January 2000

Hungary Update Memo

The following report outlines new developments in the past three months and the state of on-going developments.

The structure of commercial television in Hungary has been transformed considerably during the previous few months. As the mandate of the present members of the National Radio and Television Commission nears its end in March 2000, the new leadership of the body can play a determinant role in shaping the future of electronic media.

1. The regulatory background

Investigation results of the Consumer Protection Authority show that due to the shortcomings of legal regulation, cable television service providers, who are mostly in a monopolistic position, take an unfair advantage of their superiority. In case of contract modifications initiated on the basis of network updating, they attempt to enforce a subscription rate much higher the current one.

A draft cable bill ‘On the Detailed Regulations of Programme Allocation’ made by the Ministry of Transport, Communications and Water Management, and the Ministry of Justice this October was also introduced to the government in autumn. Its necessity is reasoned by the liabilities contained in the article 121.§ (3) of the Act I. of 1996 (Media or Radio and Television Act), and it is intended to be kept on the books until the validation of the Unified Communication Act, in which the regulations of programme allocation can be perfectly embedded. Its aim is to amplify, systematise, and stop coherence disturbances, emphasising the transitional feature of the new legislation beyond the multi-level expansion of the regulation of programme allocation. However, it is probably the economic effort of the submitter that lies behind the draft bill, since the determination of the circle of telecommunications services in the concession field has gone under several changes in the past.

Expanding the circle of market representatives by expanding the circle of public-purpose telecommunications services, a latest modification in the article 11.§ (2) of the Act LXVI. Of 1999 has also enforced antimonopoly efforts, which is intended to be amplified in the cable act. At the same time, efforts by lobbies representing other market groups’ interests could also be traced in the proposal - restrictions not involved in the regulations of the Union, but pushed through in favour of those efforts.

The proposal divides tasks regarding programme allocation between the communication authority and the National Radio and Television Board.

2. Business constraints and impediments to accession

The structure of commercial television in Hungary has been transformed considerably during the previous few months. The broadcasting of two regional channels, Szív Tv and Msat, was terminated by Antenna Hungária Hungarian Broadcasting Company Ltd. because of the accumulated arrears of broadcasting charges. In the meantime, the merger of two similar channels, Tv2 and Tv3 owned by SBS and CME respectively, is continuously on the agenda. Finally, the Supreme Court delayed the judgement determining the case of the Hungarian RTL until its unity-of-the-law decision at the end of the year. In the first instance in the fight for the concession, its previously losing opponent, Írisz Tv was the judgement creditor in the trial that questioned the lawfulness of the decision of the Hungarian Radio and Television Commission (ORTT), the judgement passing authority in the competition.

As the mandate of the present members of the ORTT nears its end in March 2000, the new leadership of the body can play a determinant role in shaping the future of electronic media in Hungary including the public service taxes, which are struggling with continuous budget problems.

From 2000, it is likely that television broadcasts transmitted through the AM-micro system of the capital can only be seen for subscribers, since Antenna Hungária wishes to renew this service meeting the requirements of EU prescriptions and copyright regulations. The programme launched in 1987 for foreign hotel guests is actually watched by twice as many people as the number of subscribers. Its implementation is scheduled after the enforcement of the cable law.

The modification of the LXXII. Act of 1992 on telecommunications until the start of the complete liberalisation, that is the enforcement of the unified communication law, includes new instructions in order to prevent the creation of natural monopolies of cable television services and to force back the superiority of telecommunications organisations.

It ad interim forbade those telecommunications organisations and such enterprises on which these organisations have considerable direct or indirect influence to own or have the disposal of a wired, cable infrastructure suitable for programme allocation activities parallel with a communication network for public purposes.

This restriction is only reasonable until complete liberalisation, when the unified communication law comes into force, within the period when the telecommunication law is in effect, until which time the volume of investment targeted on new infrastructure and providing other new telecommunications services for public purposes will presumably be increased.

During the transitional regulation period until the time of the complete liberalisation, no telecommunications organisation or enterprise on which telecommunications organisations have considerable direct or indirect influence is permitted to create, lease or dispose of a wired, cable infrastructure suitable for programme allocation activities parallel with a communication network for public purposes except for settlements with less than 30.000 inhabitants.

The regulation does not obstruct the establishment or procurement of an infrastructure; it only restricts it according to location. The restriction refers to settlements with over 30.000 inhabitants, on the one hand, and settlements where a telecommunications organisation provides services through a public-purpose telecommunications network, on the other hand.

Programme allocation can only be carried out, and a service-providing license can only be received if the whole reception area of the service provider does not exceed the limit defined in the act on radio and television broadcasting. Based on the media act, reception area is an area that can be determined by the number of inhabitants.

The number of inhabitants in the area affected by the service cannot exceed the 1/6^th of the population of the country.

