The National Communications Authority’sStrategic 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.

TABLE OF CONTENTS

PREFACE.............................................................................................................................................. 3

EXECUTIVE SUMMARY........................................................................................................................ 5

INTRODUCTION.................................................................................................................................. 12

1 REGULATORY OBJECTIVES.....................................................................................................141.1 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............................................................................................232.1 Analysis of the current market situation....................................................................................23

2.2 Market drivers and trends.........................................................................................................29

2.3 Potential market scenarios.......................................................................................................42

3 REGULATORY CHALLENGES...................................................................................................483.1 Scenario-dependent challenges...............................................................................................48

3.2 General regulatory challenges..................................................................................................52

4 REGULATORY PRINCIPLES......................................................................................................564.1 Guiding principles..................................................................................................................... 56

4.2 Specificity principles.................................................................................................................63

4.3 Implementation principles.........................................................................................................65

5 POTENTIAL INTERVENTIONS...................................................................................................675.1 Intervention 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

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PREFACEThe 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

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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 PatakiPresident

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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.

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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 situation6. 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.

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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 trends8. 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 relations3 The scenarios assume that the current regulatory environment remains unchanged to show the potential paths of ‘organic’ market evolution.

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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 principles13. 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

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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 principles17. 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 principles18. 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.

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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

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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.

‘Intensif yingcompetition’

‘Dominantplayer’

2006-2007 2008-2010

• Determi ning interaction of fixed a nd mobile marke ts on regulation mea ns’ lev el

• Dev eloping wholes ale products c onnecte d to inv estme nt ladder

• Enha ncing broadband Internet serv ice compe tition by further dev elopment of DS L wholesal e produc ts

• Promoting emer ging tec hnologies• Decreasing cross ownershi ps of parallel i nfras truc tures

• Further decreas e of mobile IC -fees• Enha ncing compe titi on in AV marke ts• Increase of consumer tra nspare nc y

• Further decreas e of mobile IC -fees• Enha ncing compe titi on in AV marke ts• Increase of consumer tra nspare nc y

• Liberalise d spec trum polic y• NGN re gula tion• Issues of conte nt prov iding

• Determination of con crete interventions should b e preced ed b y d etailed market review and impact assessment

• The focus and weight of same intervention can differ according to the scenarios

• Determination of con crete interventions should b e preced ed b y d etailed market review and impact assessment

• The focus and weight of same intervention can differ according to the scenarios

Time horizon of possible regulatory interv ention

inde pendent of scenario

POTENTIAL KEY REGULATORY INTERVENTIONS WILL BE EXAMINED IN DETAIL

• Liberalise d spec trum polic y• NGN re gula tion• Deregula tion

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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

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.

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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.

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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

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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

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.

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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.

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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

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.

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Figure 4: Interrelation between consumer satisfaction and penetration

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.

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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.

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Figure 5: Marketplace relevant for the regulator

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

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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

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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.

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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

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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

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

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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

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.

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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.

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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.

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

Figure 10: Consumers’ opinion regarding the choice of operators/services and availability of information

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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

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GDP of electronic communications spending will fall with the economic growth, notwithstanding the rising GDP is expected to result in increasing usage of given services. The VAT cut in 2006 is expected to have a positive impact on consumption when it is reflected in the prices. At the level of the national economy the investment environment is expected to improve, but on the basis of past experience this in itself is no guarantee for positive evolution of electronic communications investments. Potential significant changes in the global economic environment would naturally have a major impact on the national macroeconomic environment too, but there are no specific signs which would suggest such occurrence, so these should be included in the regulatory strategy only as potential risks.

Change in users’ preferences

96. Several significant phenomena are experienced in users’ preferences7. At the level of service preferences the demand for using broadband data services is growing, while no strong consumer demand for using digital audiovisual services is available yet and demand for mobile data services neither seems to be mature. Demand for bundled services is shown by a rising share of consumers (on the basis of a consumer survey conducted by the Authority in the autumn of 2005 currently about 30%), but for the moment the underlying reason is not the demand for new services, but the expected price advantage of bundled services. On the basis of consumer preferences in Hungary fixed, mobile and cable operators have similar chances for the sale of bundled services. In terms of the users’ technological preferences the consumer demand for mobility continues to be high which is a disadvantage for fixed technologies. In the voice market the technological preference (if there is a possibility of choice) is currently determined primarily by the price. In the audiovisual market it is expected that television remains the preferred terminal equipment so the broadcasters need to reach the television set. Price is expected to remain the major selection and switch criterion, notwithstanding the majority of the users are not aware of the real price. Simultaneously with the development and rising complexity of services it is expected that new factors will also play a significantly important role (e.g. security, interoperability, etc.).

Technological development

97. In the area of technological development in the next 3 to 5 years packet-switched and IP-based technologies gaining space, convergence and strengthening mobility will be the major developments. In connection with these trends introduction of NGN (Next Generation Networks) will bring about significant change in the network architecture and is expected to result also in the development of access networks (Next Generation Access). The speed of switchover to NGN and the rate of access network development can in the medium term show significant differences in the given markets. In the competition among different platforms an important factor will be that the dominant share of the residential services currently used do not require higher than 1 Mbps bandwidth which in addition to the fixed (copper pair, cable) platforms the wireless and soon the mobile platforms will also be able to provide (Figure 11). However, in terms of cost-efficiency it is uncertain to what extent new mobile broadband platforms (e.g. WiMAX) can successfully compete with conventional fixed (copper pair, HFC) and mobile (3G/HSxPA) platforms. In respect of the most bandwidth intensive services (audiovisual services, in particular HDTV) fixed technologies have an advantage in terms of efficiency and profitability therefore mobile and wireless technologies are not expected to be strong alternatives in the medium term.

7 Since its establishment NHH has conducted market researches and analyses of the demand side on a regular basis either for general purposes or in connection with a given problem. These studies basically supported the market analysis process, but the results were also used and integrated into the strategic concept.

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Figure 11: Evolution of major access platforms’ bandwidth

Change in the business models

98. Significant changes are expected in the business models as a result of convergence. Primarily as a result of switchover to IP synergies of services will considerably strengthen and bundled provision of currently different services will bring clear financial advantages (service convergence). Synergies will strengthen also along the technological platforms (technological convergence), but major obstacles will have to be overcome to realise them. The fixed-mobile convergence business model can bring about significant advantages (see Figure 12), but realisation of real value creation is still uncertain. Evolution along the value chain is uncertain: direct business synergies will reduce which can lead to the value chain falling apart, but the market players are expected to attempt to transfer their market power / position to other value chain elements. Potential separation is most probable at the level of consumer relations and applications. In summary we can say that the conventional business models will significantly change and as a result of technological and service convergence there will be a greater possibility of clash between the electronic communications market and the wider ICT sector (e.g. IT, media) players.

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Figure 12: Advantages of fixed-mobile convergence

Strategic orientation of the sector players

99. In summary we can say about the sector players and objectives that the strategy and situation of international players is determining for the evolution of the Hungarian market. Considering the international financial situation in the last few years value creation has been limited, but as a result of efficiency improvement and more limited investments of incumbent operators their cash-flow generation has strengthened and substantial capital is now available to them. This, simultaneously with the dwindling possibilities of growth, can be the driver of consolidation in the sector. In respect of the market power of the national players’ owners Deutsche Telekom (DT) and Vodafone are outstanding, while in the Hungarian market itself Magyar Telekom’s financial strength is very high. In respect of financial strength Pannon GSM and Vodafone can to a certain extent compete, primarily with their international background (Figure 13). Considering the strategic directions DT, Vodafone and UPC seem to be the most regionally committed. Amongst large players DT defined a profit-oriented growth strategy which includes significant development of the fixed network, Vodafone’s business model is based on 3G-based growth and mobile dominance, Telenor’s ‘Mobile Way’ reflects a combination of common platform and local flexibility, while UPC’s international strategy is based on ‘Digital Home’ which will include also mobile partnership. The Hungarian players’ strategies basically reflect the international trends, with the exception that Magyar Telekom seems to be ahead of its mother company in terms of fixed-mobile integration. An analysis of potential market restructuring scenarios shows that as a result of the substantial free cash the most probable transactions would be acquisition and merger. International consolidation can be started most probably by large players (DT, France Telecom, Telefonica), while in this region Vodafone and UPC have been the most active buyers during the most recent period. The most important question connected with transformation of the ownership structure in the Hungarian market is whether further consolidation by DT (Magyar Telekom) and/or entry of another large international player can be expected. Such a trend could significantly impact on market evolution and the resultant competitive situation.

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Figure 13: Financial background of the major market players

‘External’ regulatory and public policy environment

100.Evolution of the ‘external’ regulatory and public policy environment is not expected to produce significant change in market evolution until 2009, but we still have to consider certain impacts. The major change in the international regulatory environment will naturally be the entry into force of amendments made on the basis of the revision of EU directives, but its impact on the market with regard to the communicated schedule is not expected before 2009 – 20108. In the interim period realistic change will be in the revision of market definitions (18 markets), but it can result only in minor changes in the regulatory approach. In the area of national regulation one of the most important changes may be caused by potential change in the legislative framework of (media) content regulation which can have an impact in particular on the evolution of the audiovisual market (e.g. spreading use of DVB-T, transformation of cable market ownership relations). Public policy and fiscal interventions can impact on market evolution mostly in connection with operative programs focusing on the information society (e.g. GVOP [Economic Competitiveness Operational Programme] connected with the current NFT) which are connected with the National Development Plans (NFT1, NFT2). The expected significant rise in the NFT budget can further strengthen market evolution and construction of infrastructures (either through direct investments or as a result of the ‘siphoning off effect’ from other markets), but all in all it will not produce a drastic change due to the relation between the amount of subsidies to market-based investments. However certain competition distorting impacts can arise in connection with the GVOP programs supporting infrastructure development.

101. In summary we can say that there is a significant modification of drivers behind the current and future market trends. Perhaps the most important ones are modification of users’ preferences, development of IP and wireless technologies, modification of conventional business models as a result of convergence and start of international

8 However amendment of recommendations and guide-lines connected with market analysis are expected to be published at the end of 2006.

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market consolidation. The major findings connected with the drivers are summarised in Figure 14.

