competition intensity we have to distinguish an access infrastructure level and a retail concentration index. Access infrastructure level concentration shows physical concentration of different accesses, its level reflects the situation of competing platforms, and thereby the level of infrastructure-based competition. Retail concentration index shows the intensity of competition at retail level, i.e. the level of services which the consumers perceive the mostly. Combined measurement of the two indexes gives a clearer picture of evolution of competition in the market than merely measuring competition at the retail level. Indicators of the evolution of infrastructure-based competition are essential since an operator offering alternatives at the level of infrastructure has much more room for manoeuvre and is less dependent on the incumbent operator therefore it has better possibilities in the retail market for product design, pricing and service differentiation. 5 HH index calculation method: the squares of the market share indicators of market players are added to obtain the HH index. According to the theoretical interpretation in microeconomics in the case of perfect competition the HH index is approaching zero, while in a monopolistic market the index amounts to exactly 1. - 19 -
  20. 20. Figure 5: Marketplace relevant for the regulator THE REGULATOR’S ‘MAP OF COMPETITON’ SHOWS THE LEVEL OF EFFICIENT COMPETITION 0 HHI(1) of the retail market competition Relevant field of competition The market competition Efficient from the Service competition consumers’ competition Preference of the regulator Infrastructure point of view competition If the infrastructure competition grows, the competition in the retail markets increases as well The level of the service- based competition Monopoly market Infrastructure competition in terms of access 1 0 HHI(1) of the access infrastructure competition (1) All the coordinates are scaled by the values of Herfindahl-Hirschman index used to measure market concentration Note: The ‘theoretical maximum’ level of retail market and access infrastructure competition may differ in each of the markets 60. Figure 5 shows the field of competition determined by the two indices. A field of competition that can realistically exist in electronic communications can be identified within the theoretically possible field of competition. For each market it can be estimated a maximum realistic infrastructure competition level (horizontal axis) since due to the technological parameters of communications only a limited number of parallel infrastructures can exist and with lower levels of concentration non-efficient investments would be made. There is a minimum realistic level of competition also at the retail level (vertical axis) under which the economies of scale of the market players would be so low that their efficiency would drop below the optimal level and consequently consumer interests would be harmed. The potential field of competition can change primarily as a result of technological development, but also in connection with other factors (such as the appearance of new technologies with higher cost-efficiency and consequently enabling the construction of more parallel infrastructures). Finally the area below the line traced from the origin to the right upper corner can be practically excluded on the basis of currently widely used business models since the level of retail competition is higher than the level of infrastructure competition. In Hungary it is unlikely in the medium term that alternative operators would reach, through service competition, higher market concentration than through infrastructure competition. 61. The Authority will determine and monitor the evolution of efficient competition for each market on this relevant field of competition. 62. The theoretical extremes of market structure (competition) are in the four corners of the relevant field of competition shown in Figure 5. On the ‘Monopolistic market’ there is no competition in any form, there is a single player in the given market, therefore both consumer relations and access are bottlenecks. In the upper left corner there is ‘Service competition’ when the level of competition is very high from consumer i.e. retail point of view while access remains a bottleneck and infrastructure competition does not evolve. In this case consumer objectives are fulfilled, but the competition does not become self- supporting and the retail market players are dependent on the incumbent wholesale operator and consequently the regulatory authority too. On the contrary in the bottom - 20 -
  21. 21. right corner of the realistic field of competition (in the upper part of the complete figure) there is ‘Infrastructure competition’ which fulfils to a high degree the consumer interests and in contrast to ‘Service competition’ can be absolutely self-supporting and sustainable. In this case competitors compete in different infrastructures, do not directly depend on each other or the regulator. Finally in the upper right corner there is the ‘Efficient competition’ model. Here competition is at the highest level, both infrastructure level and service level competition is functioning (through natural separation of the value chain) and fulfilment of consumer interests is at maximum level in this case. As with ‘Infrastructure competition’ this also means a sustainable market structure and competition. As previously mentioned the Authority's long-term objective is to reach ‘Efficient competition’ and in the shorter term