No room for competition among Hungary’s cable providers?

“For big multinational cable providers such as UPC and Telekom it is not worth expanding their networks any more,” Ferenc Kéry, president of the Hungarian Cable Communications Association told the Budapest Business Journal, going on to enumerate possible explanations.

Firstly, most of the potential acquisition targets are simply too small to consider. Secondly, these small service providers operate in such remote regions that their networks would be too costly to connect. Thirdly, the Public Utility Tax Act that came into effect as of January 1, 2013 has had a hindering impact. The new tax was meant to increase the revenues of municipalities, making it possible for them to levy a HUF 125 tax on every meter of wire – including coax cable and above-ground cables. If a company exceeds a certain cable network length determined by the law, the amount of tax to be paid will rise.

“Such a tax comes as a surprise from a government that declares itself committed to the principle of Internet access being a citizens’ right,” Kéry remarked. Since the levying of the new tax, cable companies have preferred hiring to acquiring. “It has become common for small cable providers to lease out their networks to the big cable companies which continue to operate them, as has recently happened in Nyíregyháza.”

UPC communications director László Szűcs believes that the small number of acquisitions is a sign of the market’s maturity. “Cable network penetration has reached quite a high level on the service providers’ footprint,” Szűcs explained. “Having invested in the technical upgrade of these networks, operators in the past few years have focused on rolling out advanced new digital services to the customers.”

Concentration is a must
“Our three largest members are UPC, Telekom and Digi,” Kéry said. “They together provide services for 1.6 million households in Hungary, which means about two-thirds of all subscribers.” In addition, there are four medium- to large-sized providers: Invitel, Tarr, PR-Telekom, and ViDaNet. These provide for 16% of Hungarian households. The remaining 17% of subscribers are divided among more than 230 small providers.

“In the profession, providers which cater for 5,000 to 20,000 subscribers are already considered middle size, but there are no more than 10 such companies in Hungary. There are hundreds of further companies which provide for 1,000 to 5,000 subscribers,” the president said, characterizing the membership of his association.

This is all the more surprising because all the actors in the profession agree that economy of scale is the keyword in the trade. “Only large-size networks can be operated in an economical way. Furthermore, technological development, meaning for example digitalization, favors the establishment of large networks,” Szűcs told the BBJ.

It does not matter whether a company provides for 1,000 or 100,000 subscribers; it has to invest into a digital headend station when a transition from analogue to digital broadcasting has to be made. In order to transmit the Internet signal to the BIX Center in Budapest, the company has to rent a line irrespective of the number of its subscribers.

“In situations of procurement, one has a better bargaining position if one can boast more subscribers, whether it is about set-top box purchases, servicing, or contracts with television channels,” Szűcs added.

There is, however, an inherent contradiction in the present situation. Even though economy would dictate concentration, a surprisingly large number of small providers operate in Hungary at the moment. Kéry provides the answer by suggesting that many of these small cable companies are family enterprises, the owners of which make a living out of their activities. “Such owners would not consider selling the family firm even if they are struggling with the operations,” Kéry explained.

Of course, the large companies have also lost much of their enthusiasm for new acquisitions since the public utility tax was introduced in January 2013. Prior to that, an ever-increasing number of acquisitions had characterized the 25-year history of the business.

“Today’s big providers have all been created through acquisitions and continued to grow organically,” one of the BBJ’s informants pointed out. The predecessor of UPC bought up municipally developed cable networks. So did MATÁV Kábel. PR Telekom and Fibernet have grown into mid-size companies via acquisitions, and Invitel acquired its entire cable operation by buying up part of Fibernet.

The exception is Digi, the latest entrant. It is the only company which has grown mainly by pulling out new networks in the recent years, becoming the third biggest actor in the market by creating a network on its own, and providing services for about half a million households today.

“There are still some service providers catering to more than 20,000 subscribers, e.g. DigitalVác, which are nonetheless not courted by dozens of suitors,” a source wishing to remain anonymous told the BBJ. The reason for the lack of interest is probably the Public Utility Tax Act. 

Competition outward
Parallel network development as a form of competition is still conceivable. “Digi used to be notorious for establishing its own cable lines right next to the existing cable lines of UPC and Telekom, seducing their customers away,” one expert said. “Digi is in fact present on 50% of UPC-covered territory with its own parallel network, which generates a permanent price competition. The situation is similar between Digi and Telekom, too,” our informant remarked adding, however, that recently Digi has also given up the practice of parallel network development.

“The majority of the cable companies, especially the smaller ones, today compete less with each other but rather with other technologies,” Szűcs explained. True, cable technology is still dominant in the transmission of TV channels, but satellite TV services and the Mindig TV digital content service of Antenna Hungária are definitely gaining ground, especially in suburban areas.

As far as the Internet is concerned, cable TV is pre-eminent in its provision, while the ADSL technology, which was favored by Telekom for a long time, is rapidly losing its importance. There exists an even more up-to-date technology too, namely mobile Internet, but its relatively low penetration at this point does not jeopardize the position of cable providers.

“In the early 2000s, UPC became market leader by triple play, that is, by the combination of television, Internet and telephone services. Subscribing for combined services proved to be a simple and convenient solution for many families,” Szűcs said. “In 2004, landline telephone started to decline, but with the help of triple play UPC managed to revitalize it. Today, we are the second-largest wired telephone provider after Telekom.”

These days, time shifting (UPC Horizon) is playing a similar role in the rejuvenation of television. Time shifting means that viewers do not have to adapt to TV programs anymore, but by the help of various telecommunication technologies they can watch programs anytime, anywhere and on any device.