Figure 14: Major findings connected with the evolution of drivers

THE CRUCIAL DRIVERS: THE USERS’ PREFERENCES, THE DEVELOPMENT OF THE TECHNOLOGY AND THE EVOLUTION OF THE

BUSINESS MODELSDrivers Main statements

Macroeconomic/investments environment

Users preferen ces

The development of thetechnolog y

The stakeholders/objectives

Regulatory and public po licyenvironment from ‘Outsid e’

• The macroeconomic environment will not change dramatically• The investment climate will be better, but this will not likely impact the investments to

communication markets

• The demand for bro adband data services will gro w• The demand for bundled services will r ise, but main ly b ecau se of pricing issu es• The demand for mob ilit y will further deep en • The price will still remain the crucial factor for service provider choice

• IP-solutions (eg. NGN) will gather ground due to their flexibi lit y and cost-effectiveness• Though wireless broadband solutions will produ ce relevant alternatives…• …but providing audiovisual services the wireline technologies will still remain dominant

• The stakeholders’ capabilit y to produce cash-flo w will further strengthen, and consolidation s are l ikely to happen

• The DT, The Vodafone and the UPC will be the most committed to the Hungarian market• The domestic players will follo w the intern ational strateg y – the DT wil l be a crucial factor

• Until the EU-Framework sup ervision, significant impact from „outside” will not likely be expected

- except the review of small impact ed markets• Fiscal support may distort competition

The business models• The limits of the services will be blurred , the technolog y synergies will emerge (like

NGN), and the fixed-mobile convergence wil l bring advantages• The business logic will strongly differentiated along the valu e ch ain

2.2.2 International market trends and their impacts in the Hungarian market

102.The trends in the electronic communications market indicate a shift in value creation focus along the three dimensions of the above described analysis framework. Accordingly technological, service and value chain trends can be distinguished. Naturally there are significant interactions between the given technological, service and value chain trends because the convergence of services and the technological platforms serving them are behind the majority of the trends.

103.Out of the changes seen in the market 12 trends can be identified which can have a significant impact on market evolution in Hungary (Figure 15). Out of these six seem to be highly important for the Hungarian market. In the following section the trends are analysed first from an international point of view, then with a description of their key parameters and potential impacts in the Hungarian market.

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Figure 15: Identified electronic communications market trends

THE TRENDS IDENTIFIED IN THE ELECTRONIC COMMUNICATION MARKET

Six trends seem to be critical on the Hungarian market

1

2

3

4

10

11

12

5

6

7

8

9

x Most important trends

Technological trends Service trends Value chain trends

Voice traffic gro ws only with price decrease

Data usag e sho ws strong gro wth

The difference bet ween services diminishes – all b ecome IP-based data service

Services will b e offered in bundles

Interactive, on-demand services become more widespread

Voice and dat a services are increasingly distributed on more technological platforms-mobile voice (FMS)-mobile data ( eg. GPRS, 3G)-voice via cable

Audiovisual services are avai lable on new platforms

Technological convergence on several elements of the value chain

New, upcoming technolog y (e.g, W iMax) becomes a relevant factor on the market

The role and importan ce of content provisioning is gro wing

Stronger division b etween network operation, service provision and cu stomer relationsh ip functions

Fight between d evice producers and service companies for service intell igence

There can be strong interdependencies between the trends e.g. convergence as an overarching mega-trendThere can be strong interdependencies between the trends e.g. convergence as an overarching mega-trend

Technological trends

104. Internationally we can see that voice and data services are distributed on a rising number of technological platforms. This is reflected by the falling share of fixed service in the area of voice service and the rising share of mobile voice service. New technological or service solutions – such as fixed mobile service (homezone) or managed VoIP provided on cable – generate increasing competition to fixed voice service provided on copper pair. Out of data service accesses DSL is expected to maintain or raise its market share, while the share of cable access will fall, but wireless/mobile access technologies will play a greater role.

105. In Hungary migration of voice service to a mobile platform is ahead of the trend in Western Europe as a result of the regional particularity of market evolution, and the mobile technology already today plays a greater role in voice service than the fixed technology. Further increase of mobile share is expected through achieving greater share in the home fixed services market too. A certain share of the data traffic will be shifted to mobile platform, but a rapid rise in the number of 3G/mobile data users is not expected. More important can be the construction of wireless internet accesses, primarily in areas which cannot be covered profitably with fixed infrastructure.

106.Parallel to voice and data service the distribution of audiovisual content will also be available on new platforms. In this area internationally digital program delivery (DVB-x standards), IPTV distributed on xDSL networks and mobile television broadcasting enabled by the construction of 3G networks are the most important trends. Currently these program delivery platforms play a significant role only in a few places, but on the basis of the market dynamics, the announced plans and activities so far of the market players we can predict with great certainty that in the medium and long term these new technologies will obtain significant share in the market of audiovisual content delivery.

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107. In Hungary IPTV is expected to be widely used as an important component of bundled service packages. While television subscription is a service that can be provided in a natural way by cable operators, for providers using a copper pair platform IPTV is the solution if they want to compete with the bundled television-internet-telephone service packages of cable operators. The future and success of terrestrial digital broadcasting (DVB-T) is still uncertain. Mobile television service will probably be restricted to a narrow segment of the population in the period 2006 to 2010.

108.A basic international communications trend is that differences are becoming blurred among technological platforms in several elements of the value chain. For example from the consumers’ points of view distinguishing the mobile and fixed networks will become less important which is reflected among others in the fact that the terminal equipment enabled for voice service offered in the fixed and mobile networks will be increasingly similar. Integration of a rising number of mobile and fixed operators with the same owners has already started and will result in the following years in one of the most important market restructuring events. Integration will be accompanied by merger of customer relations base or transmission networks which will bring about the spreading use of consumer offers which are independent of the network technology. The key driver of technological restructuring will be the conversion of transmission and – to a lesser extent – access networks to next generation networks (NGN) which already reflects at a physical level the termination of distinguishing the fixed and mobile networks.

Figure 16: Examples of fixed-mobile convergence in Europe

109.The Hungarian market plays, even by European standards, a pioneer role in the convergence of mobile and fixed networks and market players. Magyar Telekom is currently integrating its earlier independent mobile and fixed arms and will soon start the switchover to a next generation network. Integrated fixed-mobile offers are expected to appear within a short time and to be widely used in one-two years. It is highly probable that other market players will also make efforts to renew their networks, but the volume and timing is still uncertain.

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110. It is expected that some new emerging technologies can play a significant role in the market in the period 2006 to 2010 while the development and renewal of current technologies also continues (e.g. ADSL2, ADSL2+, VDSL). The most probable scenario is that two technological standard groups will be widely used. The first one is installation of optical fibre as access platform (FTTx). The access link of next generation networks can be installed with optical fibre as physical carrier either up to a distributor serving several users or (with less probability) up to the users. Another emerging new technology is the group of standards called WiMAX (IEEE 802.16x) which can play a key role in providing broadband connection in areas which cannot be profitably covered with fixed network. It is possible that interconnection of Wi-Fi networks will be the major application area of WiMAX. It seems less probable that an alternative WiMAX network competing with a mobile network (GSM/3G) would be constructed by 2010.

111. In Hungary development and renewal of current technologies will be carried out according to the international trends. Similarly new emerging technologies will also appear in Hungary although due to the market size and particularities only after their widespread use in Europe and first of all in America and Asia.

Service trends

112.The first finding on service trends concerns the volume of voice usage. The European trend is that the volume of voice traffic carried on conventional technology has reached or approximated a maximum level and will not continue to grow significantly. Conventional fixed voice volume has already reached its maximum level while mobile voice volume will do it in the near future. The fall in average prices significantly contributed to increase of mobile voice volume. The volume of voice traffic carried on new platforms, voice traffic appearing as IP data traffic (VoIP) is increasing while voice traffic volume carried on conventional technologies is stagnating and is partly replaced by the former. At the same time the share of access charges within voice service revenues is increasing against the share of usage charges also as a result of the declining usage charges caused by VoIP.

113. In Hungary an evolution path significantly differing from the trend seen so far is expected neither in the fixed nor in the mobile market. Present mobile voice service tariffs are already low by international standard therefore additional growth generated by a price cut cannot be expected. As a result of VoIP usage voice traffic volume carried on conventional fixed platform will decrease, which can be slowed down by a significant price reduction that is perceivable for the consumers. The trend of rising share of access charges to the detriment of usage charges is seen also in Hungarian market pricing, a shift which will become stronger in the future.

114.Simultaneously with the stagnating voice usage data usage is dynamically growing. More and more users generate increasing data traffic thanks to the rising transmission capacities and new applications. The number of internet users, in particular those with broadband access, is growing fast. The content and applications available on the internet (e.g. online commerce, e-government, internet banking) induce users’ consumption readiness. In addition to fixed internet usage the share of data traffic in mobile revenues is also rising.

115.The Hungarian market follows the international trend with the rising importance of data usage. The strong growth seen so far will maintain or may further accelerate. Internet penetration will rise and the cost of internet access will fall also in Hungary. Mobile opertors will pay more attention to data service which will be accompanied by a rising consumer demand for such a service.

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116.One of the major factors in the rising data usage is gradual conversion of the other electronic communications services to data services, in particular packet-switched IP-based data service. The most evident example of this is currently and will also be in the following years, the conversion of voice service to data service through VoIP. VoIP services using PC-based open internet (‘Skype-type services’) are practically impossible to distinguish physically from any other internet application. Program delivery via DSL network (IPTV) is, as it is shown by its name, an IP-based special data service which is much more blurred with the internet service accessible on the same access network as its equivalents delivered via cable network. IP-based solutions (e.g. managed VPN) are also spreading quickly among business data services and will play an increasingly important role.

117.The international trend will have an impact also on the Hungarian market: conversion of a certain share of voice traffic to data service and the spreading use of IPTV are expected in line with the rising popularity of VoIP applications. However it is unlikely that by 2010 either PC-based VoIP using the open internet or IPTV becomes a dominant technology in their respective markets. Business data services will be among the first to use the advantages of migration to an IP-based platform (e.g. cost reduction) and full convergence of business services will be much faster than the same process in the more conservative and much slower-to-act residential market.

118.Out of the service trends the spreading of bundled service packages will have the greatest impact on consumers. New services will be added to the already existing usual bundled offers (e.g. cable television and internet). First the fixed voice service (triple play), then mobile voice service and other electronic communications services (e.g. mobile data service). Saving against separately paid services and more convenient administration will be the advantages for consumers. When these advantages are actually perceivable bundled service packages can spread quickly, in particular if – as it is expected – their increasing use will provide a competitive advantage for the operators and therefore they will actively promote it.

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Figure 17: UPC’s international experience with the use of bundled services

THE BUNDLED SERVICES MIGHT BE ATTRACTIVE FOR MOST OF THE CONSUMERS

(1) On the markets where tripl e-play is aval iab leSources: Liberty Global Inc. website

1,57 1,59

1,16 1,1

1,28 1,221,191,221,11,11

1,521,53

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

31%

49%52%

0%

10%

20%

30%

40%

50%

60%

Data Phone VoIPAustria Chile France Hungary Netherlands Norway

March 2005

March 2004

The triple-play bu yers’ ratio among bu yers of any UPC product(1) , 2005 The averag e number of services p er subscriber, UPC

119. In addition to the triple play offers already existing in the Hungarian market (UPC and T-Kábel) other operators will also offer similar service packages. Primarily the larger cable operators and internet service providers with more capital will be able to do so. Magyar Telekom should be addressed separately because the company has a competitive advantage for offering bundled services due to its position. T-Com's DSL-based triple play service is planned to be launched in 2006 and if the offer is successful mobile voice service will also be added to the package – probably not much later. With this the mobile voice service offering can become more important for the other market players too. The operators which can offer to their customers competitive bundled service packages will have a competitive advantage primarily due to the higher stability of their customer base.