to promote evolution of the electronic communications market on this path. 1.4.2 Measurement of fulfilment of consumer objectives 63. Figure 6 shows the fulfilment of consumer interests along the regulatory impact curve as a result of regulation. This figure illustrates well that the regulator can have limited direct impact on the interests reflecting consumer satisfaction (price, value) since this would suppose retail interventions. The direct impact of its activity is rather reflected at the level of choice which offers an indication of competition intensity. However, the other consumer interests are also fulfilled along the regulatory impact curve by the increase of choice and inherently competition. The ratio of switches is a suitable index for the measurement of choice to assess regulatory impact curve since it reflects the market impact of choice which is relevant for the consumers. It should be mentioned here that the Authority's objective is not simply to increase the ratio of switches because it can only be used as a means for reaching higher consumer satisfaction level. Figure 6: Regulatory impact curve NCAH IS CAPABLE OF INCREASING THE CONSUMER SATISFACTION ALONG THE REGULATION IMPACT CURVE % High % Illustr Illustrati ation on Efficient Very strong Impact of market competition in Price Value service competition and providers and Market C growing satisfaction satisfaction Regulation Impact Curve Price/Value sense = Satisfaction the long term Market B Market A % % Dissatisfaction and The competition starts: little possibility to extending service choice provider switches 2 Price Value Low Low High Ratio of the switches Relevant measurable choice-indicator from the consumer point of view 1 The regulator can affect this in the short term - 21 -
  22. 22. 1.4.3 Measurement of fulfilment of sector interests 64. As it was mentioned above fulfilment of sector interests is reflected by the following three factors: level of innovation, investments and financial stability. In respect of the efficiency of measurement the level of investments in the sector can be a good indicator of the first two dimensions as the measurement of innovation would require a very complex methodology. Financial stability should be measured on the basis of sector revenues and profitability. 65. Four situations can evolve in the sector along the two dimensions: • Developing sector: appropriate level financial stability, high level of investments • Good prospects in the longer term: lack of financial stability, high level of investments • Short-term optimisation: appropriate level financial stability, low level of investments • Declining sector: lack of financial stability, low level of investments 66. According to the Authority's approach a developing sector can provide the best basis for evolution of efficient competition, therefore the objective of regulation is to create the regulatory background needed for creation of a developing sector. The Authority cannot actively support its achievement but considers it as a major aspect in the impact analysis of interventions. - 22 -
  23. 23. 2 EXPECTED MARKET EVOLUTION 2.1 Analysis of the current market situation 67. The Authority conducted the analysis of the market situation and the evolution trends which shape the market in a standardised procedure. The analysis procedure examines the market along three key dimensions: • The technological platform dimension distinguishes copper pair, mobile (and other wireless), cable (HFC), terrestrial access platforms and other emerging access technologies. • The service dimension groups electronic communications services in voice, data and audiovisual categories. • The value chain dimension separates consumer relations, terminal equipment, provision of (network) access, transmission (on electronic communications infrastructure), application layer and content offering related activities, i.e. creation and aggregation of content. A fourth relevant dimension encompasses the customer segments (e.g. residential, business). 68. Numerous separate markets can be defined along the four dimensions considering all potential combinations. However, when a regulatory strategy is being elaborated for practical reasons these need to be grouped and filtered. A market definition that is appropriate for strategy elaboration must take into consideration the regulatory objectives (e.g. whether the consumer and sector interests can be interpreted in the market), the market ownership structure (e.g. how much do the market players’ current and expected activities reflect the defined markets), the telecommunications trends (whether the markets can be separated from each other in the examined period), the market structure from the consumer point of view (how much the products and services offered in two markets substitute each other) and the limits determined by the available information. 69. A market definition along the service dimension satisfies the best of these conditions with the comment that the voice market was divided into fixed voice market and mobile voice market. The underlying reason is that these two markets alone are the largest on the Hungarian electronic communications market and currently are still separated in a marked way on the basis of the majority of the above explained criteria. Therefore the following markets were defined for the analysis of the current market situation and expected evolution of the market: • Fixed voice market which includes voice services provided on copper pair and cable. • Mobile voice market, i.e. voice services provided with mobile technology. • Data market which includes fixed internet access and service (xDSL, cable modem based, switched line, wireless, etc.), mobile data access and data services (e.g. SMS, MMS, GPRS, 3G based data services) and business data service. • Audiovisual content delivery market which includes program distribution, broadcasting, delivery of content produced by broadcaster on IP-based or mobile network. Naturally this market definition does not substitute in any form the definition of relevant markets identified by the EU for regulatory point of view. It should be also noted that in the long term market evolution will result in convergence of services and therefore a - 23 -
