Liberty Global Inc. Rating: Buy

Transcription

1 SATELLITE, CABLE & BROADCASTING David B. Kestenbaum James Leahy Company Update July 13, 2006 Key Metrics LBTYA - NASDAQ $21.28 Pricing Date 07/12/2006 Price Target $ Week Range $27.35-$18.21 Shares Outstanding (mm) Market Capitalization ($mm) $10, Mo Average Daily Volume 2,122,569 Institutional Ownership NM Debt/Total Capital 55.5% ROE NM Book Value/Share $16.30 Price/Book 1.3x Dividend Yield NM LTM EBITDA Margin NM EPS($) FY: December Prior Curr. Prior Curr. 2005A 2006E 2006E 2007E 2007E 1Q-Mar A Q-Jun (0.34) -- (0.13)E Q-Sep (0.32) -- (0.07)E Q-Dec (0.03)E FY (0.20) -- (0.14)E E P/E NM NM NM Revenue($mm) Prior Curr. Prior Curr. 2005A 2006E 2006E 2007E 2007E 1Q-Mar 1, ,625.9A Q-Jun 1, ,677.2E Q-Sep 1, ,739.0E Q-Dec 1, ,787.3E FY 5, ,829.5E -- 7,479.0E Liberty Global Inc. Rating: Buy A Trip Around The Liberty World: Poland and Hungary Investment Highlights: We continue to present our view of the Liberty Global world. We are in the process of examining each of Liberty Global's major markets, gauging the relative competitiveness in these markets and assessing the company's position. Our stops in Poland and Hungary represent our fourth and fifth stops on our Liberty Global tour. Poland represents Liberty Global's most competitive market. The Polish cable market is among the most competitive worldwide given the presence of six major operators and hundreds of other players. There is also significant satellite competition, including a large amount of available free-to-air programming. The major telco, Telekom Poland, is a strong broadband and telephony provider while its IPTV (Internet Protocol television) product is gaining some traction. Overall, the strength of the Polish economy and the demand among Polish citizens for television programming make this a highly competitive market. Hungary represents Liberty's most advanced triple-play market. The company's Hungarian network is among its most highly upgraded, driving the delivery of an advanced triple-play offering. While there is far less cable competition in Hungary compared to Poland, the incumbent provider is also the largest cable competitor. Also, Hungarians have access to a large amount of free-to-air programming via satellite, as Polish citizens do. Finally, there are a growing number of alternative service providers that have made the Hungarian market much more competitive in recent years. 1 Year Price History for LBTYA Q2 Q3 Q1 Q Created by BlueMatrix Company Description: Liberty Global Inc. ( is a worldwide provider of broadband distribution services and video programming, including analog and digital video television, Internet access, and telephony. It also offers direct-to-home satellite service in certain markets as well as multi-channel distribution systems. As of March 31, 2006, the company's networks reach approximately 29.7mm homes, including 13.6mm video subscribers, 3.3mm broadband Internet subscribers, and 2.4mm telephone subscribers. The Disclosure section may be found on pages of this report. The Valuation section may be found on page 18 of this report.

2 Market Overview Liberty Global's Polish and Hungarian units operate in very competitive and advanced triple-play markets, respectively. The Polish market is one of the most competitive cable markets in the world, given the existence of a number of significant (and advanced) competitors who provide very similarly featured and similarly priced offerings, and a pair of aggressive satellite service providers whose service offerings, especially in the case of the larger operator, easily surpass UPC's television offering. The incumbent telecommunications service provider has deployed a video service that is fairly robust. In addition, the Polish satellite market features a significant amount of free-to-air programming. Liberty's network in the Hungarian market is among its most highly upgraded, with a solid triple-play offering amidst an increasingly competitive market. The incumbent telecommunications provider is also the company's largest cable competitor while there is a solid over-the-air programming offering available. Also, there is, like in Poland, a large amount of free-to-air programming that is available via satellite. Despite the competition, business in these two markets remains solid for Liberty Global. Basic Economics The Polish economy is undergoing significant change as the country works towards full liberalization. While unemployment remains among the highest in Europe and government corruption and an inefficient agricultural sector have dampened growth somewhat, economic growth has continued to outpace the European Union average. The country's entry into the European Union in May 2004 has also generated a number of benefits. The European Union membership brought a surge in exports and a healthy benefit to the agricultural sector, including higher prices and subsidies. According to CIA World Factbook statistics, the country has approximately 38.5mm people and is experiencing a population decline at the rate of 0.05% per annum. In addition, GDP per capita as of 2005 was a relatively low $13,300, with a high 18.3% unemployment rate and inflation of 2.1%, which is among the lowest in Europe. Poland is a new member of the European Union but has not adopted the Euro currency. Instead, its zloty has remained relatively stable and demonstrated solid appreciation in recent months. The television market in Poland is among the best in Europe, with 90% of all households owning a television and average household viewing of over four hours per day. We note that 55% of households still receive programming via an antenna while 34% access television programming via cable and 11% use satellite. In addition, the improving health of the Polish economy has enhanced personal wealth and has helped drive higher ARPU (average revenue per user) for cable operators. Hungary has successfully transitioned away from a state economy and toward a fully liberalized market economy, but much work remains to be done, as the government continues to reform its public finances and its social programs. While the country's economic growth remains solid and its per capita income is improving, the country has a long way to go to reach the health of Western European nations. The country's private sector now accounts for over 80% of GDP and private investment has been improving as well. According to CIA World Factbook statistics, the country currently has approximately 10.0mm people and is experiencing a population decline at the rate of 0.25% per annum. In addition, GDP per capita as of 2005 was relatively weak (vs. much of Western Europe) but growing, at $16,300 with a 7.1% unemployment rate and a moderately high inflation rate of 3.7%. These statistics do leave the country at a level below Western Europe but signify that Hungary is rapidly improving following its admittance into the European Union in May The country, like Poland, has maintained its currency, the forint, but is working toward joining the Euro Zone in approximately MORGAN JOSEPH & CO. INC.

