Technology Communications and Media Hungary

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Despite austerity measures on the back of high public debt and weak economic growth that have impacted thedomestic telecom landscape, Hungary has maintained gradual expansion in the sector and remains attractive toexternal investors. High mobile phone penetration and broadband Internet subscriber rates that are above the regionalaverage are the primary drivers behind sector growth, with FTTH and 4G LTE set to be the focus of infrastructuralinvestments going forward.

EXECUTIVE SUMMARY

The share of mobile telecom revenues in total telecom revenues has increased in Hungary, with the 2007 levelof 39.6% having increased strongly to 51.8% in 2012. Mobile telephony remains the most dominant telecomsegment in the country;

The Hungarian smartphone market by retail value is projected to reach US$417 million in 2012, which wouldamount to a surging 952% real-term gain over 2008, the earliest date figures are available. The rapid growth ofthe smartphone market has been aided by intense pricing competition between operators, with budget dealsallowing more Hungarians to obtain the web-ready handheld device;

Household possession of a broadband enabled computer reached 65.3% in 2012, with a surging expansion from33.0% in 2007. In 2012, Hungarys broadband penetration rate placed it in 28th place out of 85 countries, aboveSlovakia and Lithuania but below Slovenia and the Czech Republic;

Some 55.0% of homes had cable TV in 2012, decreasing from 57.0% in 2007. Satellite TV is rarer among

homes and tends to be more expensive, but the segment has expanded strongly on the back of greater offeringsand wider coverage, with possession at 27.8% of households in 2012, having risen strongly from 19.2% in 2007;

92.9% of Hungarian businesses used a computer in 2012, which was an increase from 91.4% in 2007. BusinessInternet use has seen strong growth, rising from 86.4% to 90.0% over the same period, with 84.4% of businessesusing fixed broadband in 2012. Hungary is one of the most progressive nations in Eastern Europe when it comesto business IT usage;

Social media is one of the most popular online activities in Hungary, with the social network Facebook the mostpopular website in the country by hits as of June 2013 according to Alexa. Facebook also has extremely highpenetration in the country, at almost half of the entire population according to Socialbakers at the same time,which has been a strong driving force behind the online adspend segment.

Chart 1 Total Telecommunications Revenues in 2012 Regional Overview


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US$ million

Source: Euromonitor International from national statistics

MARKET OVERVIEW

One of the stronger markets in the region beset by economic underperformanceAn influx of early foreign investments at the turn of the century and EU funding has helped make Hungary one ofthe stronger telecom markets in Eastern Europe, with international players dominating the local telecom scene.However, rising public debt and the double impact of the global economic downturn of 2008-2009 and the eurozonesovereign debt crisis have forced the country into severe austerity measures, which have an impact on telecomconsumer purchasing power and tax rates for telecom firms. Nonetheless, as many industries in the country are

experiencing stagnation the telecom sector is one of the few that continues to expand.Hungary ranked 44th in the World Economic Forum (WEFs) Networked Readiness Index (NRI) in 2013 out of 144

nations, declining slightly from 43rd in the 2012 NRI out of 142 nations. In Eastern Europe, Hungary is only behinda handful of advanced Baltic states, as well as Slovenia and the Czech Republic, which makes the country one of thetop telecom performers in the region. However, cuts in public and private telecom investments due to a pooreconomic climate undermine its position in the future.Telecom revenues see a large drop while investments are gradually recovering:

Overall capital investment in telecommunications stood at HuF103 billion (US$460 million) in 2012, decliningby 9.4% in real terms over the period 2007-2012, one of the milder drops in the region. Investments in the sectorhave held up quite well considering the poor economic environment in Hungary, although this is largely due tolarge expansion in the pre-crisis years of 2008 and 2009;

Capital investment saw an annual real fall of 13.9% in 2012, with the indicator beginning to recover its footingfollowing large declines throughout the 2010-2011 period. Consumer frugality and fewer public assistance

programmes for commercial operations have held back investments;


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In terms of total telecommunications revenues, Hungary posted HuF819 billion (US$3.6 billion) in 2012, havingseen period decline of 39.4% in real terms over 2007-2012. This large drop has largely come about as a result ofconsumers reining in their spending levels due to high unemployment levels and a poor economic outlook;

2012 saw an annual real fall in telecom revenues, with a decrease of 8.6%. Over the entire 2007-2012 period,every year saw an annual real decline in telecom revenues. Market maturity and the growing saturation oftelecom services are also factors that are pegging back the initially high revenues of telecom operators.