120.The demand for on-demand audiovisual services will rise both at international and national level. This includes among others Video on Demand (VoD), Pay per View (PPV), interactive television, Personal Video Recorder (PVR). The possibility of such services requiring multiple-way traffic will be enabled by IPTV and cable-based digital television (DVB-C). According to forecasts it is unlikely that these services would significantly impact the market, but we have to reckon with rising usage and revenues in connection with on-demand services.

Value chain trends

121.The major shift in focus along the communications value chain is reflected by three trends. The first two reflect that the conventional communications market focusing on transmission and access will be converted and value chain elements complementing them – such as content service and consumer relations – will play a greater role.

122.There is already a currently perceivable and in the future further strengthening trend that the role and value of content service is growing. Simultaneously with the increasing weight of new media types (online, mobile) the share of revenues generated from

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content service will rise within the revenues generated from communications services. It will induce the access providers to enter or strengthen their presence in the content service market. Content providers and editors (Yahoo, Google) will use their customer base and brand power to enter the access market. Successful market presence and high revenues require a stable and large customer base and high quality content, however the area where profit will be generated in the value chain has not been finally decided yet.

123. In Hungary out of the existing communications market players the Magyar Telekom Group and UPC have the greatest possibility to play a determining role in the content service market. Magyar Telekom is expected to give priority to the content market which will be reflected for example by making exclusive content offers on its internet portals and via IPTV. UPC will protect its achieved position in content editing. Additionally Vodafone – in line with the owner’s international strategy – will play an active role in widening the mobile content offerings. With the convergence of content service and electronic communications operators which are currently active only in the former market may enter the communications market. This will be primarily in the interest of commercial television channels which hold the content distribution rights and have vast experience in content aggregation. For this reason Magyar Telekom’s ownership share in RTL Klub can be a critical factor in market evolution.

124.The growing role of consumer relations will be reflected by stronger separation of network operation, service provision and consumer relation connected tasks. New players focusing on value chain elements which are closer to the end consumers independently of the networks will enter the market. One of its internationally widespread examples is the appearance of mobile virtual operators which provide mobile voice service and manage customer relations more or less without network components and spectrum license. A similar process is seen, although not on such a scale, in internet and fixed voice service, where incumbent operators are slowly pushed back and alternative operators take over their customers, either together with the access (e.g. ULL) or without it (e.g. through carrier preselection). New players which may come from other sectors (e.g. Skype, Google, system integrators) will enter the market of applications and can potentially play a determining role by using their brand power.

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Figure 18: Virtual mobile operators in Europe

125.Such separation of value chain elements – primarily consumer relations – in the Hungarian communications market will depend on the evolution of technological (e.g. spreading use of next generation networks and their availability to several players) and service trends (e.g. spreading use of bundled services). Virtual mobile operators spontaneously enter with the greatest chance when this is unavoidable for the market players who otherwise could not provide mobile voice service, while the consumers also require it from them in bundled packages. Application providers with international background (Skype, Google, SAP) can obtain a significant share also in the Hungarian market in their relevant markets.

126.While in the past the network operator owned the service intelligence (e.g. customer usage data and value-added services based on it) in the future this will not be inevitably so: intelligence will be distributed among the terminal equipment, application and network. The competition is not decided yet, but the network and service/application providers have the greatest chance due to their advantageous position. A few companies with strong brand (e.g. Apple, Nokia, Microsoft) can break through, e.g. if certain popular applications can be used only through them.

127.Due to the international nature of the determining business models the Hungarian market evolution is forced to follow the international trends, but network and service are expected to preserve their advantage. The two major reasons behind this are that international brands and premium contents can address a much smaller customer base in Hungary and the relations established between local content producers and network operators will be preserved.

128.The international electronic communications trends and their impacts on the Hungarian market can sensibly affect the competitive situation and create new challenges for the regulator. Convergence of services will reduce the possibility to differentiate among given markets and enable the operators having significant power in given markets to leverage their dominance to other markets. The spreading use of bundled service packages will give competitive advantage to larger players with integrated services and

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reduce consumer transparency and the possibility to switch. On the other hand new emerging technologies, distribution of voice and data services among several platforms and separation of value chain elements can enhance competition. For this reason the Authority must monitor the evolution of market trends to minimise negative impacts and promote positive developments.

2.3 Potential market scenarios

129.Future evolution of the Hungarian electronic communications market depends on the international trends and the drivers behind them. For this reason when the potential scenarios describing the market evolution are identified the trends which can have the greatest impact and the occurrence of which is the most uncertain need to be selected. Such trends which occur with high probability must be taken into consideration in all potential scenarios. It should also be noted that the scenarios assume that the current regulatory environment remains unchanged, to show the paths of ‘organic’ evolution of the market. This ensures also that definition of the regulatory interventions for the given scenarios is logically consistent.

130.On the basis of these principles three key issues can be defined. The different responses given to them define the market evolution scenarios. The three issues address the major and most uncertain factors impacting the market evolution along the three key dimensions of the market analysis framework:

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: How much and how fast will various electronic communications services are blurred and to what extent will combined services including various communications services be used?

Value chain dimension: To what extent will it be general that the market players’ scopes of activities are separated or converge along the value chain?

131.Extreme values of the responses to these questions can be identified which limit the potential developments. The actually occurring market evolution is with high probability between such extreme values. The above-mentioned questions and the potential extreme values are shown in Figure 19.

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Figure 19: Questions which define the scenarios and extreme values of the responses given to them

SCENARIOS CREATED ALONG DIMENSIONS WITH HIGH IMPACT AND UNCERTAINTY

Service dimensionTechnology dimension Value chain dimension

Mainissues

Extreme situations considered

To wh at ext ent will the communication s market infrastructure b e dominated b y a single provider that can offer the majority of the services?

Magyar T elekom transforms its network to NGN in the n ext 3-5 years and by doing so acquires a significant comp etitive advantage

More than one, b y- and-large equal infrastructures and their independent providers compete

How mu ch will the difference between the services disappear, wh at wil l be the market su ccess of bundled services (in cl. fixed and mobile voice, internet, television)?

Significant d emand remain s for separate, non-bundled services, offering an attractive market space for comp anies not being able or not will ing to offer the full array of services

Services converg e, comp anies able to offer bundles have competitive advantage over those which are not able to offer one or more elements

To wh at ext ent will the functions and market players diverge or converge along the value chain?

Vertically integrat ed compan ies dominate the market, which are active in all elements of the value chain

Significant market players appear which are active in only some elements of the value chain

Logicalorder

132.Realistically, up until 2010 there are four potential scenarios for evolution of the Hungarian electronic communications market along the above three questions:

‘Battle of platforms’: there is no dominant player with significant competitive advantage at the level of infrastructures, widespread use of combined services is limited, while the value chain remains generally integrated.

‘Dominant player’: at the level of infrastructures Magyar Telekom plays a dominant role and has significant competitive advantage, bundled services will have a major impact, while the value chain remains generally integrated.

‘Intensifying competition’: at the level of infrastructures there is no dominant player with significant competitive advantage, bundled services will have a significant impact, the value chain will fall apart considerably (several players enter the market along the value chain components).

‘Service layer separation’: at the level of infrastructures Magyar Telekom plays a dominant role and has significant competitive advantage, combined services will have a major impact, but the value chain will fall apart considerably.

133.The probability of the other potential scenarios based on the responses to the three key questions is much lower than that of the selected ones. The underlying reasons are the following:

If a dominant infrastructure with significant competitive advantage is created – which means in this case that Magyar Telekom converts its network to NGN – it will be used in a natural way for the provision of bundled services and it is expected to force the competitors too to offer bundled services.

If there is neither dominant infrastructure with significant competitive advantage nor bundled services are widely used the market players are expected to make efforts to preserve integrated value chains.

If there is no dominant infrastructure with significant competitive advantage but bundled services (including fixed and mobile voice) are widely used the players other than Magyar Telekom can provide them only through a separated value chain since Magyar Telekom is the only player with both fixed and mobile infrastructure.

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Figure 20: Evolution of the Hungarian market is the most probable along the following four scenarios

134.On the basis of the estimated probability of a scenario becoming realised, the extent of departure from the current situation and the substantially differing nature of regulatory challenges, the ‘Dominant player’ and ‘Intensifying competition’ scenarios were selected for in-depth analysis and the potential regulatory interventions were identified and presented also along the lines of these two scenarios. However, it should be emphasised that the regulatory principles presented later are not connected with the specific market evolution trends and therefore can support in the following years the Authority's decisions independent of the specific market evolution case. At the same time the Authority is also prepared for regulatory interventions in the case of the occurrence of other market evolution scenarios.

135. In the case of the ‘Dominant player’ scenario Magyar Telekom will achieve significant competitive advantage among the transmission and – partly – the access networks with its new completely IP-based network. For this reason Magyar Telekom’s offers determine the market for example in the market of broadband data accesses. In the longer term the other infrastructure players cannot make competitive offers therefore they will be gradually pushed out of the market. The access providers control the majority of the value chain elements too, independent alternative operators do not enter the market to a significant extent. Since Magyar Telekom can provide with the best conditions the bundled services which the consumers appreciate it will erode the market share of the other players primarily in the mobile voice and audiovisual content delivery markets. In the fixed voice market Magyar Telekom is the least endangered through competition by cable and mobile voice services.

136. In the case of the ‘Intensifying competition’ scenario competition among the access platforms will intensify because several players have competitive solutions (copper pair, cable, GSM/3G, optical fibre). This will be reflected in the market among others by further strengthening of fixed-mobile substitution and – consequently – shrink of the fixed voice service market. New emerging technologies (e.g. wireless broadband data access) can achieve noticeable market share and impact the market dynamics. Demand

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for bundled services is significant, companies which can provide them have competitive advantage. Competition is promoted by the separation of value chain elements, operators independent of networks (i.e. MVNOs) appear in addition to the access providers and obtain significant market share further the consumer relations are better distributed between the access and service providers. New companies and more new services appear in the market and create stronger competition for the incumbent operators. As a result of the demand for bundled services the companies having network in the given markets act in other markets as virtual operators.

137.A common feature of both scenarios is that due to the widespread use of bundled services the operators which cannot provide several types of services have a competitive disadvantage. Content contracts and networks enabled for program distribution (potentially also for internet and voice service) are means which enhance the value of cable operators possessing them. For companies which want to provide both fixed access and voice and broadcasting service (in larger area) it can be financially better to obtain a license for own or for use these facilities than to build them. This can encourage companies (i.e. primarily alternative fixed and mobile voice operators) to acquire certain cable operators or conclude strategic partnership agreements with them. In the ‘Dominant player’ scenario – because the market is not growing – consolidation is expected in the fixed voice market and cable market where as a result of the demand for bundled services and competition generated by IPTV, larger investments need to be made by operators which want to preserve competitiveness.