3 UPC Services Poland UPC Poland currently passes about 1.9mm homes in eight regional clusters out of the country's ten largest cities, including Warsaw and Katowice. The company ended March 31, 2006, with 1.0mm analog cable subscribers, 139,900 Internet subscribers, and 12,300 telephony subscribers. Within its network, about 49% of the plant has been upgraded to two-way capacity and 98% has been upgraded to at least 550MHz of two-way capacity (we believe UPC Poland is continuing to work on upgrades in 2006 and, according to the company, is targeting upgrades to 860MHz of capacity for an additional 20% of its system). On the television side, the company offers analog television services in three primary packages. The entry-level tier, the broadcast package, gives subscribers up to 12 channels (depending on the market) while the mid-level tier, the intermediate package, gives subscribers access to up to 22 channels (again, depending on the market). According to UPC Poland, about 18% of total homes passed take lifeline analog cable services only. On the high-end, the company's full package offers the entry-level service and up to 30 additional channels, including sports programming, kids programming, science and educational programming, news, films and music (see Table 1 below for a look at UPC Poland's television services). Beyond the full package, the company also offers several premium packages, including HBO (including HBO and HBO 2), Canal+ (Canal+, Canal+ Film, Canal+ Sport, and Canal+ Sport 2), a Polish language cinema option, and an English language programming option. Table 1: UPC Poland - Cable TV Service Packages (prices in PLN - 1 PLN = 0.32 USD) UPC Full Package Premium Packages Films Documentary Kids HBO MaxPak AXN National Geographic Channel Cartoon Network Canal+ Multiplex TCM Discovery Channel Jetix Play Canal+ Multiplex and HBO Max Pak Hallmark Discovery Travel & Learning Jetix English Package w/ HBO or Canal Zone Europa Discovery Science Polish Broadcasters English Package w/ HBO & Canal Sports Discovery Civilization TVP1 Cinema Package 6.99 Eurosport Animal Planet TVP2 Eurosport 2 Travel Channel TVP3 TVN Turbo Planete TVP Kultura Polsat Sport Music/Entertainment TVN Polsat Sport Extra MTV TVN 7 Extreme Sport Channel VH1 Polsat Information 4funTV TV 4 TVN 24 VIVA TV Polonia TVN Meteo VIVA Polska Polonia 1 CNN Women's Tele 5 BBC Prime TVN Style TMT Zone Reality Zone Club Polsat Zdrowie I Uroda Zone Romanitca Cinema Package Ale Kino Kino Polska MGM English Package MGM ESPN Classic Sport Cartoon Network Jetix Play Adventure One TCM On the broadband side, the company offers a full suite of broadband Internet access products to the subscribers served by its two-way network. Service is provided in five tiers and, like most of the company's systems, is branded with the chello name. Download speeds range from a low of 256Kbps to a high of 12Mbps (see Table 2 below for a look at UPC Poland's broadband offerings compared to those of its primary competitors). In 2005, the company expanded its Internet capabilities in Warsaw, Krakow, Gdansk and Katowice and continued its two-way upgrades in 2006, driving higher net additions in this business. We note that about 10% of UPC Poland's video subscribers take a high-speed Internet product, which represents about 82% of its total Internet subscriber base. Finally, on the telephony side, the company began offering VoIP (voice over Internet protocol) telephony services in 4Q05 (UPC Poland did not offer a circuit-switched telephony product like many of the other Liberty systems prior to offering VoIP) to about 46% of its total homes passed base. The 3 MORGAN JOSEPH & CO. INC.

