Are you sure?

Broadband competition going mobile

A tax on underground cable is apparently driving service providers up into the airwaves. The result is likely to mean more competition and lower prices in the mobile internet market.

Among the many sectoral taxes that the current government has placed on utilities, there is one that is said to be the shortest piece of legislation in Hungarian history. The entire Utility Networks Tax Act of December 2012 fits onto one A4 page.

“It is a simple and clear-cut tax law, to which there are rarely any exceptions,” Norbert Izer, Senior Tax Advisor of PwC told the Budapest Business Journal, adding that the Utility Networks Tax also had an impact on competition among internet service providers. “Those companies that provide internet and telephone services through cable networks pay very large sums, while cell phone providers of the same services are not affected at all by the tax. The measure therefore causes huge inequalities in the market.”

While the goal of the tax was apparently to increase government revenue by hitting up wealthy utilities, the measure had the side effect of encouraging cable-based internet providers to switch to more technologically advanced, wireless methods for delivering internet access. In their eagerness to avoid the tax on underground cable networks, both UPC and Digi are planning to push deeper into the mobile internet market in Hungary, analysts say. While there are obstacles to penetrating this market, it seems that the entry of these two competitors is likely to shake things up. Judging by what happened recently in Romania, the new competition might lead to dramatic price cuts in services.

Charged by the meter

Under the Utility Networks Tax Act, utility line owners must pay HUF 125 per meter in tax, regardless of how thick the line is: Companies pay the same rate per meter, whether it is a thread-thin wire or the 10-meter-wide, vaulted main sewage pipe which serves all the Buda districts.

From the government’s point of view, the beauty of this straightforward tax is that it provides a dependable source of income with no loopholes. “The revenues generated from the Utility Networks Tax have proven to be rather stable,” Izer said. In 2012, the creators of the central budget calculated on HUF 55 billion in revenue from the utility tax, and the actual income in 2013 was only one billion less; in 2014, the income was the same.

Critics of the tax say that it discourages networks from laying cable in rural areas, where homes and businesses are farther apart. They also note its outsized impact on the internet market. While electricity providers have 36% of the taxable cable in Hungary, they tend to enjoy local monopolies. Cable providers, who have the second longest network of underground lines, at 30% of the total, are in a much more competitive market.

Rather than try to beat their wireless competitors, UPC in Hungary decided to join them. In November, the firm announced the full commercial launch of UPC Mobile, a mobile virtual network operator offering 3G voice and data services in Hungary.

“UPC has two main reasons to do this. Firstly, the future belongs to mobile broadband: In order to win the younger generations, one has to invest into that service. Secondly, mobile networks are not burdened by the utility tax,” László Szűcs, a UPC spokesperson told the BBJ.

Digi is apparently preparing to do the same, according to analysts. In September 2014, Digi applied for and won a frequency suitable for the provision of cell phone and wireless internet services at the competition announced by the national media authority (NMHH). RCS & RDS, the company that owns Digi, declined to comment for this story.

A tight market

With at least one, and probably two firms jumping into the cell phone business, it would seem that the market will change, though it is not clear how much room for change there is.

According to data published by NMHH, there are a little more than 11.7 million subscriptions in Hungary, a country with a population of just under 10 million. Magyar Telecom is said to have a 46% market share, while Telenor is listed with 31% and Vodafone with 23%.

János Suba, Corporate Communication Director of Vodafone, told the BBJ it is not easy to reshuffle the market, because few people leave their current provider. “Real swaps actually amount to no more than 3%, most of which is made up by company fleet subscriptions being switched from one provider to another,” he said.

One reason for the customer loyalty may be that the majority of clients buy dedicated cell phones from the providers and they also join customer loyalty programs of a two-year duration.

“Hungarians apparently like buying all communications services from the same company. This is why we hope to convince those customers who already buy internet services from us to buy mobile internet services from us too,” says Szűcs.

UPC has already developed a tradition of full-range services, which have proven to be successful. UPC entered the cable-based telephone market in 2003, at the time when the incumbent T-Com was losing ground because evermore people were switching to mobile phones. Using friendly pricing policies – including allowing UPC’s line-based phone subscribers to call each other for free – the firm has grown into the second biggest provider of land-line phones in Hungary.

If it follows this strategy again, UPC might try to muscle its way into the mobile internet and voice market by undercutting the dominant market players. This tactic could also be employed by Digi, which has already used a similar technique in Romania, where Digi’s parent company RCS & RDS is based. RCS & RDS offered significantly lower prices to potential subscribers: For €5 per month, customers can make unlimited intra- and extra-network calls; on top of that, calls within the European Union were made free of charge; furthermore, customers could transmit 5GB of data via the mobile internet service every month.

For comparison, a similar scheme in Hungary today costs the equivalent of roughly €50 – ten times as much as Digi’s offer in Romania. As a result of their price cuts, RCS & RDS in Romania seduced 70,000 subscribers away from rival mobile providers, Orange, Vodafone, and Cosmote in half a year.

While Digi still hasn’t officially entered the competition, based on what we’ve seen with the country next door, we might be looking forward to mobile internet price wars in Hungary in the near future. It’s hard to say who the winner of such a war might be, but clearly it would be good for consumers.