138. In the two scenarios electronic communications market growth is different. While in the ‘Dominant player’ scenario consumer prices fall to a lesser extent and for this reason mobile and internet penetration also increases at a relatively limited rate, in the ‘Intensifying competition’ scenario there will be higher reduction of prices and more mobile telephone and internet subscribers. However as a result of these two factors of opposite impact higher retail sales revenue in the mobile voice market and data market is expected in the case of the ‘Intensifying competition’ scenario.

139. In the case of the ‘Dominant player’ scenario the fixed voice market can better preserve its absolute and relative weight although in both cases its level will reduce compared to the current one. In the ‘Intensifying competition’ scenario the mobile voice service and the nomadic PC-based VoIP service which appears as data traffic can take away a higher share of the fixed voice market.

140. In the case of the ‘Dominant player’ scenario in the mobile voice market the current trend of levelling market shares will stop and T-Mobile can again increase its advantage. Pannon GSM and Vodafone will have almost the same share of the remaining market and some virtual operators may also enter. However the latter cannot make competitive offers so their market presence will not be determining. The case will be the contrary in the ‘Intensifying competition’ scenario where virtual mobile operators without spectrum license can play a significant role. There will be little differences in terms of market share among the three operators having network.

141. In the data market the share of xDSL among internet accesses will further increase. The number of cable modem based connections will also increase but at a slower pace. The absolute number of switched line subscriptions will decrease. In the ‘Intensifying competition’ scenario internet penetration will increase faster and broadband solutions will gain space as in the ‘Dominant player’ scenario. In the mobile networks the role of data service will enhance which will also be reflected in the revenues. The possibility of using applications independently of the network operator will result in the ‘Intensifying competition’ scenario in a higher growth of data service revenues at sector level.

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142.The audiovisual content delivery market will grow in both scenarios but can become a real driver of the electronic communications market growth only in the case of separation of value chain elements and entry of network-independent content provider companies. If vertically integrated operators can continue to exclude the other operators from content service provision on their networks market dynamism and appearance and widespread use of new services will be more restricted.

143. In summary, in the ‘Dominant player’ scenario the Hungarian electronic communications market retail revenues will not rise in real terms until 2010. On the contrary in the ‘Intensifying competition’ scenario a growing market can be predicted although the growth rate will be lower than has been seen since 1999: the annual average growth rate is estimated to amount to 2% (see Figure 21).

Figure 21: Hungarian electronic communications market evolution and forecast until 2010

‘DOMINANT PLAYER’ DOES NOT CAUSE MARKET REAL GROWTH, WHILE ‘INTESIFYING COMPETITION’ DOESThe relative weight of sub-markets alter in both cases

Source: NCAH, BCG analys is and estim ation

Retail revenue on electronic commun ication market, 2004 comp arable prices

Billions HUF

384 383 348 319 287 271194 148

194 208 237 268 280 286272 325

27 44 64 97 118 143211 24942 45 55

64 67 70 102145

0

200

400

600

800

1 000

1999 2000 2001 2002 2003 2004 2010Dominant

player

2010Intesifying

competition

Fixed voice Mobile voice Data AV

867

647 680 704748 752 771 780

144.The restructuring of the electronic communications market, the change of the relative weight of given sub-markets will continue in both cases, but the ‘Intensifying competition’ scenario is where the evolving market differs from the current market to a higher extent and more closely resembles the market structure which will expectedly evolve in the European countries as a result of international trends.

145.There is a huge difference between the shares of market players in the two scenarios. While in the ‘Dominant player’ scenario Magyar Telekom’s total market share will probably increase (in particular if – as it is expected in this scenario – Magyar Telekom carries out consolidation in the market of players with copper pair based infrastructure), while the ‘Intensifying competition’ scenario will result in a rising share of the other players, in particular the smaller companies. In both cases the mobile operators will raise their share of the total market retail revenues, although in the ‘Dominant player’ scenario it will mainly facilitate T-Mobile’s strengthening. Consolidation and reducing role of smaller companies is expected in the cable market. Figure 22 shows the summary of the main characteristics of the electronic communications retail market in the two scenarios examined.

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Figure 22: Main characteristics of the electronic communications retail market in the two scenarios examined

Market size

AV

Data

Mobile voice

Fixed voice

Consolidation

MAIN CHARACTERISTICS OF THE ELECTRONIC COMMUNICATION RETAIL MARKET IN THE TWO SCENARIOS EXAMINED

‘Dominant player’

• Considerable

‘Intensifying competition’

• Not considerable

• Recedes persistently

• Slower penetration growth• T-Mobile market share

advantage increases

• Drastic set-back

• Faster increasing penetration• Market shares levelling off• Appearance of MVNO-s

• More moderate penetration growth

• Strongly increasing Internet penetration

• The role of mobile data service increases significantly

• Persistent growth tendency• Considerable spread of new

applications (eg. IPTV)

• Quick growth• Spread of new applications (eg. IPTV,

DVB-T)

• Stagnates • Increases

General market features

Sub-markets

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3 REGULATORY CHALLENGES

3.1 Scenario-dependent challenges

3.1.1 ‘Dominant player’ scenario

146.The regulatory objectives can be fulfilled in the ‘Dominant player’ scenario only partially since a situation near to efficient competition would not evolve in any of the markets. The competitive situation in the markets where currently competition is somewhat more intensive (mobile voice, internet service) will minimally weaken, while in the currently concentrated markets (fixed voice and in particular program distribution) slight improvement is expected (Figure 23).

Figure 23: Evolution of the competitive situation in the case of the ‘Dominant player’ scenario

147.The dominant player has an insurmountable competitive advantage resulting from its more efficient and flexible infrastructure with higher transmission capacity and from business integration encompassing the total range of electronic communications services that it has carried out. With the widening market convergence and use of bundled services the dominant operator increasingly leverages its power to the majority of the electronic communications markets and several elements of the value chain as well. As a result the entry of the dominant player in the program distribution market, where so far the local dominance of companies independent of Magyar Telekom was the key feature, will enhance competition, while in the markets where so far Magyar Telekom has been the dominant player its strengthening will result in higher competition concentration. In the fixed voice market as a result of the slow growth of cable voice service providers the concentration will reduce to a minimum extent.

148.Fulfilment of consumer interests reflects the evolution of the competitive situation (Figure 24). In the audiovisual content delivery market (within it in particular in the program distribution market which is determining for the consumers) the possibility of

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switching to other operators will rise when the access monopoly of cable networks is terminated with the new technological solution (IPTV). However, in the fixed voice market just the voice service provided on cable can result in some improvement in terms of choice and switch. In the mobile voice and data markets (within it in particular among internet accesses) the share of switches will decrease with the spreading use of bundled services.

149.Consumer prices will decrease at a relatively slower pace and a decreasing level of competition will also slow down the spreading use of innovative solutions. Penetration and usage volume growth will fall behind the potential opportunities due to the slower reduction of prices.

Figure 24: Evolution of consumer interests in the case of the ‘Dominant player’ scenario

150.At the level of sector interests a bipolar structure will evolve since the dominant player is in a financially stable position, while the other market players are not and can achieve only minimum growth and can get into difficult financial situation. Some market players may leave the Hungarian market and the probability of new players entering the market will decrease significantly.

151.Total market growth will slow down and stagnate at around the current level in real terms. The investment level will be increased by the fact that the dominant player can reckon with stable payback of investments while minimum investments will be made in alternative infrastructures. The fact that competition does not force the dominant player to innovation while the other players will not be capable of introducing innovative solutions will have a negative impact on the level of innovation. However, at the same time the dominant player can reckon with stable payback of investments into innovative products as well.

152.The ‘Dominant player’ scenario would raise serious challenges for the Authority along all three regulatory objectives and consequently will probably require extensive detailed regulation.

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153.Regulatory challenges are diverse. Rejection or restriction of access to the monopolistic network can ensure significant competitive advantage for the network operators, primarily due to the high level of entry barriers. Additionally bottlenecks can arise in several elements of the value chain, while converging services make definition and analysis of separated markets increasingly difficult. As a result of these facts and the differing architecture of the next generation networks the majority of the current interventions (e.g. provision of local access) will become obsolete which raises numerous questions for the Authority:

How can the creation of alternative infrastructures be promoted while preserving efficient resource allocation?

How can service competition be promoted in the short term? Is wholesale regulation sufficient or will be the Authority forced to intervene also in

the retail market? How can bundled service packages containing both regulated and non-regulated

products be regulated?

154. In the case of the ‘Dominant player’ scenario wholesale regulation in itself is not necessarily sufficient for the protection of consumer interests, e.g. due to the reducing possibilities of switching seen in several markets. Additionally pricing and quality dimensions will be significantly modified which is beyond the current regulatory mechanisms.

155.At sector level the lack of competition can result in inefficiency and in the longer term quality problems since investments and innovation are less encouraged. This means that a critical regulatory issue will be to efficiently encourage investments at sector level.

3.1.2 ‘Intensifying competition’ scenario

156.The ‘Intensifying competition’ scenario shows a much better picture in respect of the regulatory objectives since concentration would further reduce in all key markets and consumer interests would also be better fulfilled.

Figure 25: Evolution of the competitive situation in the case of the ‘Intensifying competition’ scenario

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157.The lack of a monopolistic infrastructure and separation of the value chain elements lower the entry barriers in the markets and leaving them contestable. Both infrastructure and service level competition will be generated more easily and market concentration will reduce significantly in each sub-market (Figure 25). However, bundled services gaining space and convergence of markets can continue to ensure a competitive advantage to an incumbent player who is already present in all markets today and has significant market share.

158. In the case of the ‘Intensifying competition’ scenario the consumers would enjoy higher choice and be able to select among several, even virtual operators (Figure 26). Competition for the consumers will push down prices and raise penetration and usage and force quality and high consumer value. Since in this scenario there would be a real competition among different infrastructures differentiation by quality would also be possible in addition to price competition.

Figure 26: Evolution of consumer interests in the case of the ‘Intensifying competition’ scenario

159.Since competition is partly infrastructure-based the players would have wider opportunities for innovation which requires additional investments. The theoretical risk that concentration decreases below a level which would endanger sustainable competition is not realistic in this scenario. Growing penetration and usage counterbalances price reduction and market growth is sustained.

160.A certain share of the regulatory challenges resembles those described for the ‘Dominant player’ scenario. Converging services make separated analysis and regulation of markets increasingly difficult and bundled services can also generate competition problems. Bottlenecks can emerge in several elements of the value chain (e.g. at the level of applications or content service), but their competition restricting impact is more limited due to the open market. The risk of exclusivity agreements between network operators and service providers can arise which can lead to the creation of an oligopolistic structure. However, in addition to these problems to be monitored and solved in the case of the ‘Intensifying competition’ scenario in the longer

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term reduction of regulation would become possible if enabled by the evolution of the market situation. Optimal smooth reduction of the sector-specific ex ante regulation level can grant greater space for natural operation of the market.

161. In connection with the protection of consumer interests management of separation of the value chain, handling market entry of various operators and separation of the access level will become critical. Ensuring interoperability, switch to other operator and consumer transparency in respect of quality and price must be given higher priority within the regulatory means of the Authority. As a result of the market evolution, pricing and quality dimensions will be significantly modified here as well, and the current regulatory mechanisms are not necessarily capable of managing these changes.