4 company's offering is based on two primary packages, which offer varying calling rates and a standard suite of extra services like voic , call waiting, caller ID, and call forwarding, among others (see Table 3 below for a look at UPC Poland's telephony offering). We note that while only 0.1% of video subscribers take telephony service (representing 98% of total telephony subscribers), this is a very early stage product and its popularity is likely to grow throughout Table 2: Poland - Broadband Service Provider Pricing (prices in PLN - 1 PLN = 0.32 USD) UPC Chello Easy Chello Light Chello Classic Chello Plus Chello Ultra Monthly Pricing Special Pricing for TV Customers Speeds (downstream/upstream) 256Kbps/64Kbps 1.0Mbps/256Kbps 3.0Mbps/384Kbps 6.0Mbps/512Kbps 12.0Mbps/1.0Mbps Data Limit 7GB 15GB 25GB 50GB NA Telekom Poland Neostrada TP 128 Neostrada TP 256 Neostrada TP 512 Neostrada TP 1024 Neostrada TP 2048 Neostrada TP 6144 Monthly Pricing (1 yr contract) Special Pricing NA NA Speeds (downstream/upstream) 128Kbps/64Kbps 256Kbps/128Kbps 512Kbps/128Kbps 1.0Mbps/256Kbps 2.0Mbps/256Kbps 6.0Mbps/256Kbps Data Limit 7GB 7GB 15GB 25GB 35GB 50GB Vectra ev mini ev dom ev speed ev glob Monthly Pricing Monthly Pricing for TV Customers Speeds (downstream/upstream) 128Kbps/64Kbps 256Kbps/128Kbps 512Kbps/256Kbps 1.0Mbps/256Kbps Data Limit NA NA NA NA Aster City Cable (Warsaw) Pakiet TwojNet Pakiet TwojNet 512 Pakiet TwojDom Pakiet TwojSwiat Monthly Pricing Monthly Pricing for TV Customers Day speeds (downstream/upstream) 128Kbps/64Kbps 512Kbps/96Kbps 1.0Mbps/256Kbps 1.5Mbps/384Kbps Night speeds (downstream/upstream) 256Kbps/64Kbps 1.0Mbps/96Kbps 2.0Mbps/256Kbps 3.0Mbps/384Kbps Data Limit NA NA NA NA Multimedia Starter 512+ Internet 128+ Internet 256+ Internet 512+ Internet 1MB+ Internet 2MB+ Monthly Pricing (1 yr contract) NA Monthly Pricing (no contract) Special Pricing NA Speeds (downstream/upstream) 512Kbps/256Kbps 128Kbps/64Kbps 256Kbps/128Kbps 512Kbps/256Kbps 1.0Mbps/256Kbps 2.0Mbps/256Kbps Data Limit 500MB 6GB 10GB 15GB 25GB 35GB 4 MORGAN JOSEPH & CO. INC.

5 Table 3: UPC Poland - Telephone Pricing (prices in PLN - 1 PLN = 0.32 USD) Basic Conversation Monthly Pricing Local Weekdays 0.11 Local Weekends 0.11 Long Distance Weekdays (8am-6pm) 0.31 Long Distance Weekdays (6pm-8am) 0.17 Long Distance Weekends (8am-6pm) 0.28 Long Distance Weekends (6pm-8am) 0.17 Cellular Weekdays (8am-6pm) 1.04 Cellular Weekdays (6pm-8am) 0.73 Cellular Weekends (8am-6pm) 0.73 Cellular Weekends (6pm-8am) 0.61 International Calling starts at: 1.09 Free Time Monthly Pricing Local UPC Calling 0.00 Local Weekdays (8am-6pm) 0.11 Local (Other times) 0.00 Long Distance UPC Calling 0.00 Long Distancel Weekdays (8am-6pm) 0.31 Long Distance (Other times) 0.00 Cellular Weekdays (8am-6pm) 1.04 Cellular Weekdays (6pm-8am) 0.73 Cellular Weekends (8am-6pm) 0.73 Cellular Weekends (6pm-8am) 0.61 International Calling starts at: 1.09 Hungary UPC Hungary currently passes about 1.0mm homes in its service areas nationwide. The company ended March 31, 2006, with 732,700 analog cable subscribers, 179,600 DTH subscribers, 156,300 Internet subscribers and 118,300 telephony subscribers. Within the company's network, about 87% of the plant has been upgraded to two-way capacity and 64% has been upgraded to capacity of over 750MHz. This represents one of the most highly upgraded networks within the Liberty Global system. On the television side, the company's primary product is analog cable television. UPC Hungary's cable-based services are delivered in three different tiers that range in channel sizes of as few as four (the company's lifeline Minimum Package) and as many as about 50 (with availability largely dependent on the capabilities of the network in the various areas the company serves). The company also offers two premium channel services that give subscribers the chance to add HBO programming or a variety of active lifestyle programming (see Table 4 below for a look at UPC Hungary's analog cable television services). About 5% of total homes passed take analog service at the lifeline level only. We note that the company's service offerings include national Hungarian terrestrial broadcast channels and a selection of available programming from European satellite operators and local programmers. 5 MORGAN JOSEPH & CO. INC.

6 Table 4: UPC Hungary - Cable TV Service Packages (prices in HUF - 1 HUF = USD) Minimum Package Basic Pack Family Pack Active Pack 800 per month 4,180 per month 5,100 per month 3,190 per month Adds: m1 m1 Hír TV m1 RTR Planet Hustler TV m2 m2 MTV Europe m2 Zone Europa AB Moteurs Duna TV Duna TV Cartoon Network/TCM Duna TV TVE SPORT1 Varosi TV Varosi TV Animal Planet Varosi TV tv2 CNN SPORT2 CNN Travel Channel HBO Pack VIVA Spektrum VIVA RTL Klub 3,110 per month TV5 RTR Planet TV5 Zone Romantica Adds: Zone Club Zone Europa Zone Club Magyar ATV HBO Városi TV TVE Városi TV Discovery Channel HBO 2 Cool tv2 Cool VIASAT3 Hálózat TV Travel Channel Hálózat TV Mozaik csatorna Zone Reality RTL Klub Zone Reality JETIX SAT1 Zone Romantica SAT1 Minimax/A+ Eurosport Magyar ATV Eurosport Mezzo National Geographic Discovery Channel National Geographic Sport Filmmúzeum VIASAT3 Filmmúzeum TV Deko Extreme Sports Mozaik csatorna Extreme Sports Discovery Civilization Képhír Képhír PAX TV Hír TV Film+ MTV Europe Discovery Science Cartoon Network/TCM TV Paprika Animal Planet Hallmark SPORT2 SPORT1 Spektrum Beyond traditional analog cable television services, UPC Hungary also offers a DTH (direct to home) satellite service called UPC Direct. UPC Direct is offered nationwide (including current service areas) and gives subscribers up to 100 channels of digital programming and an additional 50 channels of free-to-air programming. The service is delivered using a primary "Family Package" that can be augmented by a variety of 12 other premium programming packages and bundles (see Table 5 below for a look at UPC Direct's service offerings). 6 MORGAN JOSEPH & CO. INC.

