Telecom companies continue to play catch up to legislation that often lacks transparency and public input, making strategic planning more difficult.
Balazs Fazekas of White & Case
The Hungarian telecom market and the oversight of that market are constantly evolving as EU regulations and Hungarian telecom authorities continue to change the rules of what is perhaps the most regulated game in Europe. To figure out what is happening in Hungary we sat down with Balázs Fazekas who regularly advises the Hungarian regulatory authorities, strategic and private equity investors, media and IT companies in the telecoms, media and technology sectors on the full range of their issues in the Hungarian market. He also leads White & Case’s Central and Eastern Europe (CEE) regional TMT practice group, establishing initiatives to enhance the firm’s client relationships across CEE.
What do you think of the regulatory exposure of the telco sector and the Hungarian telecom regulatory environment?
The law establishing the current regulatory environment for electronic communication was passed originally in 2003 and today the environment is result of a decade long evolution. Still, the legislative environment continues to be a “moving target”, with frequent changes to the electronic communications act and the implementing decrees.
Also, as the Hungarian National Media and Infocommunications Authority (NMHH) gained legislative powers, most of the detailed rules ranging from frequency management through data privacy issues to consumer relations have gone through a major overhaul by the NMHH in recent years. While the cornerstone of the current regulatory regime, the market analysis procedure, slowly became a routine procedure. Other areas, such as the regulation of subscriber relationships, still need a heavy revision, towards the direction of simplifying rules. Ideally, stability of the regulatory environment should be achieved not by overregulation, but by relaxing regulation giving more flexibility.
In my view the industry suffers not only from the sheer number of changes to adopt, but a relatively low level of transparency when it comes to decision making. Legislative amendments are passed frequently not only to align to long-term policy goals, but occasionally to address actual problems faced by the government or the NMHH. What you see are decrees being passed without sufficient public consultation and impact assessment. Major regulatory decisions, such as those related to allocation of frequencies, are published unexpectedly sometimes. The industry has no choice but to adopt to these changes reactively and strategic planning has become more difficult. My team and I have always been advocates of transparency in regulatory work. I honestly believe that, by increasing transparency through public consultations and real impact assessment, the feedback from the various stakeholder groups could significantly contribute to a higher quality and future proof legislation and regulatory decisions.
What is the relevance of EU legislation and oversight in Hungary?
It is needless to say that the electronic communications sector is one of the most heavily EU law driven sectors in Europe. Our legislation is in almost all respects based on EU law and application of the law also requires sensitivity towards those legal concepts and principles of European Law, which are not necessarily present in other areas of national law. Although the Hungarian regulatory authority, the NMHH now routinely applies EU law, my personal view is that there is still a long way before we can see that the principles such as transparency, proportionality or reasoning on objective grounds are applied as intended.
While there is a formal EU-level oversight in the market analysis procedure, one should not forget that NMHH, as member of the BEREC (the Body of European
Regulators in Electronic Communication), is involved in an EU-wide cooperation among national regulators, which involves an intensive dialog and exchange of information, concepts and regulatory ideas. I believe this cooperation takes an important role in ensuring that the output of the NMHH reaches a higher quality.
Above I made an observation about lack of transparency in legislation and decision making in Hungary. Interestingly, Europe seems to “learn” from us in this respect. When commissioner Nelie Kroes presented a legislative proposal — “Connected Continent” — in September 2013, the industry immediately criticized the proposal for lacking prior consultation. This has rarely happened before and is very detrimental to the image and credibility of the European Commission.
To what extent could telecom policymaking be held responsible for state of play in the telco sector?
Telecom policy and legislation is an important, but not necessarily the only, decisive factor for the telco sector. The macroeconomic situation is not ideal, to say the least. How profitability of the sector could be maintained is a big question mark in the whole of Europe, but the introduction of crisis taxes in Hungary added another layer of problems to the situation in the country.
Studies show that since the late 1980s, evolutions of telco regulation significantly contributed to the welfare of European citizens by ensuring intensive competition and pushing down prices. This has been considered a success story so far, but the current view is that the generally low retail price level has resulted in the gradual loss of capital in the sector blocking investments in modern infrastructure.
Also, with the increasing role of over-the-top content providers, who are practically absent from the radar screen of European regulation, the role of the entire telecom regulation should be revised to ensure competitiveness not only of the sector, but the entire European economy. Hungary is one of the countries with a powerful convergent telco authority.
What do you think about convergence? What do think about the authority’s role and power in Hungary?