Chart 2 Capital Investment in Telecommunications and Telecommunications Revenues 2007-2012

US$ million

Source: Euromonitor International from national statistics/trade sources/OECD/Eurostat

PHYSICAL INFRASTRUCTURE

Providers focusing on FTTH and bundled servicesStrong EU support and large public investments have helped develop strong information and communicationstechnology (ICT) infrastructure across Hungary, with access to high-speed data networks comparable to that ofWestern European nations. Cable and DSL platforms remain the primary connection platforms for broadbandInternet, although Fibre-to-the-Home (FTTH), which offers higher speeds and more stable bandwidth, has been thefastest growing segment in fixed broadband in 2012. According to trade sources, by the end of 2013 there areexpected to be around 350,000 FTTH subscribers.Landlines contract in line with regional standards:

The number of telephone lines in use in Hungary stood at 2.9 million in 2012, having contracted by 11.4% over2007, which is roughly in line with the Eastern European trend over the same period. The availability ofwireless telecom services is allowing more homes to drop unnecessary landlines;

Household possession of a mobile phone has continued to expand as landlines are contracting, rising from86.4% in 2007 to 95.7% in 2012. The availability of digital main lines has remained at 100% throughout 2007-2012.

Although Hungary has made great telecom development progress in urban areas, rural zones continue to behampered by poor fixed infrastructure. The arrival of 4G LTE in 2012 has been vital in providing greater Internetaccess to areas that remain commercially unattractive for fixed services, and more rural households are expected tocross the digital divide throughout 2013-2014. Cable providers are also increasingly focusing on the provision of

bundled packages by upgrading their existing infrastructure so that they can offer pay-TV and other data-basedservices.

Chart 3 Telephone Lines in Use 2007-2012


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000

Source: Euromonitor International from International Telecommunications Union (ITU)

MOBILE CONNECTIVITY

Surging growth in smartphone marketThe Hungarian mobile market has a competitive landscape with three operators leading an aggressive pricing policyto win new subscribers in an increasingly oversaturated sector. According to the National CommunicationsAuthority of Hungary, T-Mobile is the market leader with a 45.6% share of total mobile subscribers in mid-2012,followed by Telenor 31.9% and Vodafone on 22.6%. In early 2012, Tesco Mobile became the countrys first virtual

network service provider and this segment of the market is expected to grow going forward.Mild growth in new subscribers in a highly saturated mobile market:

Hungarys mobile phone penetration has increased over 2007-2012 to reach 95.7% of households, one of thehighest rates in Eastern Europe. With rural homes joining the mobile telephony bandwagon, especially due tothe availability of mobile broadband that acts as a replacement of fixed broadband that is unavailable in some

regions, there are few non-connected consumers in the country;

Hungarys mobile phone subscriptions stood at 11.9 million in 2012, having seen a mild increase of 7.8% over2007. High saturation levels are preventing strong growth in subscriptions, with operators increasingly relyingon marketing additional services to existing subscribers;

The share of mobile telecom revenues in total telecom revenues has increased in Hungary, with the 2007 levelof 39.6% having increased strongly to 51.8% in 2012. Mobile telephony remains the most dominant telecomsegment in the country.