7 Table 5: UPC Hungary - UPC Direct Service Packages (prices in HUF - 1 HUF = USD) UPC Direct Family Package 5,290 per month UPC Direct Extra Packs HBO Pak (2950) Extra Package (6250) m1 Super RTL HBO HBO m2 VIVA Hungarian HBO 2 HBO 2 TV2 MTV Europe Cinemax (2950) Cinemax RTL KLUB MTV Hits Cinemax SPORT 1 Viasat3 MTV Base HBO MaxPak (3500) SPORT 2 Cool MTV2 HBO AXN Filmmúzeum VH1 HBO 2 Boomerang Duna TV VH1 Classic Cinemax Cartoon Network Hungarian ATV VIVA German SPORT 1 (2500) Viasat History hírtv VIVA Plus SPORT 1 Viasat Explorer Echo TV Zik SPORT 2 (2500) TCM Club Ocko SPORT 2 blue Hustler Reality TV Sky News SPORT Pack (3500) Sport Klub BBC Prime CNN SPORT 1 Hustler TV (2400) Travel Channel BBC World SPORT 2 Hustler TV Bp TV EuroNews Premium Package (6000) XXX (2400) Discovery Channel DW TV HBO XXX Spektrum TV CNBC Europe HBO 2 Adult Package (2990) Animal Planet N24 Cinemax Hustler TV National Geographic Channel Bloomberg SPORT 1 XXX TV Paprika N-tv SPORT 2 TV DEKO ZDF Dokukanal Plusz Package (1250) Film+ ARD AXN Viasat Explorer Hallmark ZDF Boomerang TCM Eurosport RTL Cartoon Network blue Hustler Eurosport2 PRO7 Viasat History Sport Klub Extreme Sports SAT1 DSF Rai Uno Eurosport (German) TV5 Monde RealMadrid TV Kabel1 Minimax/Anime+ TVCE Jetix RTL2 Ki-Ka On the broadband side, the company offers a range of three service tiers that are, like other broadband products among the Liberty family, branded with the chello name. Download speeds across the tiers range from a low of 512Kbps to a high of 5Mbps (see Table 6 for a look at the company's broadband products and a look at those of its primary competitors). UPC Hungary provides these broadband Internet access services in 18 Hungarian cities, including Budapest (this service availability is largely predicated on the ability of the network to provide two-way digital services, and we expect the company to continue to roll out broadband services in additional markets going forward). The company also offers a legacy ADSL (asymmetric digital subscriber line) product using a twisted copper pair network in the southeast part of Pest County. We note that about 10% of the company's video cable subscribers receive Internet service (about 56% of total Internet subscribers). On the telephony side, the company offers circuit switched analog telephony over its twisted copper pair network in Pest County through its Monor Telephony Company subsidiary. VoIP telephony service is offered in Budapest and all major cities located within the company's broadband Internet service area. According to the company, about 5% of UPC Hungary's Internet subscribers take analog telephony service and not video service. On the VoIP side, about 9% of UPC Hungary's video cable subscribers take VoIP telephony (about 61% of total telephony subscribers) and 6% of VoIP telephony subscribers take Internet service and not video (see Table 7 for a look at the pricing scheme for the company's VoIP telephony product). We note that VoIP is a major telephony growth driver for UPC Hungary, given that the rate of subscriber decline from Monor is being largely outweighed by the growth in VoIP subscribers. 7 MORGAN JOSEPH & CO. INC.

8 Table 6: Hungary - Broadband Service Provider Pricing (prices in HUF - 1 HUF = USD) UPC Chello Light Chello Classic Chello Plus Monthly Pricing 7,670 11,510 28,790 Special 6mos Pricing 5,750 10,600 16,320 Speeds (downstream/upstream) 512Kbps/128Kbps 2.5Mbps/512Kbps 5.0Mbps/512Kbps Data Limit 5GB 30GB 60GB Magyar Telekom/T-Online ADSL Light ADSL Start ADSL Biztonsag ADSL Csalad ADSL Multimedia Monthly Pricing 3,290 4,900 7,200 9,400 11,900 Speeds (downstream/upstream) 512Kbps/96Kbps 512Kbps/96Kbps 1.0Mbps/128Kbps 1.0Mbps/128Kbps 2.0Mbps/192Kbps Data Limit 10 hours 3GB 3GB NA NA T-Kabel/Kablenet Kabelnet Light Kabelnet Start Kabelnet Biztonsag Kabelnet Csalad Kabelnet Multimedia Monthly Pricing 3,290 4,900 7,200 9,400 11,900 Speeds (downstream/upstream) 512Kbps/96Kbps 512Kbps/96Kbps 1.0Mbps/128Kbps 1.0Mbps/128Kbps 2.0Mbps/192Kbps Data Limit 10 hours 3GB 3GB NA NA HTC ADSL 512K ADSL 1M ADSL 2M ADSL 3M Monthly Pricing 7,670 9,590 13,430 17,270 Speeds (downstream/upstream) 512Kbps/96Kbps 1.0Mbps/128Kbps 2.0Mbps/192Kbps 3.0Mbps/384Kbps Data Limit NA NA NA NA Invitel ADSL 512 ADSL 1024 ADSL 2048 Monthly Pricing 6,490 9,490 12,490 Speeds (downstream/upstream) 512Kbps/96Kbps 1.0Mbps/128Kbps 2.0Mbps/192Kbps Data Limit NA NA NA 8 MORGAN JOSEPH & CO. INC.

