ESIS extension / Hungary / Alternative Networks / Master Report

According to the Telecommunication Act of 1992 (no. 72), telecommunication services - with four exceptions - can be provided by concession companies established for this purpose, and by state-established corporations.

In other words, anyone can provide public telecommunication services, with the above exceptions.

CONCESSION CONTRACT: A concession contract allows a company to pursue telecommunications activities (signal transmission or access) for a fee, based on licenses publicly announced and awarded by the state or telecommunications providers established or owned by the state, with generally defined contract conditions. Concession holders receive exclusive providing rights for 8 years (until January 1. 2002).

CONCESSION REQUIRING SERVICES: Any service that can be accessed through the public telephone network for a fee. It includes the ability to initiate local, distant or international calls, to receive and forward calls, to use emergency call services, operator services, telephone registers and public telephone stations.

Concession competitions can be announced by the Ministry of Transport, Telecommunications and Water Management (KHVM). Concession competitions can also be initiated by local governments on their respective territories, if the telecommunication network needs to be expanded or its quality needs to be improved. The minister has 90 days to decide on the competition to be announced, and once the decision is made, he has to announce the conditions within one month. The minister establishes a committee to evaluate the applications.

The concession contract can be renewed only once. Setting up a public telephone station can be initiated by anyone. A certain proportion of these stations - a number fixed by the concession contract - should be available for use by disabled or hearing-impaired persons. Supervisory tasks are carried out by the Communication Authority (HIF) or its local chapters, working under the KHVM.

If the service provider fails to meet its obligations, the HIF can advise the minister to cancel the contract.
Service providers operating under a concession contract have obligations concerning data and privacy protection. If they receive personal data or private communications, they are not allowed to forward it to others. It is also forbidden to purchase, publish or use correspondence that was not meant for public use.

1.2 The relationship between network operators, service providers and owners

Different telecommunications networks need to be built and operated according to such technical standards that, with the insertion of appropriate units, they can establish connections among themselves and thus create a working system. To ensure cooperation, the minister, having consulted the Grading Committee of Telecommunications Engineers, issues orders to regulate basic technical plans. Telecommunications service providers must cooperate in the course of setting up, operating, modifying and terminating networks in order to ensure a unified public telecommunications network for the country. Their cooperation must include:

Thus, according to the Telecommunications Act, service providers must cooperate; however, reality is somewhat different. Market participants do not take new players very seriously; they often simply purchase startup companies. The situation of cable television providers is an example of a lack of cooperation. Nationwide supply is much bigger than necessary, since service providers do not coordinate their ideas and operations. Obviously, this policy is not profitable; competition instead of cooperation in this case is expensive and unnecessary.

The interests of telephone providers independent from the Hungarian Telecommunications Company (Matáv) are represented by the LTO Alliance, whose members are the following: Monor Telephone Company (MTT); JászTel; Bakonytel; United Telecom Investment (UTI), which includes Dunatel, Egocom and Kisdunacom; Matel/CG Sat, which includes Digitel 2002 and Déltáv; Hungarian Telephone and Cable Corporation (HTCC), comprising Hungarotel, Kelet-Nógrád COM, Rába-Com and Pápatel.

These companies have spent over a billion forints to improve telecommunications services in areas with poor telephone supply. Their subscribers number well over half a million. Waiting lists have all but disappeared; a number of local providers will launch ISDN and cable television services next year. Even the combined capital resources of these companies are dwarfed by that of Matáv; however, it is worth noting that the owners of concessioned local telephone companies include such American and Western European companies as US-MCG Holding, which owns part of MTT; Citizens Utilities, which owns 15% of HTCC, or Tele Danmark, with a 20% ownership in the same company. JászTel is owned 50-50% by Swiss Telecom and PTT Telecom Netherland; Matel B.V., a Dutch company, has a 92% stake in Digitel 2002 Rt. and a 95% stake in Déltáv Rt; Matel is owned 40% by the French company CG Saté, 25% by General Electric Capital of the US, and 8% by Tal-Giltek, an Israeli company. UTI is a holding comprising of European and American shareholders.

On December 18, 1998 MKM-Tel Kft. and Unisource N.V. signed a shareholders' agreement, governing the operations of a new, united corporation. The company can only start operating after January 1. 2002, the date until which Matáv and its local concession companies have a monopoly on speech transmission. MKM-Tel, which initiated the new company, is a very young organization: it was established on July 3. 1997 with government decree no. 2184/1997 and the approval of the minister. The company was founded by MÁV Rt., (Hungarian Railway Company) with a 75,54% share, KFKI Számítástechnikai Rt. (20,86%) and Mol Rt. (Hungarian Oil Company) with 3,6%, with 27,8 million forints in capital. The goal was to create a service provider by making use of the optical cable network of MÁV - and possibly that of Mol. With its services provided on its own nationwide network, the company aims at the Hungarian corporate market, and aspires to achieve a 20 percent market share. The company plans to do that mainly with managed leased line services, data transmission services (packaged data transmission, frame relay, LAN connections), Internet services and virtual private network services.