Chart 4 Proportion of Mobile Revenues in Total Telecom Revenues and Household Possession ofMobile Telephone 2007-2012


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% of telecom revenues, % of households

Source: Euromonitor International from International Telecommunications Union, World Bank, trade sources and nationalstatistics

The Hungarian smartphone market by retail value is projected to reach US$417 million in 2012, which wouldamount to a surging 952% real-term gain over 2008, the earliest date figures are available. The rapid growth of thesmartphone market has been aided by intense pricing competition between operators, with budget deals allowing

more Hungarians to obtain the web-ready handheld device. T-Mobile was the first operator to launch 4G LTEservices in the country in 2012, with this being one of the earliest launches of the high-speed broadband technologyin Eastern Europe. By the end of 2013, all remaining operators are expected to offer commercial 4G services.Mobile phone ownership to reach almost blanket coverage:

Mobile phone subscriptions are projected to expand by 4.2% over 2013-2020 to reach a total of 12.5 million,with this low growth rate largely in line with the regional average. As only a handful of Hungarian consumersare expected to remain without a mobile phone by 2020, operators will focus on the provision of mobile

broadband and associated services such as mobile money transfers, entertainment and other m-commerce-basedsegments;

Mobile phone possession is set to reach 98.6% of all households by 2020, which would make Hungary one ofthe most penetrated mobile phone markets in Eastern Europe. This will come as welcome news for m-commerce

businesses as they will be able to gain access to almost all of the countrys households.

Chart 5 Smartphone Retail Market Value 2008-2012

US$ million

Source: Euromonitor International from trade sources and national statisticsNote: Data for 2012 is forecast; figures in 2011 constant terms


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HOME CONNECTIVITY

Satellite TV sees strong expansionThe Hungarian fixed broadband market is developing rapidly with a focus on FTTH infrastructure, as consumerdemand for bandwidth and speed is driving investments by providers. The local sector is dominated by UPCHungary and Maygar Telecom, with both investing heavily in infrastructure as mobile broadband increasinglythreatens to challenge the fixed segment for new subscribers. However, austerity measures and the slashing of EU

funding for digital goals has meant that national programmes for the development of fixed broadband into rural areasand for low-income homes have been downgraded significantly.Broadband dominates the fixed telecom landscape:

In 2012, Hungarys fixed total Internet subscribers amounted to 2.4 million, of which all were broadbandsubscribers, with dial-up non-existent on the local market, which underlines the progressive nature of theHungarian telecom sector;

Broadband subscribers expanded by a strong 71.8% over 2007-2012, as total Internet subscribers grew by64.3% over the same period. The rapid decline in dial-up users, at 99.8% over the same period, ensured thatdial-up disappeared as a technology;

Household possession of a broadband enabled computer reached 65.3% in 2012, with a surging expansion from33.0% in 2007. In 2012, Hungarys broadband penetration rate placed it in 28th place out of 85 countries, above

Slovakia and Lithuania but below Slovenia and the Czech Republic.As broadband subscribers continue to increase in size the domestic market will open up more to high-level webservices:

Broadband Internet subscribers are set to reach 2.9 million by 2020, seeing growth of 18.1% over 2013-2020.Expansion into rural areas and the offering of high-speed FTTH services are set to boost subscriber take-up ;

Possession of a broadband enabled PC will reach 82.2% of households by 2020, as Hungary continues to be oneof the strongest markets in Eastern Europe for broadband penetration. The growing access to high-speedservices will ensure that local consumers use more digital and social media, opening up the market to greater

bandwidth-dependent services.

Chart 6 Household Possession of Broadband Internet Enabled Computer and Telephone 2007-2020

% of households

Source: Euromonitor International from trade sources and national statisticsNote: Data for 2013-2020 refer to forecasts

According to the 2011 ICT Price Basket, which measures the prices of telecom services as a percentage of GNI per

capita, Hungary ranked 60th out of 161 nations in terms of the affordability of local services, which was around the


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mid-level in Eastern Europe. Although telecom services are not cheap, broadband tariffs continue to fall and urbanzones are increasingly home to competitive pricing levels.Cable TV is the dominant platform for pay-TV services in Hungary, although the segment has stalled as moreconsumers move to satellite and IPTV services. Some 55.0% of homes had cable TV in 2012, decreasing from57.0% in 2007. Satellite TV is rarer among homes and tends to be more expensive, but the segment has expandedstrongly on the back of greater offerings and wider coverage, with possession at 27.8% of households in 2012,having risen strongly from 19.2% in 2007. By 2020, 55.3% of homes will have access to cable TV, while a growing30.7% will have satellite TV.