  24. 24. market definition based on consumer needs (which distinguishes for example peer-to- peer and broadcast services) can become more relevant. 70. The total Hungarian infocommunication market produced on the average a stable 8% annual growth at current prices in the period 1999 to 2004. Within this the share of electronic communications is permanent, accounts for about two thirds of the market. This share is higher than the European average, i.e. in Hungary the electronic communications market is relatively more developed than the IT market. 71. Revenues generated from electronic communications increased at current prices on the average 14% annually from about HUF 500 billion in 1999 to HUF 975 billion in 2004. Within this the weight of wholesale revenues is rising and reached in 2004 about 20% of the total revenue. The rise in electronic communications spending and its weight within the GDP in Hungary shows an evolution similar to that of the countries in this region. 72. Within the retail communications revenues growth was driven by mobile voice market and data market revenues while the fixed voice market showed a slow fall (Figure 7). In 2004 aggregated fixed and mobile voice services accounted for 72% of the total retail communications revenues, while the data market added 19% and the audiovisual content delivery market 9%. The greatest share of the wholesale market (80% in 2004) was generated by mobile voice service revenues and this is the source which grows the fastest. Figure 7: Evolution of the Hungarian retail electronic communications market STAGNATING FIXED, DINAMICALLY INCREASING MOBILE AND DATA MARKET (CAGR) 1999-2004 Retail revenue on electronic communication market (current prices) Billion HUF 11% 771 800 705 19% 670 700 600 49% 600 530 460 500 16% 400 300 200 100 0% 0 1999 2000 2001 2002 2003 2004 Fixed voice Mobile voice Data AV Source: NCAH 73. The electronic communications market was characterised by a relatively low and decreasing level of investments. While in 2000 the investments volume exceeded HUF 230 billion, it dropped to HUF 140 billion in 2003 which represents 3.8% of the total investments in the economy in contrast to 8.1% in 2000. 74. A rising share of market players provide voice, data and audiovisual services. This is reflected by the distribution of revenue sources (e.g. share of data service revenues among mobile operators) and launch of new services (the best example is UPC’s triple - 24 -
  25. 25. play offer). Notwithstanding these facts Magyar Telekom remains a dominant size player in the communications market. Magyar Telekom’s share of the electronic communications market players’ revenues is almost 60% but this figure is continuously decreasing. 75. Usage of communications services is growing: with the exception of fixed voice service the penetration of all major services has increased since 1999 (Figure 8). In 2004 the number of households with mobile phone reached the number of households with fixed telephone and currently more than 80% of the households have fixed telephone or mobile phone. The penetration of program distribution (mostly cable television) subscriptions was rising at a stable rate by 2004, the number of internet subscriptions per 100 households had grown to about 20 from a minimum base. Figure 8: Evolution of usage of the most widespread electronic communications services THE PENETRATION OF THE ELECTRONIC COMMUNICATION SERVICES IS GROWING Fixed line and mobile subscribers Program distribution and Internet per 100 households subscribers per 100 households 100 100 90 90 80 Fixed 80 70 70 60 60 Program distribution Mobile 50 50 40 40 30 30 Internet 20 20 10 10 0 0 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 Source: NCAH 2.1.1 Fixed and mobile voice market 76. The fixed and mobile voice markets have shown different evolution trends in the last few years. While the fixed market was stagnating the mobile voice market surpassed it in all respects till 2004: • There were two and a half times more mobile subscriptions than fixed ones and mobile phone penetration of households also reached that of fixed telephone. • More call minutes were originated from mobile phone than from fixed telephone. • More revenues were generated with mobile calls (51%) than with fixed calls (49%) 77. T-Com remained the dominant player in the fixed voice market with 75-80% market share (on the basis of the number of connected main lines, duration of originated voice calls and retail revenues generated with voice service), while competition has been intensifying in the mobile market since the entry of Vodafone and the market tends towards a levelling of market share. The earlier concession-holder operators are practically still today the exclusive players in the fixed access market in their respective earlier service areas. Competition from cable and internet voice service is still not significant, but shows a strengthening trend. - 25 -