The Telecommunications Act states that Matáv, which has a monopoly in fixed telephone service, will not be allowed in the future to build cable television networks in cities with a population over 30,000. This modification was proposed by the Office of Economic Cooperation, which wanted to control market competition, though not obstruct it. However, Matáv has found a legal loophole, so it can continue to develop its cable television network. Hungária Biztosító Rt., an insurance company, has a 25% ownership and 75% of the voting rights in MATÁVkábelTV Kft., so that Matáv can comply with the new regulations and still remain a dominant market player.

Service provider licenses are awarded by HIF. HIF will only decide whether Matáv can compete in this setup if the company specifically asks for a permission to build or start a new service.

The law governing the operations of the media states that the possible market share is limited to one sixth.

Telecommunications infrastructure in Hungary has been constantly lagging behind demand since the 1950s. It often took years for the construction of networks to start after the telephone lines had been ordered. As a consequence, subscribers had to wait 2-3 years for their telephones to be installed. Not only individual subscribers, but also companies and government offices got fewer lines than needed. Therefore, they often built separate networks to satisfy their urgent needs. Although everyone was aware that setting up many alternative networks cost more than constructing a single high-capacity network, they still managed to get the necessary funds. Magyar Posta (the Hungarian Postal Service) had limited funds, but it did not cost them much to set up additional networks - as opposed to MÁV or the oil industry. In addition, state security authorities set up their own networks, as did the government. These networks were at a certain technical level and did not necessarily develop over time.

The network of Magyar Posta sometimes incorporated the latest technology. In 1968, under a contract with Ericsson, it purchased crossbar-centers and 960/2700 frequency multi-channel equipment. This equipment was also licensed to BHG and Telefongyár. At the same time, a small coaxial cable network was built with SAT cables, while Magyar Kábel Muvek (Hungarian Cable Company) was licensed to produce these cables. These developments, as well as the appearance of digital equipment in the late 1970s and the installment of 15 Ghz microwave systems helped satisfy demands, but the quantity was far from sufficient. There was a much larger demand for telephones than the postal service could meet.

For the above reasons, a development of separate networks followed. The networks of the police, the military, and the ‘K’ network of the government were acceptable, since security concerns meant different requirements. However, these networks often used the buildings, towers and amplifier stations built by Magyar Posta. MÁV developed a separate network along its rail lines. These primarily served as a means of communication between railway stations and, but modern telephone networks between larger railway stations and MÁV headquarters were also developed. Their network operated so efficiently that it was used by the public telephone service when its own network broke down. The telecommunications and safety directors of MÁV installed and operated these systems with remarkable skill.

The network developed by the oil industry along its own pipelines was also significant. This network spawned the whole country; a construction and operation center was established in Siófok. This network could also be utilized as a means of telephone communications among the various company headquarters. A similar network was developed by Magyar Villamos Muvek Tröszt (Hungarian Electric Company, MVM), which included the power plants and headquarters of various electricity providers. An emergency-calling network was built along highways, with emergency phones every two kilometers. A somewhat less significant network was that of the Water Management Authority, designed primarily to coordinate flood emergency activities. Otherwise it was only used to facilitate communication between dam guards and the management.

Cable television networks were developed in the 80s, but they were only used for one-directional, tree-structure transmission. A central station was connected to the homes in a given district.

Matáv developed fast after being separated from the Magyar Posta. In three years, it built a nationwide high-capacity optical network, and started to install programmed TDMA digital centers. In 1994, Deutsche Telekom and Ameritech purchased a 30% share in Matáv, which was extended to two thirds in 1996. This was followed by the development of a supplier’s market, with new services introduced and with the telephone supply comparing favorably with the GDP (34 users/100 people). Mobile phone providers also launched their services - mobile phone coverage now exceeds 12%.

The network of MÁV is also based upon an optical cable network, with wide bandwidth connection available along major rail lines. At the same time, their safety units and other elements of the network have been updated. MOL was more conservative in implementing development, using mainly copper cables when expanding their system. 1998 saw the establishment of PanTel, as a part of the Dutch company KPN. MÁV and MOL are partial owners, having brought in parts of their networks as apport. This marked the beginning of a second nationwide network, providing large-scale users with Internet-based voice and data services.

MVM did not take part in all of this. Neither did it join a new enterprise that would base its services for Budapest and the neighboring areas on the network of Budapesti Elektromos Muvek (Budapest Electric Company). Together they formed a new communication company, NovaCom, with the help of foreign capital.