9 Table 7: UPC Hungary - Telephone Packages (prices in HUF - 1 HUF = USD) UPC Telefon Monthly Pricing 2,000 Supplementary Mobile Monthly Pricing 1,000 Supplementary Home Monthly Pricing 1,000 Standard Calling Prices (per minute) Fixed Line (Daytime 7am-6pm) On-net 0.00 Fixed Line (Nights and Weekends) On-net 0.00 Fixed Line (Daytime 7am-6pm) Local 7.10 Fixed Line (Nights and Weekends) Local 3.55 Fixed Line (Daytime 7am-6pm) Long-Distance Fixed Line (Nights and Weekends) Long-Distance 7.95 Mobile Line (Daytime 7am-6pm) Mobile Line (Nights and Weekends) Mobile Supplement Calling Prices (per minute) Fixed Line (Daytime 7am-6pm) On-net 0.00 Fixed Line (Nights and Weekends) On-net 0.00 Fixed Line (Daytime 7am-6pm) Local 7.10 Fixed Line (Nights and Weekends) Local 3.55 Fixed Line (Daytime 7am-6pm) Long-Distance Fixed Line (Nights and Weekends) Long-Distance 7.92 Mobile Line (Daytime 7am-6pm) Mobile Line (Nights and Weekends) Home Supplement Calling Prices (per minute) Fixed Line (Daytime 7am-6pm) On-net 0.00 Fixed Line (Nights and Weekends) On-net 0.00 Fixed Line (Daytime 7am-6pm) Local 7.10 Fixed Line (Nights and Weekends) Local 3.55 Fixed Line (Daytime 7am-6pm) Long-Distance Fixed Line (Nights and Weekends) Long-Distance 7.52 Mobile Line (Daytime 7am-6pm) Mobile Line (Nights and Weekends) Incumbent Competition Poland Telekom Poland's (PTTWF.PK - $ OTC) predecessor company, Polska Poczta, Telegraf i Telefon (Polish Post, Telegraph and Telephone), was established in 1947 as the state-owned telecommunications service provider in Poland. The current company was founded in 1991 and began operating as a publicly-owned enterprise in January The shares began full public trading in 1998 with a dual share listing in both Warsaw and London. In 2000, a consortium consisting of France Telecom (FTE - $ NYSE) and Kulczyk Holding SA purchased a 35% share of the company, which they increased to 47.5% in September 2001 and still maintain today. The company's telephony operation delivers fixed-line telephony services, including local calling, domestic long distance calling, international calling, voic , call forwarding/call waiting, and a range of other standard fare telephony services. Telekom Poland began rolling out a new range of tariff plans in 2005 that are based more heavily on fixed monthly costs and not on per minute charges and fees, bringing the company more in line with similar moves undertaken in recent years by other telecommunication service providers worldwide. These plans attracted 0.5mm customers in 1Q06 and 9 MORGAN JOSEPH & CO. INC.

10 now serve about 4.0mm total subscribers. On the broadband side, the company continued to accelerate its ADSL rollout in 2005 and now serves 1.3mm total ADSL subscribers, having installed broadband capabilities in approximately 94% of its total lines. Telekom Poland offers a range of broadband services that deliver download speeds of as low as 128Kbps and as high as 6Mbps with prices as low as PLN97 per month (see Table 2 above for a look at Telekom Poland's broadband offerings and a comparison of these to its competitors). We note that the company's low-end service offerings (Neostrada TP 128, Neostrada TP 256, and Neostrada TP 512) attract far more market share than its high-end service offerings. The company is also one of the largest mobile service operators in the Polish market (total share is approximately 34%) through its PTK Centertel subsidiary, which was established in This business operates a digital network branded under the Orange name and serves about 10.4mm subscribers. We note that the company also has a small number of subscribers taking legacy analog services under the Centertel brand. In addition, Poland Telekom has recently launched full-featured IPTV services under the Videostrada brand name that offers four levels of service and additional premium channels and packages, which we detail in Table 8 below. Table 8: Telekom Poland - Videostrada TP Service Packages (prices in PLN - 1 PLN = 0.32 USD) Starter Package Thematic Package Comfort Package Premium Package Extra Channels per month per month per month per month Cinemax per month AXN per month Mini Mini Ale Kino Ale Kino Reality TV Canal+ TV Biznes Kino Polska per month Zig Zap Eurosport Eurosport TVN Turbo Canal+ Film MTV Mezzo per month Planete Extreme Sports Channel Extreme Sports Channel Hyper HBO MTV 2 TVN 24 Mini Mini Mini Mini Club HBO 2 VH1 Canal+ Package /month TVN Meteo Zig Zap Zig Zap TVN Style Cinemax Trace TV Canal+ EDUSAT Planete Planete Podroze TV AXN Mezzo Canal+ Film TV Biznes TVN 24 TVN 24 TV5 Monde Ale Kino 4funTV Canal+ Sport Trace TV TVN Meteo TVN Meteo Xtra Music KinoPolska TVN GRA Canal+ Sport 2 4funTV EDUSAT EDUSAT TVN Canal+ Sport itv TVN GRA TV Biznes TV Biznes TVN Siedem Canal+ Sport 2 Reality TV HBO Package /month itv MTV MTV Polonia 1 Eurosport TVN Turbo HBO TVN Turbo VH1 VH1 Tele 5 Eurosport 2 Hyper HBO 2 Hyper Trace TV Trace TV Eurosport 2 Extreme Sports Channel Club TVN