PUBLIC CONNECTIVITY

Advanced Wi-Fi accessibilityThe total number of Hungarian Internet users stood at 6.1 million in 2012, having expanded by 12.9% over 2007.Growing access to more options of connectivity, especially Wi-FI and mobile broadband such as 4G, have allowedmore users to access the web, especially for consumers unable to facilitate fixed subscription services.The percentage of the population using the Internet has expanded gradually, rising from 53.3% in 2007 to 60.8% in2012, above the Eastern European average of 52.2% the same year. The installation of Wi-Fi services in restaurants,hotels and bars across Hungary over 2007-2012 has greatly assisted the access to the web among consumers.According to jiwire.com, there were 879 Wi-Fi locations in Hungary as of June 2013, with 394 of these in the capitalBudapest.

By 2020, Hungary is expected to have 6.9 million Internet users, marking a rise of 11.8% over 2013-2020. Thepercentage of the populace using the web is expected to reach 71.2% by 2020, which would place the country amongthe leaders in Eastern Europe for this indicator. The growing tourist industry in Hungary will likely boost Internetaccess further, as more leisure businesses provide free Wi-Fi to their clientele.

Chart 7 Internet Users and Percentage of the Population Using the Internet 2007-2020

000 / %

Source: Euromonitor International from trade sources/national statistics

Note: Data for 2013-2020 refer to forecasts

ONLINE APPLICATIONS AND SOCIAL MEDIA

Social media penetration extremely high

Table 1 Ten Most Visited Internet Sites by Reach June 2013

Internet site Description Ranking (out of 100)

Facebook.com Social networking site 1Google.co.hu Localised search engine 2

YouTube Video sharing site 3Google.com Search engine 4


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Index.hu Internet portal 5Freemail.hu Email service 6Neobux.com Paid-to-click services 7

Amazon.com Online marketplace 8Blog.hu Blogging site 9Wikipedia.org Free encyclopedia 10

Source: AlexaNote: Reach refers to the number of unique visitors per month as a percentage of total users. Values correspond to the

average of the three months ending at the end of June 2013

Social networkingSocial media is one of the most popular online activities in Hungary, with the social network Facebook the most

popular website in the country by hits as of June 2013 according to Alexa. Facebook also has extremely highpenetration in the country, at almost half of the entire population according to Socialbakers at the same time, whichhas been a strong driving force behind the online adspend segment. LinkedIn and Twitter have also seen solidexpansion but these newer social platforms are still used by a small minority.

Table 2 Social and Digital Media Statistics June 2013

2013

Facebook Users 1.0 millionFacebook Penetration 48.8%LinkedIn Users 308,021LinkedIn Penetration 3.1%Most Popular Twitter Page (No. of Followers) Eva Henger (126,869)Most Popular YouTube channel (No. of Subscribers) Smosh (10.4 million)

Source: Socialbakers

Digital mediaAs in most countries in the region, YouTube is the third most popular website in the country, according to Alexa,with many Hungarians subscribing to a variety of channels for viewing on a regular basis. Foreign, especially NorthAmerican, channels are extremely popular, with the comedy-based sketches called Smosh attracting the most

Hungarian YouTube subscribers. Local web portal Index, the fifth most popular site in the country, has been pushingits own digital media offerings, and consumers are increasingly interested in domestic content. The rollout ofwidespread FTTH networks will likely boost this segment as consumers will have access to greater speeds forstreaming and downloading data.