There has been a growing demand for cable television networks. Taking information network services, Internet and two-directional services to private homes can be done efficiently through the KTV network. Experiments have been done in this field in Nyíregyháza and around Sopron. The network in Nyíregyháza was met with appreciation from users. An optical cable based cable television network is growing fast in Budapest as well. In addition to smaller companies that already had a license, United Pan-Europe Communications NV (UPC) has been the most significant investor. The Hungarian section of the Dutch-based, mostly American-owned company has half a million subscribers. They are waging a more aggressive marketing campaign than most European companies, and they usually aim to buy local cable networks (owned by local governments) that are already in operation.

Matáv was initially persuaded to develop a cable television network by mayors of various Budapest districts. In 1996, these mayors asked Matáv to consider how a modern cable television network could be developed in their districts. Since there are 160 thousand homes in these six districts, this proved to be a quite large-scale network construction. In three of the six districts (X., XVI., XVII., XVIII., XX., XXIII.) the work is done by Elso Pesti Telefontársaság (First Telephone Corporation of Pest), which also provides telecommunications services in the name of Matáv. The company is building a modern, so called star-node network, with a very large bandwidth, which will mean that the number of channels can be expanded significantly, while the high technical quality will result in better picture quality for viewers.

Another recently emerged market player is Fibernet, founded by the investment fund of American insurance company Prudential. They have announced their plans to attract 300-400 thousand new subscribers in the Hungarian cable television market. They plan to launch Internet and telephone services later on.

Roughly one half of all homes are connected to cable television networks. Updating the existing network would cost at least 50-100 billion forints, while achieving a 90% coverage would require an investment of 300-400 billion forints. It seems that the competition is wide open for all potential market players, with the possibility that new players will also emerge (such as Argus Risk Fund and Hungarian-American Enterpreneurship Fund).

All these major constructions seem to indicate that this network will provide more than mere entertainment.

It is clear that Antenna Hungaria will also want to play a part in the telecommunications market. An indication of this is that it has a 20% share in PrimaTel, the third mobile service provider. Antenna Hungaria is still state-owned, but there are plans to offer a minority ownership stake to any company with large sums of capital that could help Antenna Hungaria to provide telecommunications services.

Besides telephone and cable television services, Matáv is also present as an Internet provider, having joined the market of Internet services in 1996. As a new provider, it forced the just-emerging market to cut prices radically. This made the Internet, up until then only available for wealthy companies, affordable for households.

MATÁVnet is currently working with a 14 Mbit international connection, which can be expanded according to demand. It is connected directly to American and European end-points, through telecommunications and Internet provider companies such as TeleGlobe, Cable&Wireless, MCI and Deutsche Telecom.

Other significant Internet service providers include DataNet, Elender and EuroWeb.

As of today, the majority of telecommunications services are offered by Matáv. Its transmission and switching units are up-to-date and cover the entire country. They also offer services in areas covered by smaller concession companies.

Besides Matáv, the following players are expected to take a major part in the telecom competition:

1. PanTel, which, in addition to its own microwave connections, is built upon the networks of MÁV and MOL. It was founded in 1998 with 20 billion forints in capital. Its goal is to liberalize the Hungarian telecommunications market and put an end to monopolies.

2. UPC, which is based on cable television networks. UPC Hungary is the largest wide bandwidth telecommunications company in the country, providing more than 30 communities with cable television services.

3. NovaCom, which would use the networks of the Budapest Electric Company and perhaps that of Budapesti Közlekedési Vállalat (Budapest Transport Company), possibly in alliance with Antenna Hungaria.

4. Antenna Hungaria, whose microwave networks could be used not only for broadcasting but also for telecommunications.

5. GTS Hungary, which is affiliated with the US based Global TeleSystems Group, Inc., and which has provided telecommunications services on a national and international level since 1993, with the help of satellite, microwave and optical systems. DataNet, the first company in Hungary to offer Internet access, has been an affiliate of GTS since 1998.

Magyar Posta Rt. would also like its offices - present in three thousand cities, towns and villages - to take part in telecommunications services in one form or another. It is expected that at the time of total liberalization there will be four major service providers, although it is unlikely that more than three of them will see lasting success.

In addition to all these, there is a paging service with minimal success, along with three successful mobile providers: Westel 900, Westel 0660 and Pannon. A fourth one, PrimaTel, will be launched at the end of 1999, offering services primarily in the 1800 MHz range, although the other two companies will also be allowed to operate in the 1800 MHz range, just as PrimaTel will be able to work in the 900 MHz range.

Please note that this report has been prepared under the sole responsibility of the ESIS II contractors.
It does not necessarily reflect the views of the Commission, nor does the Commission accept responsibility for the accuracy or completeness of information contained herein.
The ESIS Team of contractors welcomes any additional information or corrections.