Style 4funTV 4funTV ESPN Sport ESPN Sport TVN Style Multi Premium Package /month Podroze TV TVN GRA TVN GRA National Geographic Channel Mini Mini Podroze TV Canal+ TV5 Monde itv itv MTV 2 Zig Zap TV5 Monde Canal+ Film Xtra Music Reality TV Planete Xtra Music Canal+ Sport TVN TVN Turbo National Geographic Channel TVN Canal+ Sport 2 TVN Siedem Hyper TVN 24 TVN Siedem HBO Polonia 1 Club TVN Meteo Polonia 1 HBO 2 Tele 5 TVN Style EDUSAT Tele 5 Cinemax Podroze TV TV5 Monde Xtra Music TVN TVN Siedem Polonia 1 Tele 5 Hungary Matáv Hungarian Telecommunications Company Ltd. (MTA - $ NYSE) was established on December 31, 1991, following the government's decision to begin the privatization process of the telecommunications industry. In late December 1993, MagyarCom, a consortium of Deutsche Telekom (DT - $ NYSE) and Ameritech International (eventually, Ameritech was purchased by SBC, which was subsequently purchased by AT&T [T - $ NYSE]), acquired 30.1% of the company for $875.0mm. In November 1997, the company listed 26.31% of its outstanding shares on the NYSE and, under an agreement reached in July 2000, Deutsche Telekom acquired SBC's 50% ownership in MagyarCom. This gave Deutsche Telekom 59.52% ownership in Matav. The company joined the T-Mobile worldwide brand in May 2004 and, one year later, the Matav Group changed its name to Magyar Telekom Group. Overall, the company serves 2.0mm fixed telephony lines throughout the country (there are several smaller providers that provide incumbent service in some small areas of Hungary) and about 4.2mm wireless phone subscribers. Beyond its telephony operations, the company has approximately 370,362 subscribers to its high-speed Internet via ADSL services, 30,971 subscribers to its high-speed Internet via cable services, and 406,682 subscribers to its cable television services. 10 MORGAN JOSEPH & CO. INC.

11 Besides being the nation's incumbent telephony service provider, Magyar Telekom's T-Kabel subsidiary is also the second largest cable television operator in Hungary and UPC Hungary's largest competitor. On the video side, this subsidiary provides three levels of service including a low-end seven channel tier, a mid-level tier, and a high-end 45 channel tier. The company also offers subscribers a wide range of a-la-carte premium services, including HBO, Cinemax, sports, music, adult, and documentary (see Table 9 below for a look at T-Kabel's television service packages). We add that the company is also looking to deploy an IPTV product in its non-cable markets later this year, which would augment its current cable services. Table 9: T-Kabel - Cable TV Service Packages (prices in HUF - 1 HUF = USD) Package 1 Package per month 2,850 per month Package 3 4,640 per month Popcorn Packages Extra Packages Wave Package fix.tv fix.tv fix.tv Fonix TV HBO Pak 1,300 per month Zenit TV/Helyi TV Zenit TV/Helyi TV Zenit TV/Helyi TV tv2 2,900 per month MTV Base Deutsche Welle/Helyi TV 1 Deutsche Welle/Helyi TV 1 Deutsche Welle/Helyi TV 1 RTL Klub HBO MTV 2 T-Kábel Információs Csatorna T-Kábel Információs Csatorna T-Kábel Információs Csatorna Viasat3 HBO 2 MTV Hits Duna TV Duna TV Duna TV Travel Channel Cinemax Pak Extreme Sports Channel m2 m2 m2 Discovery Channel 2,600 per month Trace TV m1 m1 m1 VH1 Cinemax ATV ATV Romantica/Blue Hustler Cinemax 2 Hot Package Eurosport Eurosport Mezzo HBO MaxPak 1,900 per month Budapest TV Budapest TV Sport Klub 3,900 per month XXL film+ film+ Minimax HBO Hustler TV Hálózat TV Hálózat TV Spektrum HBO 2 XXXtreme SAT 1 SAT 1 Cartoon Network/TCM Cinemax Chasse et Peche BBC Prime BBC Prime National Geographic Channel Cinemax 3 AB Moteurs Sport1 Sport1 MTV Europe Motors TV Hír TV Hír TV Hallmark Champion Package RTL RTL Club 1,300 per month Globe Package Filmmúzeum Filmmúzeum COOL Sport Klub + 1,990 per month VIVA VIVA Jetix Chasse et Peche Discovery Travel & Living CNN International CNN International Sport2 Eurosport 2 Discovery Science Channel TV5 TV5 Rai Uno Sailing Channel Discovery Civilization BBC World BBC World Echo TV ESPN Classic TCM Fonix TV TV Paprika Extreme Sports Channel Wine TV tv2 AB Moteurs Performance Channel RTL Klub Motors TV Viasat3 On the broadband Internet side, the company provides ADSL services through its T-Com subsidiary and cable modem-based services through its T-Kabel subsidiary. The services provided by cable modem and ADSL are virtually identical both in terms of price and in terms of service level (see Table 6 above for a look at the company's high-speed Internet services and a comparison to competitors in the Hungarian market). On the fixed telephony side, the company remains the country's incumbent voice provider. We note that Magyar Telecom also provides voice services through its cable business using VoIP technologies. The company's fixed telephony products are largely consistent with any telephony product provided by a nation's incumbent service provider and are available essentially nationwide due to standard