  26. 26. 78. By European comparison in 2004 in the fixed voice market in Hungary the level of competition was among the lowest, while the mobile market was in the medium group in terms of competition. By 2005 the situation improved primarily in the fixed market due to an already perceivable competition generated by Tele2 and UPC. In the first half of 2005 Tele2 became the second largest player in terms of originated voice calls and in the autumn UPC’s cable telephony subscriber base reached 30,000 (about 1% of all connected main lines). 79. The evolution of revenues generated from voice calls is basically different in the fixed and mobile voice markets. In the fixed market the average revenue per user remained at a stable level of around HUF 6,500, while in the mobile market decreased to less than half of the initial figure – to about HUF 4,500 – since 19996. In both markets revenues from interconnection fees went up, in the mobile market it already exceeds one third of the total mobile voice revenue. 80. The regulatory objectives expressed along the consumer interests seem to be better fulfilled in the mobile market because while in the fixed voice market average per minute tariffs preserved their value in real terms with decreasing traffic, but in the mobile market the rising traffic in minutes was accompanied by falling tariffs which reached the level of fixed tariffs. 2.1.2 Data market 81. The Hungarian data market is growing continuously and dynamically. The number of Internet subscriptions has been growing since 1999 on the average by 40% annually and has currently reached about 800,000 (including switched line, DSL, cable modem based, leased line, wireless and other internet access subscribers). However internet penetration is still lagging behind the EU-15 average level both in terms of the number of internet users and the number of subscriptions per 100 inhabitants and per 100 households. However the Hungarian internet market has a positive feature that the ratio of broadband accesses is significantly higher than the EU-15 average, currently accounting for more than 60% of the total internet subscriptions. 82. Data service revenues grew annually by about 50% between 1999 and 2004. Out of the sub-markets internet service revenues and data service revenues increased at the highest rate. However in the latter market SMS/MMS traffic has grown only slowly in the last three years and the average usage per user is constantly below the European average. 83. In 2004 cable operators served about one third of the broadband internet subscriptions. About half of the population could select among broadband internet access technologies, i.e. DSL and cable modem based internet. Where cable modem based access is available generally DSL is also available. 84. In 2004 somewhat more than half of the DSL subscriptions were served by the Magyar Telekom Group, UPC had similar share of the cable modem based internet subscriptions. Magyar Telekom served about 10% of cable modem based subscribers. 85. The prices of broadband internet accesses have been falling continuously and significantly in the last few years, simultaneously with the dropping average price 6 Including retail and interconnection revenues. - 26 -
  27. 27. bandwidths were rising. Cable modem based accesses are cheaper than DSL-based accesses. 2.1.3 Audiovisual content delivery market 86. Currently cable television is the dominant television program reception method. Out of all households nearly 60% receive television programs on cable, while 35% through terrestrial broadcasting and 10% via satellite (there is minimum overlap among the program reception methods). The ratio of households with cable television subscription is high by European standards, primarily thanks to the high penetration within the homes passed (about 65% of the homes were passed with cable television and 86% of the homes passed were subscribers). 87. The Hungarian program distribution market was growing at a steady rate over the last few years. In 2004 the number of subscribers exceeded 2 million and revenues grew annually on the average by 22% between 1999 and 2004 (at current price). 88. In addition to the two largest operators (UPC and T-Kábel) numerous smaller operators exist in the program distribution market. There is little overlap among the service areas of cable television operators, at present the companies are practically in a monopoly position. However the program delivery (i.e. program distribution and free-to-air broadcasting) market is very concentrated: in 2004 the three largest operators covered more than 80 percent of the market in terms of revenues. 89. However competing technologies (primarily IPTV) can endanger the position of cable television because with a similarly high rate of homes passed they have the capacity to provide a service of comparable quality at competitive prices. Television program distribution via DSL network benefits from the relatively low level of innovation in Hungarian cable networks which is reflected by the low penetration of bundled services (internet, telephone). 90. The program distribution market situation is rather unfavourable for the consumers. On the one hand the subscription fees which remain stable in real terms are still considered by many customers to be expensive. On the other hand as a result of the limited possibility and – partly – readiness to switch there is little customer movement and switch to other program distributor. 