162.The overall interests of the electronic communications sector will not be harmed since as a result of greater competition and price reduction the financial stability of the sector can reduce, but in the medium term it will not have a negative impact on investments.

3.2 General regulatory challenges

163. Irrespective of the evolved market scenario the Authority will face six important medium-term challenges along its three key regulatory objectives. These are challenges of such magnitude as to require a reconsideration of the Authority's current approach which is reflected also in the regulatory principles. Figure 27 shows these challenges and the necessary new regulatory approach.

Figure 27: General regulatory challenges and the new regulatory approach

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3.2.1 Efficient competition

Converging markets

164.Challenge: Convergence can reduce the possibility of identification of technological and service markets.

165.As a result of the spreading use of IP-based technologies, increasingly rich multimedia contents and internet voice services (VoIP) of rising popularity the data services market will widen and become blurred in numerous areas with the audiovisual and voice markets. Many of the data market operators will also become players in the audiovisual and/or voice market and compete with the companies currently operating in them. Similar signs of blurring are seen in the voice market as well, where according to the conventional definition mobile and fixed technologies are distinguished but their relevance will be further reduced in the future. Mobile voice service can increasingly take the function of fixed voice services and substitute most of its services for the consumers. Additionally bundled and convergent services will further blur the boundaries among traditionally defined services.

166.Necessary new regulatory approach: In the long term, gradually focus on the value chain elements also in respect of market definitions and interventions.

Evolution of new bottlenecks

167.Challenge: As a result of convergence bottlenecks can be generated in addition to the access also at other points of the value chain (e.g. transmission, applications, content, consumer relations).

168.A potential example of the generation of new bottlenecks in the converging data and audiovisual markets is the aggregation of rich content by integrated operators, and the exclusive sale of which to its own customers. This market behaviour could result in an insurmountable competitive disadvantage both for the smaller data providers and the independent audiovisual operators having rich content. The former will not be able to offer similar content with their data service, while the latter will not have a customer base in the broadband data service market and the customers of the integrated operators will be difficult to reach. In this way the content element and the consumer relations part of the value chain could become a bottleneck of competition.

169.Necessary new regulatory approach: The competition problem can be handled only through consistent and co-ordinated application of electronic communications, content and IT regulation means.

Strengthening the infrastructure competition

170.Challenge: Competition that can be sustained in the long term can be based principally on competition among alternative infrastructures.

171. In the residential electronic communications market in the area of fixed technologies (e.g. copper pair, coaxial cable, optical fibre) construction of additional parallel access infrastructures does not seem to be realistic. With regard to the existing mature infrastructures replication of the access network is realistic only in respect of mobile technologies. Consequently efficient competition can be based in the short and medium term on the existing alternative infrastructures (access technologies), in the long term it can be complemented by the evolution of currently still emerging technologies to alternative infrastructures and thus further strengthen sustainable competition.

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172.Necessary new regulatory approach: In addition to supporting gradual investments of alternative operators, competition among various platforms must be promoted with means beyond the current system.

High regulatory cost

173.Challenge: Ensuring compliance with non discrimination and non-price related obligations and their ongoing renewal requires very high costs of regulation due to the intensity of changes in the sector.

174.Should the regulated players with SMP show limited readiness to co-operate with their competitors and the Authority to create the conditions of efficient competition, the Authority will be forced to achieve efficiency of interventions with regulatory means and sanctions elaborated in detail. However, as a result the sector players will have to comply with detailed complex regulation which significantly limits and restricts their business processes which inevitably reduces their operational efficiency. This means that detailed regulation incurs significant additional costs for the sector players in addition to the rising costs of elaboration and operation of regulation. There is a significant probability of evolution of the above situation particularly in connection with the application of non-price related obligations which may give greater space for behaviour hindering competition.

175.Necessary new regulatory approach: The commitment of sector players to efficient competition, their behaviour and readiness for co-operation must be taken into consideration both for the selection of intervention means and the sanctions imposed in market surveillance procedures.

3.2.2 Consumer interests

Reducing consumer transparency

176.Challenge: Consumer interests (transparency, possibility of choice and switch) can be harmed as a result of market changes (e.g. bundled services).

177.Fulfilment of each consumer interest requires consumer transparency. Without appropriate level of information and comparability of competing offerings the consumers cannot appropriately choose or switch. Therefore they cannot always select the service which is cheaper and/or gives higher value. However transparency is harmed with the spreading use of bundled products because the consumer cannot separate the price of each sub-service in the price of the package. Increasingly complex pricing policies with changing structures also make transparency difficult for the consumers.

178.Necessary new regulatory approach: The Authority must give high priority to protection of the consumers’ possibility to choose and switch and must promote better comparability among operators and transparency.

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3.2.3 Sector interests

Responsibility of sector players in ensuring of competition

179.Challenge: Development of electronic communications can be ensured primarily by sector players generating efficient competition, the regulator’s contribution has an effect only indirectly and only after an inevitable period of delay.

180.The market players’ investments and innovation result in enhanced consumer value, their efficient operation and competition result in reduced consumer prices. Although the regulator’s role is indispensable for the creation of competition, its contribution has an effect appearing only indirectly and can be measured only with some delay after the launch of interventions. This means that without the investments of the market players the regulatory objectives cannot be fulfilled either – however investments require appropriate market and regulatory environment.

181.Necessary new regulatory approach: The interests of the whole sector must be kept in mind when regulatory decisions are taken.

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4 REGULATORY PRINCIPLES

182.The principles of the regulatory means to be applied were defined on the basis of the regulatory objectives, various market evolution trends and scenarios (and challenges resulting from their comparison). In addition to the objectives the principles ensure a future-proof strategic approach because they are not connected with the given market evolution paths and this way they can support the Authority’s decisions in the following years independently of the specific market scenarios. The potential regulatory interventions described later identify only the focus of problem-oriented analyses and are integrated into the market analysis and other decisions of the authority based on the outcome of these examinations. This means that the potential interventions are applied in each case subject to the market evolution, on the basis of approaches laid down in the principles.

183.The principles defined for the application of regulatory means can be classified in three groups:

The guiding principles identify along three regulatory objectives (efficient competition, consumer interests and sector interests) the major intervention principles which the Authority wants to follow.

The specificity principles describe the potential level of differentiation of regulatory interventions.

The implementation principles define principles for the approach to be used for and implementation of the Authority's specific regulatory and market surveillance activity.

4.1 Guiding principles

4.1.1 Efficient competition

Elimination of bottlenecks

184.Due to the nature of the electronic communications markets, the current trends and the market evolution seen so far, certain bottlenecks exist which distort and hinder the ensuring of competition and therefore their existence requires ex ante market regulation.

185.The Authority has a double duty: on the one hand its objective is to eliminate bottlenecks in the long term. On the other hand while these bottlenecks exist the Authority must hinder the way that control over bottlenecks can abuse their resultant market power.

186. In the short term the major bottleneck exists at the level of the access infrastructure primarily due to the very high market entry barriers. The incumbent operators possessing this are the only players who can physically deliver the given service to the consumers. For example in the fixed voice market the ‘last mile’ copper pair connected to the given customer is in the majority of cases owned by a single incumbent operator and construction of a parallel access infrastructure is financially non profitable for potential competitors. This means that the incumbent operator is in a monopolistic position in the given geographic area in the fixed voice services market. Without the possibility of substitution its pricing is determined by monopolistic revenues and profit maximisation instead of a competitive market situation.

187. In the short term another bottleneck along the value chain is the size of the existing customer bases. The size of the customer base of a mature market player grants an

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advantage in economies of scale which can in various ways distort competition and make competition from new entrant operators impossible. Advantage in economies of scale can be generated for example as a network impact that is a feature of communications. A new consumer finds it better to become member of a larger network since in this way he can communicate in the network with discounted rates and with more other consumers. Advantages of economies of scale can also be generated as a result of significant differences in the per consumer fixed costs needed for the construction of control and serving IT and other systems needed for the operation. Similarly only a large existing customer base can make development of applications connected with the basic service or development and aggregation of contents profitable. Advantages of economies of scale can also be generated when a physical distribution channel is created, only a large existing customer base can ensure profitability of a shop network. Finally a large customer base facilitates the building of strong brands which reduces the consumers’ readiness to switch.

188.The Authority must consider these factors and set out objectives which hinder the way that the existing SMP operators can leverage their market power based on the size of their customer bases to other markets or other elements of the value chain in the given market (in vertically connected markets). Additionally the Authority will monitor the risks of generating bottlenecks in other value chain elements, such as in the area of content and applications.

189.Figure 28 shows the bottlenecks which are the most important in the medium term and the factors behind them.

Figure 28: Bottlenecks which are the most important in the medium term

Regulatory possibilities for ensuring of efficient competition

190.The final objective of the Authority is to ensure the existence of efficient competition in the market of electronic communications services. The regulatory strategy and principles also reflect these efforts. However when medium-term evolution is considered evolution of efficient competition is not always a realistic requirement and this must be taken into consideration by the Authority to ensure fulfilment of the consumer objectives.

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Consequently when the nature of regulatory interventions is determined the current and expected medium-term outcome of competition in the given market must be taken into consideration (Figure 29).

Figure 29: Regulatory preferences along the current/expected outcome of competition

191.When efficient competition has been achieved or in the medium term is created in a ‘self-supporting’ way the role of sector-specific regulation gets marginalised and its role is taken over by ex post means.

192. In the case of a functioning infrastructure competition (without service competition based on it) the necessity of sector-specific ex ante regulation is reduced and market mechanisms must be ensured, primarily on the basis of the Competition Act.

193.When efficient or infrastructure competition has not been created yet, but there is a realistic chance of its natural generation in the medium term the Authority's major duty is to ensure competition of platforms. In this case the regulatory approach is based on enabling efficient investments along the competing platforms (infrastructures) and ensuring the conditions of competition among platforms at the highest level.

194.When it seems that there is no chance of creating efficient competition through support of natural infrastructure competition but there is a realistic chance of it through service competition the regulatory approach must focus on support to gradual investments. One form of which is the creation of an efficient investment ladder.

195.When the chance of creating infrastructure-based competition is minimal the regulator must create the conditions of long-term service competition since this competition enables the realistically achievable highest level of competition and in this way promotes fulfilment of consumer interests.

196.Finally when shifting from the monopolistic structure is not possible for reasons connected to the particularity of the market (e.g. the case of natural monopoly) the Authority must ensure through retail level interventions, the fulfilment of consumer

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interests at the highest possible level. Naturally retail level interventions are at the bottom of the regulatory preference list and should be applied only when absolutely necessary.

Sustainable, efficient and ‘self-supporting’ competition

197.Finally in the long term the regulatory activity can contribute to creation of sustainable, efficient and ‘self-supporting’ competition by the sector players in the whole electronic communications market. Creation of ‘self-supporting’ competition assumes that bottlenecks in competition are eliminated or gradually lose their importance. When this occurs the use of sector-specific means can be gradually reduced and support to market self-regulation and application of ex post means can gain space. However in the long term some ex ante regulation must be maintained e.g. to ensure national and international level interoperability of electronic communications systems.

