Challenges to Telecommunications

Regulation
(Case Study: Hungary)
Dr. Iván Schmideg
Communication Authority, Hungary
schmideg@hif.hu

October 25-26, 2000

 PRESENTATION
OVERVIEW
 Milestones of the Hungarian Telecommunications
1988-1994
 Present regulatory environment
 Resulting market structure
 Regulation and challenges of the new Act

October 25-26, 2000 2

 PRESENTATION
OVERVIEW
 Milestones of the Hungarian Telecommunications
1988-1994
 Present regulatory environment
 Resulting market structure
 Regulation and challenges of the new Act

October 25-26, 2000 3

 STARTING POINT 1988
 EU
 40,5/100 main line density
 3,9 /1000 mobile density
 88/301/EEC Dir. on competition in the markets in
telecommunications terminal equipment
 Hungary
 8,1 / 100 main line density
 5,0 / 100 main lines in province
 91,8% automation
 13,17 years of calculated waiting time
 no mobile service
 COCOM export licensing regulation in force

October 25-26, 2000 4

 TELECOMMUNICATIONS
1988, 1989
 1988
 state-owned, monopolistic Hungarian PTT
provided and regulated
 telecommunication
 broadcasting
 postal services
 financed according to the centrally planned
economy, artificially low tariffs
 1989
 Operational and regulatory functions
separated
October 25-26, 2000 5
 TELECOMMUNICATIONS
1990
 EU
 42,1 / 100 main line density
 8,4 / 1000 mobile density
 90/387/EEC Directive on the establishment of the
internal market for telecommunications services
through the implementation of ONP
 90/388/EEC Directive on competition in the markets for
telecommunications services
 Hungary
 Postal, telecommunications services and broadcasting
separated, MATÁV established
 9,6 / 100 main lines
 NMT 450 mobile service launched
October 25-26, 2000 6
 TELECOMMUNICATIONS
1992
 EU
 45,0 / 100 main line density
 15,2/ 1000 mobile density

 92/44/EEC Directive on the application of ONP

to leased lines
 Hungary
 Act on Telecommunications
 12,6/ 100 main lines
 2,3/ 1000 mobile density
 First phase of the privatization of MATÁV

October 25-26, 2000 7

 TELECOMMUNICATIONS
1994
 EU
 47,5/100 main line density
 36,8/1000 mobile density
 94/C 379/03 Resolution on the principle and
timetable for the liberalisation of telecommuni-
cations infrastructures
 Hungary
 17,3/100 main lines
 13,9/1000 mobile density
 Tender on PSTN concession
 Two GSM mobile concessions

October 25-26, 2000 8

 PRESENTATION
OVERVIEW
 Milestones of the Hungarian Telecommunications
1988-1994
 Present regulatory environment
 Resulting market structure
 Regulation and challenges of the new Act

October 25-26, 2000 9

 SERVICE LICENSING
 Concession-bound services
 public telephone service (PSTN),
 public mobile radiotelephone services,
 nation-wide public paging services,
 national and regional distribution and broadcasting
of public radio and television programs
concession issued by the minister
 Not concession-bound public services license
issued by the Authority,
 Other services
registration at the Authority
October 25-26, 2000 10
 PUBLIC TELEPHONE
SERVICE
CONCESSIONS
 54 primary areas total
 29 primary areas (including the capital)
monopoly regions of MATÁV
 Tender in 25 primary areas
5 won by MATÁV
 2 no bidder, service obligation for MATÁV
 18 won by 9 partly foreign-owned consortia
13 local telephone operator companies
established
October 25-26, 2000 11
 POPULATION IN THE
PRIMARY AREAS
33
35

30
Number of primary areas

25

20

15 12

10
6
5
2 1
0
50-150 150-250 250-350 350-450 450-
Population in the primary area (1000)
October 25-26, 2000 12
 PSTN TARIFF
REBALANCING (1995 - 1997)
 Ex ante set by ministerial decree based on the proposal of
telephone concessionaires.
 Other services: uncontrolled.
 1995 -1997 Overall price cap = PPI
 Re-balancing factors to the previous year:
1995 1996 1997
Basket I (subscription fee) + 5,1% + 5,8% + 6,2%
Basket II (local calls) + 7,3% + 8,3% + 8,6%
Basket III (long distance calls) - 4.8% - 6,7% - 4,9%
Basket IV (international calls) - 4,8% - 6,7% - 4,9%

October 25-26, 2000 13

 PSTN TARIFF
REBALANCING (1998 - 2000)
 1998 - 2000 Overall price cap = RPI-2%

 Re-balancing factors to the previous year:

1998 1999 2000
Basket I (subscription fee) +5,0% +10,0% +10,0%
Basket II (local calls) +5,7% +6,4% +6,4%
Basket III (long dist. + int’l) -9,6% -8,0% -8,0%

 1999 Call set up charge + real time based

tariffs established
October 25-26, 2000 14
 INTERCONNECTION
 The telephone traffic between two primary areas
and the international traffic should go through the
MATÁV network.
 MATÁV should enter into interconnection
contract within
3 months with local telephone service providers,
 6 months with providers of other services.