SellsumersThe sellsumer sector has expanded strongly in Hungary, led by Amazon, which has grown rapidly in traffic over2012 to become the eighth most popular site in the country. Although Amazon does not have a Hungarian platform,local consumers browse it frequently and order goods from neighbouring countries. This suggests there is greatdemand for a domestic online marketplace, as consumers move away from online classifieds and prefer a better-rounded product. Hungarians are comfortable with online transactions and electronic banking has reached a strong

penetration level.

Cloud computingInterest in cloud computing is beginning to peak in Hungary as businesses are becoming increasingly aware of itscost-saving and efficiency benefits. Although the IT sector is still growing from a fairly low base, many smaller

businesses in the countrys finance and technology segments are already utilising the cloud. A professional cloudcomputing association was set up in 2011, representing 25 cloud providers, with this assisting take-up of cloudsolutions. According to datacentermap.com, there were eight colocation datacentres in Hungary at the end of 2012.

CONSUMERS OF TCM SERVICES

Broadband and pay-TV takeup weak among low-income homesThe impact of high public debt and recession has hit Hungarian homes, with telecom consumer expenditure suffering

as a result of lowered purchasing power:


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One of the strong business IT performers in the region:

92.9% of Hungarian businesses used a computer in 2012, which was an increase from 91.4% in 2007. BusinessInternet use has seen strong growth, rising from 86.4% to 90.0% over the same period, with 84.4% of businessesusing fixed broadband in 2012. Hungary is one of the most progressive nations in Eastern Europe when it comesto business IT usage;

Some 64.1% of businesses had a local area network in 2012, marking a gradual rise from 59.1% in 2007.Segments such as cloud computing have strong prospects in Hungary since so many businesses are focused onutilising IT in their strategies.

Hungarian online adspend amounted to HuF31.8 billion (US$141 million) in 2012, seeing a strong rise of 63.2% inreal terms over 2007, and was only one of two adspend categories to see positive real growth. Online adspend madeup 19.3% of total adspend in 2012, which made it the third largest category behind TV and print, having risen from8.3% in 2007. The countrys online advertising segment is traditionally strong and is set to influence the industry ona greater level going forward.Hungarian Internet retailing amounted to HuF165 billion (US$694 million) in 2012, which was a strong increase of196% in real terms over 2007. Home care Internet retailing has seen the fastest real expansion over 2007-2012,rising by 887% in real terms, as more local consumers have started ordering products for their home online due to alarger offering. Consumer electronics and video games Internet retailing made up the largest proportion of the webretailing market, aside from other Internet retailing, at 13.8% in 2012. Internet retailing is projected to expand by71.5% in real terms over 2013-2017, one of the stronger increases in the region.

Table 3 Regional E-Government Development Ranking 2010 and 2012

2010 2012

Hungary 27 31Poland 45 47Serbia 81 51Macedonia 52 70Bosnia and Herzegovina 74 79

Source: UN Public Administration ProgrammeNote: Latest data available; ranking out of 190 nations

According to the UNs E-Government Survey 2012, which measures a combination of web provisions, humancapital and ICT infrastructure, Hungary placed 31st out of 190 nations for its online state services, which was above

most Eastern European nations despite a decline from 27th in 2010. Hungary has traditionally invested significantsums in order to lift its e-services offering to Western European standards and allow its citizens a strong link with thegovernment through the online domain. However, austerity measures have forced a slash in the budget for e-government infrastructure.

SNAPSHOT IN 2020

Table 4 Key TCM Indicators 2020

Indicator 2020

Household possession of broadband-enabled computer 82.2% of households

Household possession of cable TV 55.3% of householdsHousehold possession of mobile telephone 98.6% of householdsHousehold possession of fixed-line telephone 27.1% of householdsHousehold possession of satellite TV system 30.7% of householdsNumber of mobile phone subscribers 12.5 millionMobile subscribers per 100 inhabitants 128Number of Internet users 6.9 million% of population using the Internet 71.2%

Source: Euromonitor International from national statistics/International Telecommunications UnionNote: Figures are forecasts

DEFINITIONS


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3GThird generation mobile systems which provide high-speed data transmission and support multimedia applicationssuch as full-motion video, video-conferencing and Internet access, alongside conventional voice services.