Since the current setup of the NMHH was designed, serious thinking has been put into assessing pros and cons of a convergent authority. When the market is characterized by convergent companies offering both telecom and media services, an authority with powers to supervise both areas makes sense. Interestingly, the convergence between media and telco may not be that strong: Liberty Group (operating UPC in Hungary) recently sold its Chellomedia arm, and also, Magyar Telekom seems to be slowing down in offering convergent internet and television content.
However, as media regulation is traditionally very much in the focus of politicians, a convergent authority faces challenges in terms of maintaining a solid professional approach also in the otherwise politically neutral telecom sector. NMHH is not an exception in this regard. In Hungary, the NMHH is not only convergent but also very powerful, with a high level of independence. In our experience the NMHH has not always been able to resist the temptation to use its powers for passing or amending legislation to intervene in ongoing disputes or solve actual matters, such as fine-tuning frequency tender rules to avoid the issues raised by the court in its judgment annulling the previous spectrum tender decision or amending rules concerning subscriber relationships.
What areas of law will be relevant for the TMT market in the near future and what progress do you envisage?
Telecom operators are key players in connecting people with content providers on the Internet. Telecom operators’ network infrastructure carries vast amounts of personal data and other sensitive personal information. The telco sector has been one of the first sectors subjected to major data privacy reform. Today, consumers may theoretically benefit from a complex set of rules protecting privacy, including that operators are required to report data breach incidents to the regulator. It is too
early to see to what extent these sets of rules prove sufficient.
Also, a major European data protection legislative package is expected to be adopted later this year, which will certainly require attention by national legislation and operators.
Net neutrality is becoming increasingly relevant. Operators complain that over-the-top content providers, while taking away an increasing portion of revenue and avoiding tax payment in Europe, are not recognized by regulation. The net neutrality related proposals of the “Connected Continent” legislative package, published by commissioner Kroes in 2013, permitting limited differentiation between content providers by network operators under specific conditions, received positive feedback from the industry, but it is unclear whether the proposed rules will be enacted in their current form.
We also don’t know whether competition law, more precisely the European Commission’s approach to concentrations will contribute to a better functioning of the telco sector in Europe. Currently there is an interesting dialog going on whether rules concerning concentrations should be relaxed to allow for higher economies of scale, or operators should find other ways to collect the necessary capital for network investments.
The frequency tenders will certainly be highlights of the telco market in 2014 in Hungary — Balázs Fazekas, White & Case
What do think about the upcoming frequency tenders?
The frequency tenders will certainly be highlights of the telco market in 2014 in Hungary. A successful tender will secure a solid frequency inventory for the incumbent operators, permitting long-term planning and bolstering innovation. At the same time, the tenders will be very important for the government as it may easily bring in one of the highest single government incomes in 2014.
I personally welcome that, unlike the extension of 900 MHz (GSM) rights of incumbent operators in 2013, the NMHH now appears to be committed to transparency and is seeking dialog with the market participants and other stakeholders.
It must be noted though that chance of bringing in a fourth mobile network operator are rather low. This is not only due to the still perceived instability of
the Hungarian economy, but also because the current market conditions may not warrant a fourth mobile operator at all, despite the NMHH’s efforts to lower entry barriers by considering domestic roaming and permitting spectrum trading.
It must also be noted that there seems to be an overlap between the tender for the 450 MHz band and the 800 MHz band. Both are expected to be announced at the same time. While the 450 MHz band is designed to serve government communications purposes, the draft tender rules suggested that the government could migrate government communications subscriptions under this service in a magnitude of millions of subscriptions. As a result, these subscriptions will not appear in the demand for the traditional mobile market, decreasing the attractiveness of the 800 MHz band (which can be used for 2G/3G/4G mobile
services), offered to the incumbents.
Interestingly, when designing the new tenders, the NMHH put no particular emphasis on the role of mobile virtual network operators (MVNO). It is true that today MVNOs are not really rebranded versions of incumbent mobile offerings.
However, in 2014 we may see the entry of full MVNOs in the market, with minimal links to the host incumbent mobile network and more freedom to develop standalone products. Appearance of full MVNOs has the potential to increase the competition in the mobile market.
The Fazekas file
Firm: White & Case
Country: Hungary
Position: Leads the Communications & Media practice group in White & Case’s Budapest office.
Joined the firm: 1995
Areas of expertise: Has advised the Hungarian regulatory authorities, telecommunications, media and IT companies as well as strategic and private equity investors in telecom regulatory, intellectual property and data protection matters.
On the side: Is a frequent speaker at conferences where he shares his extensive experience in the field.
Has been invited as a guest lecturer for postgraduate infocommunications studies.