October 25-26, 2000 15

 INTERCONNECTION
FEE
 For the GSM operators yearly fixed (traffic
dependent and traffic independent) fee set by
ministerial decree
 For the LTOs
-- 1997
revenue sharing (the ratio of the revenue from
local services and the revenue from long distance
after revenue sharing is intended to be 2:1).
1998 --
yearly fixed fee set by ministerial decree
October 25-26, 2000 16
 “UNIVERSAL SERVICE
OBLIGATION”
 Requirements of telephone concessions:
 15.5% annual growth rates in main line density (if there
is real demand)
 from 1997 to fulfil
90% of demands within six months,
98% of them within twelve months
 install payphones in the villages according to the
demand of the local municipalities
 directory service

 Requirement of mobile concessions: 95-98%

geographical coverage within one year.
October 25-26, 2000 17
 PRESENTATION
OVERVIEW
 Milestones of the Hungarian Telecommunications
1988-1994
 Present regulatory environment
 Resulting market structure
 Regulation and challenges of the new Act

October 25-26, 2000 18

 DEVELOPMENT OF THE
HUNGARIAN
TELECOMMUNICATIONS
Hungary EU average OECD average
Main lines/ 1990 9,60 41,97 39,16
100 population 1993 14,60 46,50 42,60
1998 33,59 52,72 49,04
CAGR 90-98 16,9% 2,9% 2,9%
CAGR 93-98 18,2% 2,5% 2,9%
Mobile 1990 0,03 0,84 1,01
subscribers/ 1993 0,45 2,27 2,98
100 population 1998 10,50 23,92 22,38
CAGR 90-98 108,9% 52,1% 47,2%
CAGR 93-98 88,0% 60,1% 49,7%
Internet hosts/ 1993 3,00 12,89 21,25
10000 population 1998 99,09 228,87 371,88
CAGR 93-98 101,3% 77,8% 77,3%

October 25-26, 2000 19

 REVENUE DISTRIBUTION
AMONG INFOCOMM
SECTORS (1999)
3.3% 1.3%

35.3%

60.0%

telephony mobile data/IP video

October 25-26, 2000 20

 REVENUE DISTRIBUTION
AMONG OWNER GROUPS
(1999)
0.9%
1.1%
2.4% 0.6%
2.9%
6.4%

14.7%

70.9%

MATÁV KPN-PanTel. Vivendi AH-VF-RWE

HTCC UPC GTS Elender

October 25-26, 2000 21

 MARKET STRUCTURE
(FIXED)
 Main line density: >37,0
 Market: privatised, alternative service providers (PanTel,
UPC, Novacom etc.)
 Market share of concession-bound (non-liberalised
services) ~ 95%
 Exclusive rights in telephony till:
 international & long distance 2001. Dec.
 local in 31 areas 2001. Dec.
 local in 5 areas 2002. May
 local in 18 areas 2002. Nov.
 IP telephony free
October 25-26, 2000 22
 MARKET STRUCTURE
(MOBILE)
 Concessions for DCS 1800 service
 For the newcomer (Vodaphone) one 1800 MHz
band, and a 900 MHz band
 For the two incumbent GSM 900 service providers
one 1800 MHz band each, (the DCS service to be
delayed by one year )
 Mobile subscriber density: 22,13
 UMTS not sooner than 2002

October 25-26, 2000 23

 PRESENTATION
OVERVIEW
 Milestones of the Hungarian Telecommunications
1988-1994
 Present regulatory environment
 Resulting market structure
 Regulation and challenges of the new Act

October 25-26, 2000 24

 OPTIMAL SECTOR
SPECIFIC REGULATION
5

Present position
4
Regulatory intervention

Necessary intermediate position

Optimal future position

2

Future position to be avoided

1

Market environment
0
0 1 2 3 4 5
Non competitive Semi competitive Fully competitive

October 25-26, 2000 25

 NEW COMMUNICATION
ACT
To be in force from 2002
Create a completely liberalised market
 Licensing
 Universal service

 Interconnection
 SMP
 Obligations
of SMP
 Number portability

October 25-26, 2000 26

 LICENSING
 Communications equipment can be freely put
into circulation if it complies with the basic
requirements.
 Communications services can be provided on
the ground of notification
 (except national and regional radio and television
program distribution and broadcasting)