3.5G3.5G refers to evolutionary upgrades to 3G services that provide significantly enhanced performance.

4G

Fourth generation mobile systems, also known as beyond 3G. 4G technologies provide data transmission at muchhigher rates than previous generations as well as high-quality multimedia applications on an anytime, anywhere

basis.

AppsApps, or applications, are small, specialised software programmes that are typically downloaded onto mobiledevices.

ADSL (Asymmetric Digital Subscriber Line)A technology used for sending data quickly over a conventional copper telephone line.

BandwidthThe measure of the maximum capacity of a data link in the network.

BroadbandHigh-speed access to a public Internet (a TCP/IP connection). High-speed access is defined as being equal to, orgreater than 256 kbit/s, as the sum of the capacity in both directions. This can include for example cable modem,DSL, fibre-to-the-home/building and other fixed (wired) broadband subscribers.

Cloud computingData storage that relies on sharing computing resources rather than having local servers or personal devices tohandle applications.

CrowdsourcingA process that involves outsourcing tasks to a distributed group of people. These tasks could be online or offline,

paid or for free, and they are outsourced to an undefined public.

FTTHFibre to the Home (FTTH) is a high-speed, fibre-optic broadband communication delivery technology that extendsfrom a central office to a home or office space.

ICT Price BasketThe International Telecommunication Unions measurement of the cost and affordability of information and

communications technology (ICT) services across more than 160 countries globally. Ranking based on the cost ofICT services as a % of gross national income (GNI) per capita.

Internet-enabled mobile phone

A mobile phone which allows its user to access the Internet via in-built access technology.

Integrated Services Digital Network (ISDN)A network which allows the digital transmission of voice and data over traditional copper lines.

IPTVA technology that delivers digital television via fixed broadband access.

LAN (Local Area Network)A computer network that interconnects computers in a limited area.

LTE (Long Term Evolution)

LTE is a 4G technology that will enable mobile phones to provide significantly faster data rates with a potential for100 Mbps downstream and 30 Mbps upstream.


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M-commerceM-commerce (also referred to as mobile retailing) is the use of wireless handheld devices such as mobile telephones,smart phones or other devices to connect to the Internet and purchase goods online.

Mobile broadbandVarious types of wireless high-speed Internet access through a portable modem, telephone or other device.

Narrowband

A service which provides Internet data speeds up to 128 kilobits per second otherwise known as dial-up. This is mostcommonly used for making phone calls over a copper wire.

Networked Readiness Index (NRI)The Networked Readiness Index (NRI), by the World Economic Forum, measures the propensity for countries toexploit the opportunities offered by information and communications technology. It is published annually. The NRIseeks to better comprehend the impact of ICT on the competitiveness of nations. The NRI is a composite of threecomponents: the environment for ICT offered by a given country or community, the readiness of the communitys

key stakeholders (individuals, businesses, and governments) to use ICT, and finally the usage of ICT amongst thesestakeholders.

NFCNear Field Communication technology allows the electronic transmission of data between wireless devices, or a

between a wireless device and a stand-alone terminal.

SellsumersPrivate consumer-to-consumer salespeople providing goods and/or services online via private transactions orretail/auctioning websites.

SmartphoneA mobile phone that offers greater computing capability and connectivity than a basic feature phone.

VoIP (Voice over the Internet Protocol)A set of hardware and software that allows the transmission of voice conversations over a data network.

Web 2.0A second generation of web-based communities and hosted servicessuch as social-networking sites and wikiswhich facilitate collaboration and sharing between users.

Wi-FiShort range wireless technologies that allow an over-the-air connection between a wireless device and a base station(also known as a hot spot), or between two wireless devices. WiFi has a range of around 30 metres indoors, andaround a kilometre outside.

WiMAXWorldwide Interoperability for Microwave Access is a wireless technology, which is similar to WiFi, but with alonger range of many kilometres. WiMAX is a wireless alternative for an access technology to provide high speed

access links instead of copper-based technologies.

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