universal service provisions within Hungarian telecommunications law. The company provides local, domestic and international long distance telephony services and the standard related services such as voice mail, caller ID, call waiting, etc. Other Competition Poland Poland represents UPC's most competitive and highly fragmented cable market, with over 500 operators providing largely analog service throughout the country. The country's six largest operators, including Vectra (approximately 620,000 subscribers), Multimedia Polska (about 450,000 subscribers), and Aster City Cable (over 365,000 cable subscribers), control about 60% of the market while the nearly 500 other operators control less than 40% of the market. Services provided by the six largest operators are largely similar to those provided by UPC, given the competitive nature of this market. Multimedia Polska was the first operator in Poland to offer a bundled triple play product using its brand multipak. The company is the result of a merger between telecommunications service provider TeleNet Polska and cable operator Multimedia Polska. The company serves 12 cities throughout Poland, passing 659,000 homes (about 80% of which are passed by a 11 MORGAN JOSEPH & CO. INC.

12 two-way high capacity network). The company has about 450,000 cable subscribers, about 115,000 Internet subscribers, about 120,000 telephony lines installed, and about 32,000 customers taking the multipak product (see Table 2 for a look at the company's high-speed Internet services). Aster City Cable is another major cable operator that primarily serves Krakow and Skawina. The company's customers are generally found in multi-dwelling units and its network passes approximately 135,000 apartments in Krakow with a hybrid fiber and coaxial network that serves over 365,000 cable television subscribers (the company also has over 70,000 Internet subscribers and 13,000 VoIP subscribers). We have provided a look at Aster City's cable television services (seen below in Table 10) and a look at the company's Internet offerings (seen above in Table 2). Table 10: Aster City Cable - Cable TV Service Pricing (prices in PLN - 1 PLN = 0.32 USD) Antenna (lifeline) Basic Package (analog) basicplus (digital) Extra Packages per month per month per month (digital) TVP 1 TVP 1 TV 4 Jetix TVP 1 HBO Package TVP 2 TVP 2 TV Puls Mini Mini TVP per month TVP 3 TVP 3 itv Discovery Civilization TVP 3 HBO TVN TVN Podroze TV Discovery Science Polsat HBO 2 Polsat Polsat Mango TV Discovery Travel & Living TVN TV Polonia TVN24 Aster Info Zone Reality TVN 24 Cinemax Package TV 4 TV Biznes TV 5 Ale Kino Zone Europa per month TV Puls Polsat Sport M6 Zone Romantica Discovery Channel Cinemax itv TVN Turbo Deutsche Welle Kino Polska Planete Cinemax 2 Podroze TV Cartoon Network/TCM RTL MTV Animal Planet Mango TV Discovery Channel Sat 1 VH1 Polska Viasat History Canal+ Aster Info Animal Planet RTR Planeta MTV Base Cartoon Network/TCM per month Zone Europa Channel Russia Mezzo Jetix Play Canal+ TVP Kultura TV Trwam Viva Polska Zone Club Canal+ Film Fashion TV TVN Meteo Viva Plus Fashion TV Canal+ Sport BBC Prime BBC World TVN Style BBC Prime Polsat 2 Euronews TVN 7 Polsat Sport Tele 5 CNN PRO7 TVN Turbo TV Polonia Eurosport Polsat Zdrowie I Uroda ESPN Classic Motors TV MTV 2 MTV Hits TVP Kultura TV Biznes Source: Company Reports There are fewer alternative service providers in the Polish market, the largest of which is Tele2 (TLTZF.PK - $ OTC). At this time, Tele2 is only competitive in the Polish market in terms of telephony. The company's Internet product is currently based on dial-up service and does not compete closely with UPC's high-speed broadband Internet service. On the telephony side, the company offers a comparative product to the incumbent's service and one that does compete with the telephony product that UPC offers to its subscribers. Hungary In the Hungarian market, several billion dollars have been spent in the last dozen years to upgrade the telecommunications networks. Invitel is the second largest alternative fixed-line service provider in Hungary and a de-facto incumbent provider in several areas of the country where it historically held exclusive licenses to cover approximately 1.4mm homes or about 15% of the total population. The company has a backbone in Budapest and 16 other major urban areas throughout Hungary and sells its alternative services to customers throughout the country using its core network and the local access lines of the incumbent service provider. Today, the company provides fixed-line telephony services to 104,967 subscribers and broadband Internet access services to 58,095 subscribers (see Table 6 above for a look at the company's broadband service offering). Other alternative fixed-line service providers in Hungary include Hungarian Telephone & Cable Corporation and Tele2. HTC is a publicly traded service provider (HTC - $ AMEX) that is majority owned by 12 MORGAN JOSEPH & CO. INC.