October 25-26, 2000 27

 CHALLENGES TO THE
REGULATOR
(LIBERALIZATION)
 Liberalization in the EU begun when the fixed telephony
market was mature, Hungary has to speed up the process
 The incumbent operator (MATÁV, > 57% DT)
 would maintain its special rights (extra-profit) as long as
possible
 has strong power to defend its interest
 skilled, well paid experts,

 political influence,

 Hungarian ICT market is attractive for foreign investors,

forcing competition
October 25-26, 2000 28
 TELECOMMUNICATIONS
1990
 EU
 42,1 / 100 main line density
 8,4 / 1000 mobile density
 90/387/EEC Directive on the establishment of the
internal market for telecommunications services
through the implementation of ONP
 90/388/EEC Directive on competition in the markets for
telecommunications services
 Hungary
 Postal, telecommunications services and broadcasting
separated, MATÁV established
 9,6 / 100 main lines
 NMT 450 mobile service launched
October 25-26, 2000 29
 TELECOMMUNICATIONS
REVENUE AS
PERCENTAGE OF GDP
3.5%

HU

EU
3.0% OECD

MEX
Telecom revenue / GDP

2.5%

2.0%

1.5%

1.0%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

October 25-26, 2000 30

 TELECOMUNICATIONS
INVESTMENT AS PERCENTAGE
OF GDP
2.5%

HU
EU

2.0% OECD
MEX

1.5%
Telecom invest /GDP

1.0%

0.5%

0.0%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

October 25-26, 2000 31

 TELECOMMS INVESTMENT AS
A PERCENTAGE OF REVENUE
100%
HU
EU
90% OECD
MEX
80%

70%
Investment / revenue

60%

50%

40%

30%

20%

10%

0%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

October 25-26, 2000 32

 INFOCOMM MARKET ESTIMATE
(European Information
Technology Observatory 2000 )
1999 (M€) Hungary EU World
IT hardw are 502 98,652 343,627
Sof tw are 153 43,517 148,982
Equipment 421 58,091 141,535
Support 336 77,645 301372
Inf ocom services 1700 192,135 657,261
Total 3112 470,040 1,592,777
CAGR 12.7% 9.7% 9.1%
2001 (M€) Hungary EU World
IT hardw are 599 112,262 392,395
Sof tw are 187 56,805 194,391
Equipment 565 78,333 177,256
Support 463 97,335 365,614
Inf ocom services 2141 221,322 765,697
October 25-26, 2000 Total 3955 566,057 1,895,353 33
 CHALLENGES TO THE
REGULATOR (LICENSING)
 Rather weak civil consumer
protecting organisations
 Strong market monitoring needed
to protect consumers and
operators from cheap, but harmful
equipment.

October 25-26, 2000 34

 UNIVERSAL SERVICE
 Scope:
 access under equal conditions to fixed telephone
service and data transmission by modem at 9600
bit/s speed
 one payphone per 1000 residents,
one per 2500 resident for handicapped
 directory services
 free emergency call

 Affordability will be assured by special tariff

schemes set by decrees.
October 25-26, 2000 35
 CHALLENGES TO THE
REGULATOR (UNIVERSAL
SERVICE)

 “Affordable prices”
 Too low prices discourage
investment and the provision of up-
to-date infrastructure and services.
 Too high prices can split the
country into “information rich” and
“information poor.”
 Onall telecommunications
services 25% VAT imposed

October 25-26, 2000 36

 MAINLINE DENSITY vs.
RESIDENTIAL TARIFF BASKET
(OECD)

70
Main lies / 100 inhab

60
50 HU
40
30
20
10
0
100 200 300 400 500 600 700 800
Residential tariff basket US$ PPP
October 25-26, 2000 37
 INTERCONNECTION
 All network owners or network service providers
have to conclude contract, when interconnection is
requested on reasonable terms.
 Interconnection prices calculated
 Fully Divided Cost (FDC).
 Long Run Average Incremental Cost (LRAIC) from
1st January of the third calendar year following
entering in force of the Act change to.

October 25-26, 2000 38

 CHALLENGES TO THE
REGULATOR
(INTERCONNECTION)
 Supervision of really cost based
pricing

October 25-26, 2000 39

 SIGNIFICANT MARKET
POWER (SMP)
 25 % market share on the relevant market.
Consultation with the Competition Authority
considering
 the share on a closely related market
 the capability of influencing the market,
 revenues compared to the total market,
 possibilities to control the facilities providing access to the
users.
 access to capital resources
 experiences in providing services
October 25-26, 2000 40
 OBLIGATIONS OF SMP
 provide RIO
 conclude contract for access (special access for
phone service) if reasonable offer
 provide reference offer for the ULL
 shared or full unbundled access to the local loop
 accounting separation
 cost based interconnection prices approved by
the Authority
October 25-26, 2000 41
 CHALLENGES TO THE
REGULATOR (SMP)
 Thorough understanding of the
market is needed to promote and
not to hinder real competition.
Possible problem areas:
 LTOs have geographical
monopolies, without economy of
scale,
 GSM operators already competing

October 25-26, 2000 42

 NUMBER PORTABILITY
 Retain number
 moving to another service provider within the same
geographic area
 altering the network access point within the same
numbering area,
 using other service, which is accessible by the same
addressing procedure without changing the service
provider or the geographic position.
 National and international service by carrier pre-
selection, and call-by-call override.
October 25-26, 2000 43
October 25-26, 2000 44