Possibilities of creating efficient (infrastructure) competition

198.The Authority's long-term objective is to create efficient infrastructure competition which eliminates bottlenecks and enables efficient sustainable competition even with the gradually diminishing role of the regulator.

199.There are three potential ways of emerging infrastructure competition: Competition of currently existing access platforms: in this case competition among

the currently existing access platforms (e.g. copper pair, cable, GSM/3G) is emerging

Construction of parallel infrastructure for the same platform: in this case several operators with independent network operate on a given access platform (an example of this is the current GSM market).

Competition generated by emerging technologies: emerging access platforms mature and can become competitors of the currently existing platforms.

200.The Authority has three methods to support the creation of infrastructure competition. Firstly, the Authority must promote competition among alternative platforms that can provide the same service. One of its catalysts is the minimum level of cross-ownership among competing platforms. Secondly, when scarce resources are efficiently allocated the market mechanisms must be gradually strengthened since it can support both competition of platforms and competition of emerging technologies. Thirdly, it can be justified to support emerging platforms which strengthen competition when it does not harm technology-neutrality.

201.Creation of infrastructure competition in the long term can be indirectly promoted through strengthening service competition since alternative operators can easier enter the market through service competition and in this way gradually develop their customer base with which they can reduce their disadvantage in economies of scale resulting from the size of the customer base. In a service competition based on incumbent infrastructure the Authority can encourage the alternative players through efficiently encouraging investments to construct a growing size own infrastructure with which infrastructure competition can be gradually started. This indirect and gradual way of creation of infrastructure competition – which is often called in professional literature ‘investment ladder’ – is shown in Figure 30. The most important medium-term question of the investment ladder is to what extent it enables infrastructure investments into the access network (the most critical bottleneck) and their construction parallel to the incumbent’s network. This probably requires alternative technology; other ways of supporting infrastructure-based competition are also justified to ensure its successful introduction.

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Figure 30: Investment ladder impact mechanism

Service competition in the relevant markets

202.On the one hand service competition can in this way support the creation of infrastructure competition in the medium term – largely through parallel construction along the current technological platforms –, on the other hand without appropriate intensity of competition and with the existence of bottlenecks it can in itself help fulfilment of the consumer interests in the short term. However it should be kept in mind that service-based competition in itself cannot create sustainable competition.

203.Creation of service competition is based on ensuring equal access to the infrastructure and value chain elements which constitute bottlenecks. Additionally the Authority must support the appearance of innovative applications launched by the incumbent operator or a third party. The potential means connected with the creation of service competition are shown in Figure 31.

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Figure 31: Possible means of wholesale regulation

Retail intervention as last resort

204.Evolution of competition on the supply and demand side must in any case contribute to fulfilment of consumer interests. However when the market structure does not enable the creation of any form of competition and wholesale interventions supporting service competition cannot promote the fulfilment of the consumer interest the Authority reserves as a last resort the possibility of retail price regulation and requiring minimum quality level to directly fulfil the consumer interests.

205.Reservation of this possibility in itself can help evolution of market players’ readiness to comply with competition rules and regulation.

4.1.2 Consumer interests

206.Fulfilment of consumer interests can be ensured by efficient competition. The regulator according to the earlier described guiding principles wants to ensure the chance of alternative operators to create efficient competition which could be called the supply side of competition. However a precondition to ensuring of efficient competition is supporting the demand side of competition, i.e. that consumers can select among various offers and switch to the preferred operator.

207.To promote this the regulator must already in the short term, create the preconditions of efficient choice and switch by the consumers. This is connected with transparency which means that the consumers possess appropriate information about the services available to them, information which is transparent, understandable and consequently enables the consumer to compare different offers. On the other hand a precondition to switch is an acceptably short switch time and minimisation of the cost of switch. These preconditions are directly or indirectly part of the consumers’ rights.

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208.A certain share of these consumers’ rights can be ensured by competition itself since competition requires higher level customer relations, more convenient and customer-friendly general conditions. However the regulator has numerous other means to contribute to the creation of these preconditions if they are not ensured by the market mechanisms themselves.

4.1.3 Sector interests

209.As we have earlier described the regulator must take into consideration the sector interests in the regulatory process. One particularly important area is the level of investment and financial stability. For this purpose the Authority makes interventions which do not cause in the short term drastic change at the level of each player and SMP operator and consequently the players can react to the regulatory changes and continue their profitable business. Additionally the Authority monitors financial stability at the level of the whole sector and avoids it becoming endangered by its measures.

210.As it is shown in Figure 32 it is possible to ensure through successful interventions of the Authority that as a result of the creation of service or infrastructure competition sector interests are not harmed.

Figure 32: Fulfilment of sector interests with regulatory intervention

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4.2 Specificity principles

211. In Hungary and other countries electronic communications markets have certain particularities which impact on the uniformity of regulation. The Authority cannot leave these out of consideration in the practical implementation of regulation. A differentiated approach is also available to a certain extent within EU directives and recommendations (e.g. definition of 18 markets). The following specificity principles contain the related considerations:

Technology neutrality Service specificity SMP regulation depending on market position Geographic specificity Biding regulation Monitoring of market changes

Technology neutrality

212.Due to the particularities of the electronic communications market when interventions are made and other steps are taken the Authority must take into consideration the technological interrelations. This means that the regulation must often be technology-specific since on the one hand out of the relevant markets more than one is in connection with a given access technology, on the other hand when wholesale obligations are elaborated the particularities of the given technology must be taken into consideration (for example network architecture in the case of bit stream access or interconnection obligation). However in the course of its regulatory activity the Authority must pay attention not to create preferred technologies, i.e. that regulation always remains technology-neutral.

Service specificity

213.The Authority identified competition, consumer and sector objectives and principles which are beyond the markets and services and applicable to them in general. However at the level of specific interventions the Authority can identify service-specific regulation since market challenges and bottlenecks can be different for each service. One of its examples is the market definition applied in the present market analysis process.

214.However the current market trends show towards the spreading use of bundled services in numerous areas. Consequently the Authority must be prepared to elaborate regulation that is able to handle in a standard way the bundled services of the rising number of service groups.

SMP regulation depending on market position

215.Bottlenecks and competition distorting behaviours generated in separated but similar markets do not necessarily arise in the same way with the SMP operator operating in these markets. For this reason the Authority may make differentiated regulatory interventions in respect of the SMP operators depending on their relevant market positions and behaviours. This way a market situation is possible where certain obligations are imposed by the regulator only on specified SMP player(s).

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Geographic specificity

216.Within Hungary differences exist among different geographic regions in numerous respects which can have a significant impact upon the local particularities of the electronic communications markets. On the one hand huge differences can arise on the demand side of the market in the regional economic and income relations, composition of potential business and residential customer base and current penetration and usage indicators. On the other hand significant differences can be seen on the supply side in the level of competition and in certain cases also in the cost structures. The former is partly caused by differences in demand, partly by the earlier concession relations applicable for the region, and partly by corporate strategies. The latter results from geographic and demographic parameters and can have an impact on the costs of deployment the given services and payback of investments.

217.On the basis of the above market competition relations, occurrence of bottlenecks, consumer interests and sector challenges can be different for each region, consequently the regulatory problems to be solved and the regulatory focus can also be different for each region. This way the Authority can make at geographic level differentiated regulatory interventions taking into consideration the local particularities. However this cannot mean in any case that the Authority wants to define in each case interventions depending on the geographic location.

218.Figure 33 shows with the example of France how the introduction of service competition has a different impact for each town type according to the demand and supply relations of the regions and town types.

Figure 33: Role of geographic factors in creation of infrastructure competition

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Biding regulation

219.The Authority considers as emerging market9 only the launch of new services which it does not want to regulate in the early phase. The underlying reason is that innovation in the emerging markets can be seriously hindered by early regulation and dominance in a small emerging market can be partly accepted to ensure payback of investments of the first market entrant. Additionally trends are difficult to forecast in emerging markets and the Authority does not have sufficient reliable information to conduct a detailed market analysis.

220. In contrast to the above a new technological platform in an existing mature service market is not considered in itself to be an emerging market therefore the Authority does not want to remove it from the SMP obligations applicable to the given service under a sort of biding regulation.

Monitoring of market changes

221.Since the evolution of various drivers significantly impact on competition relations in the electronic communications market and a major share of them (mostly technological development) are characterised by fast changes, regulation must follow and adapt to development. The Authority continuously revises the necessary extent of specificity of regulation on the basis of the market, always taking into consideration the EU directives.

4.3 Implementation principles

222.When decisions on specific interventions are made the Authority considers partly the EU requirements, partly in line with the international practice compliance with certain high level principles as mandatory. These were laid down in the following implementation principles.

223.The Authority follows in regulation the principle of transparency, long-term foreseeability and consistency. The Authority uses regulation which follows predefined and communicated objectives, principles and methodologies. This way it creates a more predictable and stable regulatory environment which enables better planning of investments and motivates innovation.

224.The Authority examines before major intervention decisions are made the impact of alternative means and ensures the efficiency of regulation through compliance with the principles of proportionality and net benefit. The Authority, when interventions are made, has regard to the pace of emerging sustainable competition and takes into consideration the time and cost need of implementing regulatory interventions. Such interventions are only used where the probable additional welfare impact compensates for the costs of intervention in a broader sense.

225.The Authority intends to co-operate with the market players in the regulation process since a regulatory environment based on consultations and trust can reduce the direct cost of regulation both for the Authority and the market players. Therefore the Authority elaborates the necessary details of regulation on the basis of the behaviour of SMP operators and other market players and their commitment to efficient competition.

9 Several examples of regulatory principles applicable to emerging markets are contained in the document addressing ERG obligations. Public professional consultation of the ERG03 (30)rev1 document is expected to be closed in April 2006.

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226.Being aware that efficient regulation should be based on requiring compliance and when necessary applying strict punishment the Authority always wants to act in both a predictable and resolute way. In this way a simple but efficient regulatory environment can be implemented.

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5 POTENTIAL INTERVENTIONS

227.Naturally future application of regulatory means, specific interventions and introduction of obligations will continue to be in compliance with the applicable national and European legal and regulatory environment (for example SMP obligations for the 18 markets according to the applicable provisions of Eht.). Notwithstanding the Authority wishes, when its future interventions will be determined, to take into consideration the fulfilment of regulatory objectives, in particular the pace of ensuring of efficient competition. Evolution of market concentration does not necessarily coincide with the level of potential abuse of market power by SMP operators but it is a good indicator of competition intensity and for this reason it provides important information for the Authority when interventions are determined. Additionally, it is important to take into consideration the other two regulatory objectives, evolution of consumer and sector interests, when regulatory means are used.

228.Since in the case of the differing paths of market evolution, i.e. realisation of different market scenarios the fulfilment of regulatory objectives may be of different level, the specific interventions may differ as well.