91. In summary: Fulfilment of regulatory objectives in Hungary shows a varied picture. The mobile voice services market is characterised by very strong and intensifying competition and also there is medium-size competition in the data services (internet services) market, although this is mostly not attributable to access-infrastructure competition (Figure 9). But there is limited competition in the fixed voice services and audiovisual content delivery markets. This dichotomy is reflected also along the consumer interests and in respect of certain services the consumers clearly require wider choice and more information (Figure 10). In respect of the sector interests the current market was characterised by financial stability, but a relatively low and decreasing level of investment. - 27 -
  28. 28. Figure 9: Level of competition in the major sub-markets of electronic communications in Hungary in 2004 THE ELECTRONIC COMMUNICATION MARKET IS CHARACTERIZED BY VARYING LEVELS OF COMPETITION 0 HHI of the retail market competition Internet Mobile Service-based competition increased significantly in 2005 Fixed Broadcasting 1 1 0 HHI of the access infrastructure competition Source: NCAH, Ministry of Informatics and Communications, BCG analysis and estimation Figure 10: Consumers’ opinion regarding the choice of operators/services and availability of information AT CERTAIN SERVICES THE CONSUMERS NEED MORE CHOICE AND MORE INFORMATION Evaluation of the number of presently existing service providers, currently available for an Judgement of available information average consumer(1) about the service details (2) Fixed line Fixed line phone phone Mobile Mobile C ableTV C ableTV Broadband Broadband Internt Internet 0% 20% 40% 60% 80% 100% 1 2 3 4 5 Too many Adequate Too few N .A. Average (1 – absolutely no information; 5 – totally informed) (1) In Your opinion, are there too many, adequate, or too few service providers, from which you can choose? (2) To what extent do You take all the information enough about the details, conditions and the choice from your operator? Source: NCAH Residential Survey, Autumn 2005 - 28 -
  29. 29. 2.2 Market drivers and trends 92. Future evolution of the Hungarian electronic communications market depends on the changes in supply-demand drivers which are characteristic of this market and the general international electronic communications market trends and their implications in Hungary. Drivers and trends are interacting: the trends describing palpable market phenomena reflect the relevant drivers behind them, while understanding the drivers helps identification of the long-term trends and their impact. 2.2.1 Drivers 93. To understand and forecast the potential market evolution trends the Authority had to consider the evolution of six drivers which are not totally independent of each other. These are the following: • Macroeconomic and general investment environment: How do macroeconomic and investment conditions impact on demand and supply of electronic communications? • User preferences: What are the users’ preferences in connection with the given electronic communications services and technologies and what are the key buying factors? • Technological development: What changes can be induced by technological development? What is the relative capability of different technological platforms versus each other? • Business models: What synergies lie between the technologies, services, value chain elements, on what path do business models evolve? • Sector players and objectives: What is the financial strength, strategy and commitment to Hungary of the international players which are relevant for the Hungarian market? What changes are expected to occur in the ownership environment? • Regulatory and public policy environment: What changes are indispensable in national regulation as a result of changes in the international regulatory environment? In what way do public policy (e.g. fiscal) measures impact on the evolution of the market? 94. The first five drivers are mainly independent of the Authority's regulatory strategy and interventions, these factors determine – considering also the current situation – the ‘organic’ evolution path. Naturally the Authority plays an important role in the evolution of the Hungarian market, but when the expected market evolution and potential scenarios are defined the objective is to identify the ‘organic’ evolution path since it can be used to elaborate the regulatory strategy and define the potential and necessary interventions. The last driver – the regulatory and public policy environment – is naturally beyond the market mechanisms from the point of view of market players and can be considered as part of the regulatory/state intervention environment. However from the National Communications Authority's point of view this is partly exogenous since the Authority can only to a certain extent actively influence this environment; primarily a relation based on interaction exists here. Macroeconomic environment 95. No significant change for the electronic communications market is projected in the macroeconomic environment in the period 2006 to 2010. A GDP growth rate similar to the current one and further inflation rate reduction can be forecast while a continued ongoing increase in the income available to the population can be projected. On the basis of international experience it is probable that the growth rate and share within the - 29 -

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