July 2000

Hungary Update Memo

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

1. The interaction between business and regulatory constraints

1.1 Regulatory background

The Prime Minister appointed a government information technology commissioner. The applicants had to meet three fundamental criteria: firstly, thorough knowledge in the fields and markets of information technology and telecommunication, secondly, administrative regulatory work and experience in this field, and thirdly, an ability to communicate the importance and necessity of information technology even in the lives of common people in an easily intelligible way towards the society. The appointed Zoltán Sík has considerable experience both in the business competition sphere and government.

1.2 Business bounds and the impediments to entrance

With the latest modification of the telecommunications act customers will lose the most as the new regulation significantly narrows the opportunity for chartered telecommunications companies to participate in the cable television market, according to Matáv. The company noted that by the modification of the telecommunications act, the Parliament excluded exactly that firm, Matáv, from the cable television market who would have had a real chance to create competition. According to Matáv, the new regulation will cause the customers the biggest trouble, because they will be deprived of the high quality, update services as the considerable investment and development planned by the company will not take place. The company claims that those people who assume that a fall will occur in the prices of the cable television market due to the modification are wrong.

The alternative telecommunications service providers – currently partners of the monopolistic Matáv, but its will-be competitors – GTS, Novacom, PanTel, UPC and Vivendi handed in a document to the Communication Office of the Ministry of Transport, Communications and Water Management (KHVM) including their jointly shaped opinion on the upcoming uniform communication act (EHT). According to this document, Matáv, referred to as the dominant service provider after the liberalisation, should not be allowed to start from a position in which it yet preserves its quasi-monopolistic position because the new law will not involve a regulation on the use of its networks and charges. Although there is no ban on connecting networks, and there is no such rule defining how it shall happen, if Matáv does not wish to have its networks connected to others, it cannot be obliged to do so.

Regarding codification, the number of participants expanded to 9 from 5 after the joining of Antenna Hungária, British Telecom, Pannon GSM and Vodafone. The aims of the new economic group with interest enforcing weight are unaltered. The "telecommunication nines" indicated the great responsibility of the codifiers and lawmakers, since EHT will also decide on the chance of the country’s economic modernisation. Its final text will have to support the information society strategy of the Széchenyi and Neumann plans developed by the government. The nines consider EHT the most important law of the decade.

1.3 Relationship between network operators, service providers and proprietors

Compared to March, the group of active GSM mobile subscribers increased by 5,39 percent in April. Projecting this to the population of 10 million, their number reached 1,862 million, according to a minute sheet by the Communication Authority (HIF). According to data available to HIF, considering the number of active subscribers, the market share in April of Westel Mobile Telecommunications Company Ltd., Pannon GSM Telecommunications Company Ltd., and V.R.A.M operating under the brand Vodafone were 55,96 percent, 40,93 percent and 3,11 percent respectively.

UPC Hungary Ltd. takes into account 100’000 new subscribers this year – currently it is present in 30 Hungarian settlements having 503’000 subscribers. UPC Hungary Ltd. has been in the 100 percent ownership of the Dutch parent firm since the end of March 2000, which was the time when they purchased the 20,75 percent share of the First Hungary Fund for 63,9 million euros.

2. Types of services offered by operators on the network

Matáv provides an average of 10 percent discount for budgetary institutions as high-scale customers for making use of its telecommunications services. The Treasury-KHVM-Matáv agreement on this was signed and published according to the government’s decision on 13th May. According to particular covenants, other budgetary institutions (e.g.: institutions of the Parliament) can also come in for a share in the discount. Matáv provides a differentiated service for the individual institutions for the required telephone, ISDN, Flex-Com, Frame-Relay, VSAT and Internet services.

Matáv, besides traditional network improvement, will replace in the country its 160’000 RLL radiotelephones equipped between 1995 and 1997 with up-to-date ones, especially in areas not having built network. The company ensured the rapid satisfaction of telephone needs and the complete accomplishment of the concession contract contents with these RLL telephones. KHVM and Matáv agreed that the telephone company will give back until 4 November 2003 the band available in the 900 MHz frequency range, where RLL operates, and ensure the replacement of the system with a new, update technology. The replacement involving wired and wireless high technology will involve almost 96’000 RLL stations in the 14 primary districts in the area of the Eastern Hungarian technical directorate. 22’000 will take place out of these this year. The new technology will enable digital access through optical and copper lines and microwaves. Charging periods and charge zones are the same as of the current wired services.

Ericsson and Matáv signed an intention declaration regarding the mutual investigation and potential testing of the Engine system. The Engine solution enables Matáv to provide telecommunication-level services including efficient data transmission services and multimedia services accessible via an integrated multiple services network. The Engine network is capable of transmitting an increasing amount of voice and data traffic and meets the advanced network co-operation requirements of the liberal and competitive Hungarian telecommunications environment.

In the second half of January, Matávcom and Nortel Networks signed a partnership contract, according to which Matávcom has become the official distributor of the Nortel Networks Enterprise Solutions Data (private network data communications solutions) product line. Matávcom, registered as Matáv’s 100 percent subsidiary, runs a national network. Beyond strategic partnership relations, Matávcom aims to acquire the right to use the title ‘Enterprise Solution Partner’ of the Canadian giant firm. The management of Matávcom does nor expect the same scale of development in the market segment of sub-exchanges and traditional telephone distribution than in information technology, so the firm focuses on the IT market.