In case the number of subscribers (and not the number of inhabitants in the reception area) is more than 5000, starting with the 181^st day of the enforcement of the law (28 July, 1999) programme allocation can only be carried out by such independent corporate economic associations which do not provide telecommunications services that are bound to concession.

This regulation creates a basis for the supervision and registrar of service providers, and at the same time does not force small ventures operating in sparsely populated areas to establish economic associations.

3. Relationships of network operators, service providers and owners

According to the data of the Communication Authority, 202 cable television concessions have been issued throughout the country, and 156 licensing processes were in progress. The standard of services provided by them is not included in any provisions of law; nevertheless, star-point user networks have to be established by modernising networks until 2003. It has been calculated that the modernisation of the present network will cost at least HUF50-100 billion, while achieving the favourable 90 percent degree of supply will require approximately HUF300-400 billion.

Not more than a month later had the mother company found a legal loop-hole getting through which it can practically continue to build its network without restraint than the modification of the telecommunication act stated that the Hungarian Telecommunications Company Ltd., which is in a monopolistic position in wired telephony for the time being, is not permitted to build a cable television network in settlements with more than 30,000 inhabitants. By increasing its capital from HUF50 million to HUF1 billion, Hungária Insurance Company Ltd. obtained a 25-percent business share and a 75-percent voting right in MATÁVcableTV Ltd., it meets the requirements of the new regulation, and at the same time gets the right to remain a determinant player in this rapidly developing part of the market.

In the meantime, the Hungarian concern of the United Pan-Europe Communications NV (UPC), registered in Holland, with American majority ownership and 500,000 subscribers currently, is trying to buy up the already running municipal cable television companies with an aggressive marketing policy. Even the media act setting up a 1/6-market share barrier cannot obstruct UPC.

An association called FiberNet of the investment fund of the American Prudential insurance company wishes to acquire subscribers in 300-400 thousand households in the Hungarian cable television market.

Hungary was the first in Central-Eastern Europe where British Telecom opened an office. Its data transmission network, Concert, has had a terminal point in Budapest for many years, which is used by several corporate enterprises as a leased line service.

A French firm purchased 35.5 percent share in the Hungarian Eurotel. A 380-km long optical cable is in the interest of Vivendi Telecom International S.A., which means a second place behind Matáv in the capital city.

Novacom Ltd. got a license for providing countrywide telecommunication services. The firm intends to expand its 1100-km fibreglass network. In the near future, it wishes to raise its subscribed capital from HUF 1 billion to HUF 1,5 billion. The company’s subscribers are electric suppliers belonging to the Hungarian interests of RWE, and the circle of customers in the services or banking sector has recently been expanded by the Prime Ministerial Office.

The Hungarian Telecommunications Company Ltd. (MATÁV) concluded an agreement with Deutsche Telekom, according to which MATÁV obtained a right of option for purchasing the 49-49 percent portion of property of Westel 900 GSM Mobile Telecommunications Company Ltd. and Westel Radiotelephone Company Ltd.

Dunakábel, the Hungarian industrial plant of Siemens AG Communication Cable’s branch of business, has been taken over by the American Belden.

The American multinational Internet Company, PSINET, has purchased the Elender Information Technology Company Ltd., which is the second biggest domestic Internet Service Provider behind Matáv. Experts have estimated that its purchase price can amount to about HUF 7 billion.

4. Service types offered by the operators through the network

The country’s third mobile telephone company, Prímatel, the consortium of Vodafone AirTouch and RWE Telliance, will offer its services under the trade description Vodafone from December. It announced that having signed the roaming agreements with the other two service providers, it would offer a complete nation-wide service to its customers. Within a year, it will rely on its own 1800 network, which makes roaming unnecessary. The firm is carrying on negotiations that Sándor Krupanics, who has recently resigned from his post as the chairman and managing director of the Hungarian Post Ltd., should work for the company.

The circle of mobile telephone services is expanding. Pannon GSM makes the use of mobile phones possible at all stations along the line of the underground number 2 and 3 in Budapest as well as in most places of the subway. It replaces the previous 9,6 kbit/sec data transmission speed with a faster 14,4 kbit/sec speed. The service called PluszNulla transmits foreign calls through the Internet reducing the cost of international calls.

The Internet service providers, in co-operation with PC manufacturers (Elender with HP, GTS-DataNet with Compaq, and MATÁVnet with Albacomp), make efforts in order to make their potential customers’ connection to the Internet easier by offering various access packages. They offer fully equipped computers with programmes or set top boxes supplementing television with a two-year subscription period for a fragment of the commercial price. Users with long-term contracts will still remain in their circle of customers when cable television networks provide offline Internet connectivity through television channels. The main reason for the slow spreading of the domestic Internet use is the high charges that come together with telephone connections through modems. But parallel with the expansion of alternative devices, the market will immediately be restructured.