229. It should be noted in the following section that as part of the regulatory strategy the Authority identified only intervention possibilities and investigation paths, but not necessarily interventions to be applied. In the next implementation phase the Authority will conduct a more detailed analysis and impact analysis of the intervention possibilities with the greatest weight. The specific obligations will be imposed after this process, depending on the result of these analyses, in the specific market analysis and the procedure regulated by Eht. a summary linked to scenarios of the key regulatory interventions to be examined is shown in Figure 34.

Figure 34: Key regulatory interventions to be examined in the period 2006 to 2010

‘Intensif yingcompetition’

‘Dominantplayer’

2006-2007 2008-2010

• Determi ning interaction of fixed a nd mobile marke ts on regulation mea ns’ lev el

• Dev eloping wholes ale products c onnecte d to inv estme nt ladder

• Enha ncing broadband Internet serv ice compe tition by further dev elopment of DS L wholesal e produc ts

• Promoting emer ging tec hnologies• Decreasing cross ownershi ps of parallel i nfras truc tures

• Further decreas e of mobile IC -fees• Enha ncing compe titi on in AV marke ts• Increase of consumer tra nspare nc y

• Further decreas e of mobile IC -fees• Enha ncing compe titi on in AV marke ts• Increase of consumer tra nspare nc y

• Liberalise d spec trum polic y• NGN re gula tion• Issues of conte nt prov iding

• Determination of con crete interventions should b e preced ed b y d etailed market review and impact assessment

• The focus and weight of same intervention can differ according to the scenarios

• Determination of con crete interventions should b e preced ed b y d etailed market review and impact assessment

• The focus and weight of same intervention can differ according to the scenarios

Time horizon of possible regulatory interv ention

inde pendent of scenario

POTENTIAL KEY REGULATORY INTERVENTIONS WILL BE EXAMINED IN DETAIL

• Liberalise d spec trum polic y• NGN re gula tion• Deregula tion

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5.1 Interventions possibilities in 2006 and 2007 to be examined in both scenarios

230.Detailed analysis of certain intervention possibilities will be necessary in the period 2006 to 2007 irrespective of the market evolution path, i.e. the market scenario to be realised. However in the case of different market evolution paths (scenarios) the same intervention may be made with different focuses and weight.

231.The Authority sees the following potential interventions as such: Revision of termination fees, with special regard to further reduction of mobile

termination fees Creation of the conditions of competition in the market of audiovisual content

delivery Active support to ensuring consumer transparency

5.1.1 Revision of termination fees

232.Revision of the termination fee concept must include joint analysis of the SMP players in the fixed services market and the mobile voice call termination market since the termination fees result in cash flow among the market players and consequently can significantly promote or distort market processes, including competition. Due to their absolute volume and weight in the current market competition special attention should be paid to mobile termination fees.

233.The average mobile termination fee per minute in Hungary is around the European average. Additionally the weight of mobile and fixed termination fees does not differ significantly from the levels found in other European markets. This means that in this respect the Hungarian practice does not differ from the European practice.

234.However the absolute level of mobile termination fees is at national level still high and distorts competition. As it is shown in Figure 35 the ratio of termination fees determined at the end of 2004 and the annual average per minute retail charge of a mobile call cannot be explained with any business rationality. If we assume that in mobile communications networks the cost of originating a call is about the same as the cost of terminating a call10 then the cost of originating and terminating a mobile-mobile call should be about the double of the actual cost-based termination fee. This means that under realistic competition circumstances the average consumer price should be just above this cost level. But in reality the average retail (consumer) price of mobile voice calls in Hungary is much lower. This paradoxical situation questions the cost-based nature of mobile termination fees since on the basis of the retail-minus principle a much lower termination fees could be determined.

10 Naturally there are certain cost elements which differ between call origination and call termination, but their weight is not significant. Additionally certain cost elements (e.g. collection risk) are higher in the cost of call origination.

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Figure 35: Ratio of mobile termination fees to retail price

235.The current high mobile termination fees distort competition in the fixed and mobile voice markets in various respects. On the one hand they cause unreasonable competition disadvantage to fixed operators in the overall voice market competition between fixed and mobile operators. Mobile operators can offer mobile-fixed calls with a lower tariff than the tariff of fixed-mobile calls that the fixed operators can offer and at the same time mobile operators’ customers can enjoy with various tariff packages the possibility of extremely low tariff calls to the same network. Which has already become general practice for all mobile operators.

236.This distorted competition situation is best reflected by the tariff packages introduced in 2005 by more than one mobile operator positioned for calling ‘home-zone’ and fixed customers. These tariff packages are clearly positioned as substitute for fixed voice services and in certain cases they offer terminals and a package which can be used exclusively from home with which the consumers can make calls to the fixed network with prices similar to the fixed operators’ prices while can make calls to mobile networks with much lower than prices offered by fixed operators. Mobile operators can cross-finance the low-price calls to the fixed network among others from the asymmetrical fixed-mobile termination fees, i.e. they can use their termination market power to finance their products designed for substitution in the fixed voice service markets.

237.The second negative consequence of unrealistic mobile termination fees is the resultant competition disadvantage of new market players. While in most cases IP-based alternative operators can offer significant price advantages to the consumers for international, long-distance and even local fixed calls, they are forced to offer mobile calls for high price due to the termination fees they have to pay, which significantly limits their competitiveness. For example this is the situation users of the online VoIP services have to face (see Figure 36).

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Figure 36: VoIP operators’ fixed and mobile calls tariffs

238.High termination fees hinder the establishment of potential virtual operators (e.g. MVNOs) with market conditions since the owners of mobile networks could hardly offer competitive wholesale call origination prices without being in contradiction with their theoretically cost-based termination fees.

239.Finally the consumer objectives are indirectly harmed since the high mobile termination fees are included in the price of calls to the mobile networks or other potentially cross-financed calls and consequently the consumer price objectives are fulfilled to a lower extent that would be possible.

240.For the above reasons the termination fee concept and in particular the mobile termination fees must be revised and as a consequence – when justified – the mobile termination fees must be significantly reduced.

5.1.2 Strengthening the conditions of competition in the market of audiovisual content delivery

241. Currently as a result of high cable penetration and attractive service offerings, the most popular program delivery platform in Hungary is cable. However in a given geographic area generally only one cable television operator is present, more than one operator is accessible only in certain cities. The importance of the fixed program delivery sector in the audiovisual segment is currently and expectedly in the near future accompanied, in respect of infrastructure based competition, by a low level of competition and consequently the relative defencelessness of cable television subscribers.

242.The determining feature of the Hungarian cable television sector is that even by international comparison there are extreme number of players and notwithstanding this fact the market is rather concentrated. When the supply side of the fixed program distribution market is examined the differentiated and divided nature of the sector which is reflected in several respects should be emphasised. The cable sector is rather

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fragmented not only in respect of the players’ size, capital strength and strategic orientation, but also in respect of their technological capabilities. The long-term development prospects of the CATV sector are clearly determined by convergence processes and the digital television issue.

243.Another specific feature of regulation is that due to the role of program distribution in the media market the cable service is subject to regulatory interest and intervention generated by media policy, telecommunications policy and information society policy.

244.For the above reasons the Authority intends in the short term to pay special attention to the regulatory means and to the measures beyond regulation which with regard to the above capabilities can directly and indirectly positively impact on the level of competition and in this way upon consumers prices, choice and value.

5.1.3 Support to ensuring consumer transparency

245. Improvement of the consumers’ choice capability can significantly strengthen their capability to switch and thereby their satisfaction as well. However to be able to select the consumers need information about the potentially available services and their prices and must also be able to interpret and compare them. This is difficult today with the often complex tariff structures, and in the future with the rising number of services and spreading use of bundled services (service packages) resulting in aggregated prices it will be even more difficult.

246.Consumer transparency is an essential factor which can be interpreted also along the consumer objectives (price, value and choice). With regard to the critical nature of price as a factor for choice and switch the Authority can do the most in the area of creating consumer transparency through promoting price transparency and this way support in the short term the achievement of higher levels of consumer satisfaction. In the area of price transparency simple and easily understandable bill format and content and price-comparison services can be the most efficient means.

247.For this reason the Authority intends to examine in what way (e.g. through co-regulation) could a more perspicuous bill format and content be reached and consequently a higher level of consumer transparency.

248.The Authority will also examine the possibility of operating price-comparison services either by the Authority or by third parties, their roll-out and support. In the area of mobile price-comparison services the Authority has already made the first step with the introduction of TANTUSZ, a service accessible on the internet.

249. In respect of value and choice the possibility of ensuring wider availability of information with regard to the content of services, the simplification and the reducing the costs of choice and switch among operators and services could be considered.

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5.2 Potential interventions in the period 2006 – 2007 in the case of the ‘Dominant player’ scenario

250.The Authority sets for the period 2006 to 2007, in addition to the above-presented potential interventions, also the objective to conduct a detailed analysis of the potential regulatory interventions for the case of the ‘Dominant player’ scenario. The underlying reason is that on the basis of the current market evolution trends there is a high probability of realisation of this scenario and this market evolution path supports the least the fulfilment of regulatory objectives, in particular in the ensuring of efficient competition. For this reason the Authority wants to be prepared for this evolution path of the market, which is unfavourable for the regulatory objectives, to be able to ensure the conditions of creating efficient competition through necessary and proportionate interventions.

251.Naturally the focus of interventions to be examined can change and these potential interventions can become unnecessary if on the basis of continuous measurements a scenario other than the ‘Dominant player’ seems to be realised.

252.The Authority identifies for the period 2006 to 2007 the task to conduct an analysis of the following potential interventions for the ‘Dominant player’ scenario:

Mapping the impact of fixed and mobile voice markets on each other to the level of regulatory tools

Development of wholesale products connected with the investment ladder Strengthening the competition of broadband internet services through improving

the DSL wholesale conditions Support to emerging technologies Reduction of cross-ownership of parallel infrastructures

5.2.1 Mapping the impact of fixed and mobile voice markets on each other to the level of regulatory tools

253.Fixed and mobile markets are getting closer to each other. Convergence will be an increasingly marked phenomenon both in respect of substitution and integration. In the short term primarily the merger of voice markets can be expected. This necessitates primarily reconsidering the separation of the 18 markets defined by the market analysis, included in the EU recommendation and applied also by NCAH, and the potential modification of the market definitions.

254.Today mobile and fixed markets are operating in parallel, neither technology-based access can substitute the other to a significant degree. The current supply and demand relations justify both retail and wholesale interventions in the fixed markets, while in the mobile voice markets only wholesale services are subject to regulation on the basis of market analysis. However as a result of changes in business solutions (approximation of price levels, approximation of the physical parameters and intended use of services, etc.) the rigid separation of fixed and mobile demand side is expected to be terminated. Substitutability must be examined in two basic areas: in the access and voice traffic markets. Theoretically traffic substitution between fixed and mobile calls is possible without access substitution.

255. Integration of fixed and mobile markets should be approached from two points of view. Integration of services with bundled packages will occur sooner than network integration at technological level. The latter rather medium-term challenge will be discussed in the section of preparation for NGN regulation.

