The National Communications Authority’s

Strategic 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......

Executive Summary......

Introduction......

1Regulatory objectives......

1.1Room for manoeuvre in NCAH's objectives......

1.2The regulatory objectives system......

1.3Social objectives system in broader sense......

1.4Measurement of objectives......

2Expected market evolution......

2.1Analysis of the current market situation......

2.2Market drivers and trends......

2.3Potential market scenarios......

3Regulatory challenges......

3.1Scenario-dependent challenges......

3.2General regulatory challenges......

4Regulatory principles......

4.1Guiding principles......

4.2Specificity principles......

4.3Implementation principles......

5Potential interventions......

5.1Intervention possibilities in 2006 and 2007 to be examined in both scenarios......

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

scenario......

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

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

PREFACE

The 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

We are awaiting your comments, opinions and questions concerning the strategy before 31 March 2006 by e-mail to the 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 Pataki

President

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.
  1. 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

  1. 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 competition[1]. 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. 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.
  1. 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 situation

  1. 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.
  1. 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 trends

  1. 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.
  1. 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 dimension[2]: How much will the market players’ scope of activities diverge (be separated) or converge along the value chain?

Market evolution scenarios[3]

  1. 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.

  1. 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

  1. 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 principles

  1. 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.
  1. 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 regulatory interventions is determined the current and expected medium-term outcome of competition in the given market must be taken into consideration.
  1. 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.
  1. 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 principles

  1. 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 principles

  1. 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.

Potential interventions

  1. 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.
  1. 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.
  1. 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
  1. 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
  1. 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
  1. 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
  • 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
  1. 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.