Hungary Telecommunications Report Q1 2008

The number of Hungarian mobile subscribers grew by 0.9% in the second quarter of 2007, confirming our belief that the Hungarian sector is far from stagnating, and our prediction that subscriber growth will continue throughout 2007 and beyond. Hungarian mobile subscriber growth in the first half of 2007 has already amounted to 1.7%, and this contrasts sharply with the 1% growth seen in the first six months of 2006. We continue to predict that total sector growth for 2007 will amount to 4.9%, which is lower than the 6.1% growth seen in 2006.

The market share of Hungary's three mobile operators remained roughly the same during 2006, and this balancing trend appears to have continued into the first half of 2007. Pannon GSM's share of the market remained stable at 45.7%, while T-Mobile's market share increased by 0.2 percentage points and Vodafone's share of the market fell by 0.2 percentage points. Following its losses in Q107, Pannon GSM appeared to be back in form in the second quarter, this time managing to beat T-Mobile with 48,000 new subscribers (representing nearly 55% of new subscriber additions).

One of the main changes introduced in our Q407 update on the Hungarian Telecoms market relates to Hungary's broadband sector. Based on new data provided by Hungary's regulator and various operators, we now believe that there were nearly 977,000 broadband internet connections in operation at the end of the year, which puts broadband penetration at 9.7%. Furthermore, according to the regulator, the number of broadband subscribers reached 1.1mn at the end of April 2007. Conditions for ADSL competition have improved considerably in recent months and, consequently, alternative operators have steadily increased their share of the ADSL market; by the end of Q207, incumbent Magyar Telekom had a 52% share of the total broadband market (including wholesale). Based on current growth trends, we believe that broadband penetration will reach 14% by the end of 2007.

Key developments in the Hungarian sector in the past few months include the announcement, in July 2007, that HTCC (also known as the Hungarian Telephone and Cable Corp.) had agreed to acquire the Hungarian business of Tele2, the Swedish alternative telecoms operator, for EUR4mn. Tele2 Hungary is a reseller of fixed-line telephone services using the network facilities of other operators. The company has approximately 490,000 active subscribers and, in 2006, reported revenues of HUF10.7bn (US$55mn).

News of HTCC bid to acquire Tele2 follows the company's acquisition of Invitel in April 2007.

Moreover, in August 2007, it was reported that HTCC planned to market all of its products and services under a single 'Invitel' brand name. Prior to its acquisition of Invitel, HTCC marketed its products and services under three brand names: Hungarotel, PanTel and PanTel Technocom. The move to streamline its brands is further evidence that HTCC seeks to boost its competitive edge vis--vis Hungary's incumbent Magyar Telekom.