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256.As a result of its group-level integration Magyar Telekom will be the only player on the Hungarian market to be able to independently produce bundled services containing fixed and mobile services. The capability to produce these bundled services can be a bottleneck in the ensuring of efficient competition, with special regard to the fact that bundled services can contain services which are regulated at wholesale level. Consequently the Authority intends to examine the potential means aiming at creation of the conditions of efficient competition in the market of fixed-mobile bundled services.

257. In the area of bundled services efficient competition is significantly supported by the possibility to provide mobile service since currently fixed services (at least voice and data services) can be provided through the wholesale obligations by any operator which is active in the retail market. On the basis of international experience the virtual mobile operator model (MVNO) would significantly promote mobile service provision possibilities.

258. If the market-based virtual mobile service model is not created the possibility of regulatory intervention can be raised. Various types of regulatory interventions are possible in this respect: requirement of the MVNO model (or at least an access obligation) for the players designated as SMP operators in the access and call origination market of wholesale mobile network services or potentially in the market of bundled services to be defined later, potentially as an alternative solution issuing a fourth GSM/UMTS license.

5.2.2 Development of wholesale products connected with the investment ladder

259. If the ‘Dominant player’ scenario is realised the Authority’s key duty is to improve the conditions of service competition and create an efficiently operating investment ladder.

260.The two most important elements of creating an efficient investment ladder are introduction of WLR and making ULL regulation more efficient. Introduction of an efficient investment ladder requires the creation of conditions which are attractive for alternative operators which includes real cost-based pricing, ensuring transparent and simple processes through non discrimination and minimisation of the time needed for introduction in respect of ULL.

261. In connection with the investment ladder in the medium term (i.e. not necessarily in the period 2006 to 2007) there is a possibility of gradual migration of the carrier selection based service competition, in consultation with the operators, to an access-level operator competition. This migration is needed for two reasons. On the one hand since monthly subscription fees account for a rising ratio in consumer packages to the detriment of minute-based tariffs and free minutes included in the access charge, the carrier selection model can distort natural market development and its relevance will significantly reduce for the consumers. On the other hand access-level service competition ensures greater room for manoeuvre for the elaboration of alternative operators’ offers and this way consumer interests can be better fulfilled.

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5.2.3 Strengthening the competition of broadband internet services through improving the DSL wholesale conditions

262.Realisation of the ‘Dominant player’ scenario could result in copper pair based incumbent operators gaining space in the broadband data services market. In respect of the broadband access (xDSL) wholesale market the Authority wants to examine how the incumbent DSL wholesalers could be hindered in leveraging their market power based on the access level to the retail level. In this respect the Authority wants to pay special attention to fully ensuring the non discrimination, transparency and accounting separation principles.

263. In the current DSL wholesale business the incumbents are inclined to steps which distort competition against alternative retailers providing broadband data service. For example a general practice is a differentiated wholesale pricing policy using the advantage of economies of scale whereby the incumbent operator gives a price advantage to its own – market leader – retail operator. Another existing problem is that the incumbent DSL wholesaler abuses its dominance to prohibit, in connection with the given access, the use of certain applications and services or their provision by the retailer (such as VoIP or IPTV service). This particularly distorts competition when the retailer closely connected with the incumbent wholesaler provides a similar service. Finally abuse of dominance can be raised in the elaboration and practical implementation of SLAs. For this purpose the potential difference between the quality of service provided to the incumbent operator’s own retail unit and alternative retailers should be examined to eliminate it and ensure strict compliance with the requirement for non discrimination.

264. In addition to restricting competition distorting factors in the DSL wholesale market the Authority intends to analyse the requirement for introduction of ‘naked DSL’ which does not include fixed voice service.

5.2.4 Support to emerging wireless technologies

265. In addition to competition of mature technological platforms another guarantee for the creation of infrastructure competition can be the emerging wireless technologies. For this purpose the Authority intends to examine the ways in which the development of emerging technologies which can potentially become competitors to the mature technological platforms (e.g. Wi-Fi, WiMAX) can be promoted.

266.Wi-Fi can become a robust alternative access infrastructure if the regulator can proactively support its development. The Authority intends to examine the possibilities of an ‘incubation’ activity with the objective to eliminate the two major factors which hinder the spreading use of Wi-Fi as a technological platform. The first one is interference and congestion in the license exempt frequency bandwidth makes maintenance of high service quality impossible and endangers payback of investments since too many Wi-Fi operators operating at the same place can disturb each other’s system. The other factor is mobile operator’s and fixed incumbent operator’s dominance in the early phase of Wi-Fi expansion. The problem is that new market entrant operators (or even those already operating as alternative operators) have insurmountable competitive disadvantages against the incumbent operators due to their competitive edge in customer base and consumer relations resulting from economies of scale, cross-subsidisation capabilities and better negotiating position against the owners of critical properties (e.g. airports, hotels, other tourism establishments). Without an adequate international example the elaboration of a Wi-Fi ‘incubation’ concept requires serious preparation and it is very

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important to keep in mind the principle of technology-neutrality, international recommendations and obligations.

267. In a broadband data service market, and in the light of converging services also in the voice and audiovisual market the WiMAX technology can become a potential alternative infrastructure. Numerous international initiatives show this. However, in Hungary for the moment there is only minimum use of WiMAX applications and intention of introduction. For this reason it should be examined how further possibilities of spreading the use of WiMAX could be ensured with the possibilities of liberalised spectrum policy, such as creating the conditions of secondary trade and service provision to resellers and the potential distribution of new frequency bands.

Figure 37: Emerging wireless technologies

5.2.5 Reduction of cross-ownership of parallel infrastructures

268.Since the guarantee of competition that can be sustained in the long term is the creation of infrastructure competition and one of its major sources are the current mature alternative technological platforms (e.g. copper pair, cable, GSM/3G) the Authority sets the objective to analyse intervention means which are beyond the currently used regulatory means and specifically support infrastructure competition.

269.Competition among the current technological platforms can be distorted and hindered by cross-ownership since there is less chance that efficient competition can be created when the alternative platforms are owned by the same operator. Consequently the Authority considers particularly in the case of mature access platforms (such as copper pair and cable, or cable and satellite) which enable to a great extent both demand and supply side substitution that the creation of a market structure with minimum cross-ownership is better for the ensuring of efficient competition.

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270.The Authority is aware that its current powers do not enable directly promoting the reduction of cross-ownership but it will analyse and evaluate the potential steps always keeping in mind the applicable legal and regulatory environment.

5.3 Intervention possibilities in the period 2008 to 2010 to be examined in both scenarios

271.Two regulatory areas must be examined in respect of the period 2008 to 2010 irrespective of the scenario:

Liberalised spectrum policy NGN regulation

5.3.1 Liberalised spectrum policy

272.The objective of liberalised spectrum policy is to ensure a more optimal usage of the available frequency bands which are scarce resources and thereby support infrastructure competition and market development.

273.With regard to spectrum liberalisation the Authority can modify spectrum regulation in four ways. Firstly, through licensing spectrum trading, i.e. supporting the creation of secondary trading. Secondly, through easing the licensing procedure in the areas of various spectrums. Thirdly, through opening further license exempt bands. Fourthly, through enabling free usage of the technology/service selected in the given frequency bands.

274.The regulatory tasks connected with the secondary trading of spectrums are definition of ownership rights, ensuring the satisfaction of rising needs for interference management and co-ordination of market information. The Authority also wants to analyse in detail the potential legal implications connected with spectrum trading, in particular the already allocated spectrums.

5.3.2 NGN regulation

275.Next generation telecommunications network means a new network system which is now being created which

is based on packet-switched transmission, ensures to support several, simultaneous broadband services with

guaranteed quality, enables making service and transmission functions independent of each

other, provides unlimited access to different services, supports a general mobility function which covers all services required by

the users11.

11 NGN standardization work carried out in ITU, ETSI and other international organizations has not been closed yet, therefore the definition of this term is expected to be modified. For the moment there is no operator on the international telecommunications market with an operating network which would satisfy all the above requirements, BT’s network, called a 21st century network, is in the most advanced phase with construction already started and expectedly completed by the end of this decade.

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276.NGN can potentially enable simplification of regulation since a standardised access regulation which is independent of services can be created and thereby service and application level competition can strengthen. A precondition for this is that the NGN network owner uses open standards and not closed patented standards. The Authority wants to continue playing a role in supporting these efforts.

277.The Authority considers to be its critical task to adapt the service competition means to the NGN infrastructure. This will be necessary because the location of the last active device in the fixed network will be different in the NGN network topology and it will change the possibility of collocation and thereby the implementation method of fulfilling the unbundling and interconnection obligations as well.

278.Numerous further changes raise the risk that with the introduction of NGN the incumbent operators’ delaying tactic will commence again and thereby hinders for years practical implementation of service competition. For this reason the Authority wants to be prepared in due time for adjusting in technical, legal and financial terms the regulatory means to be applied to the NGN network.

279.An important question is how the optimal level of payback for investment made by the operator constructing NGN network can be determined since the higher the regulated payback of investments level is the more motivated the market players will be to construct NGN and the lower the regulated payback of investment level is the more cost advantages will be realised by the consumers, but the less the investment encouragement will be. The Authority wants to avoid the potential situation where lower than the desired service competition level is promised to ensure artificial motivation for migration to NGN.

280.All in all the Authority can ensure minimisation of the ‘regulatory risk’ of investment needed for NGN and the foreseeability needed for the market players by laying down the framework of NGN regulation in due time in advance.

5.4 Intervention possibilities in the period 2008 to 2010 depending on the scenario

281. In the period 2008 to 2010 scenario-specific interventions beyond the common areas may also be needed depending on the evolution of conditions of efficient competition: To lay the foundations for them the Authority will continuously study the evolution of market development since the regulatory interventions to be carried out in the period 2006 to 2007 are expected to drive the electronic communications market towards efficient competition.

5.4.1 Content service related issues

282. If the ‘Dominant player’ scenario is realised management of potential bottlenecks connected with the content service will be a particularly important task of the Authority. In the light of the convergence of data market and audiovisual market the Authority intends to examine how the leverage to the content market of the market power of operators with dominance in the broadband data service market (these can be in the future both fixed or mobile operators) can be prevented. The possibilities arising here are to restrict the bundled sale of broadband service and content on the basis of the principles of unreasonable bundling, transparency, non discrimination and accounting separation.

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283. In the mobile market in addition to the ‘content’ value chain element applications are also exposed to the risk that the operators extend their control to the application level on the basis of their dominance resulting from consumer relations. When this problem reaches a significant dimension the Authority will examine these issues.

5.4.2 Deregulation

284.Finally in the case of the ‘Intensifying competition’ scenario the Authority’s task will be to ensure deregulation, i.e. elaboration of a method for gradual and optimal reduction of sector-specific ex ante interventions. The specific implementation of deregulation greatly depends on the dynamics of competition in the given markets, but reduction of voice market regulations will with high probability be among the focus points.

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