13 service provider TDC. The company provides, primarily through its Hungarotel and PanTel business segments, telephony services and high-speed ADSL services over a total of 187,900 access lines in its operating areas, which include approximately 279,600 residences and approximately 38,500 business and government facilities (see Table 6 above for a look at the company's broadband service offerings). Tele2, like in Poland, only offers dial-up Internet services, which are not competitive with the high-speed broadband Internet access that UPC offers in its markets. Tele2 does provide alternative phone services that compete with UPC's phone product and the incumbent's phone services as well. On the video side, Antenna Hungaria provides mostly analog services and pilot DTT (digital terrestrial television) services on a nationwide basis (Antenna Hungaria recently renewed its analog MMDS [multichannel multipoint distribution service] license to include digital services). Antenna Hungaria provides analog and digital broadcasts throughout the country, encompassing the nation's public and government broadcasts as well as radio transmissions. It recently introduced its newest service, Antenna Digital, in December 2005, which offers digital quality television services to subscribers in Budapest. Subscribers to Antenna Digital can receive up to 100 digital channels offered in a wide range of programming packages. These packages include the Starting Package, which offers the most popular broadcast channels (and options for premium channels like HBO, HBO2, Cinemax and Cinemax 2), the Basic Package, which offers up to 40 channels and four other thematic packages (Film, Youth, Active, and Culture), the Family Package, which offers over 60 channels and three additional thematic packages (Active, Information, and Music), and the Extra Package, which offers up to 100 channels of programming (see Table 11 below for a look at the company's programming packages). Beyond Antenna Hungaria, Romanian provider DigiTV launched DTH services in February 2006 and, as of the end of June, had nearly 120,000 subscribers (see Table 12 below for a look at its programming offering). Table 11: Antenna Hungaria - TV Service Packages (prices in HUF - 1 HUF = USD) Family Package Starter Package Basic Package Basic Package Extras Family Package Extras Extra Package 6,790 per month 590 per month 2,590 per month 4,590 per month Film Package Active CNN m1 990 per month m1 Pro7 1,490 per month Animal Planet MCM Top m1 m2 AXN m2 VOX AB Moteurs/XXL ARTE Motor/Hustler m2 RTL Klub Soundtrack Channel RTL Klub BBC Prime Motors/Hustler Pro7 MTV2 Duna TV TV2 4Story TV2 RAI UNO ESPN Classic Sport Minimax/A+ Fashion TV fix.tv Viasat3 Film+ Viasat3 CNN Cherry Music TV/Super1 CNN Filmmuzeum SAT1 Hir TV Filmmuzeum Hir TV Pax TV Sailing Channel/Sexview BP TV TVE International Autonomia TV Magyar ATV Magyar ATV Euronews Extreme Sports Channel Boomerang VH1 Domino TV Halozat TV Youth Package Halozat TV TV Deko Video Italia/Spice Platinum RTL MTV Base Information Channel fix.tv 790 per month fix.tv Domino TV Pax TV Magyar ATV Cool Baby TV Cool National Geographic Channel Information SAT1 AB Moteurs/XXL Spektrum Minimax/A+ Spektrum Jetix 790 per month Cool VH1 Classic VIVA Boomerang VIVA Mezzo Discovery Civilization ESPN Classic Sport m1 Cartoon Network/TCM Nickelodeon Sport1 Baby TV Discovery Science Sailing Channel/Sexview m2 Eurosport Jetix Sport2 MTV Europe Discovery Travel Euronews Domino TV Duna TV Eurosport Europa Europa Viasat History TV5 Europe National Geographic Channel Domino TV Active Package Duna TV RTL Wine TV Sport1 TV Paprika Vital TV 1,490 per month Minimax/A+ TV Paprika Sport2 Echo TV BP TV AB Moteurs/XXL Boomerang AXN Music Halozat TV AXN Romantica Motors/Hustler Irisz/Club Nickelodeon 590 per month Viasat3 RAI UNO TVE International ESPN Classic Sport Autonomia TV Discovery Performance Channel Viasat Explorer Nickelodeon SAT1 Cherry Music TV/Super1 Viatal TV Reality TV MTV Base Viasat History Duna TV TV5 Europe Sailing Channel/Sexview Filmmuzeum Travel Channel MCM Top Discovery Cartoon Network/TCM CNBC Extreme Sports Channel Viasat Explorer Hallmark Sountrack Channel Discovery Civilization Hallmark Fashion TV Video Italia/Spice Platinum Film+ Cartoon Network/TCM VH1 Classic Discovery Science TV2 Echo TV BP TV Animal Planet MTV Hits Discovery Travel Reality TV Pro7 Culture Package Romantica ARTE MTV2 Autonomia TV RTL Klub VOX 990 per month TVE International VH1 Vital TV Cherry Music TV/Super1 BBC Prime ARTE SAT1 4Story Jetix Video Italia/Spice Platinum RAI UNO Mezzo TV5 Europe SportKlub Mezzo Eurosport CNN Viasat Explorer CNBC AXN Sci-Fi VOX Film+ RTL Viasat History Fashion TV Information Channel BBC Prime 4Story Autonomia TV Performance Channel Echo TV Baby TV Irisz/Club AXN Sci-Fi Wine TV Romantica VIVA Information Channel TV Paprika MTV Europe MTV Hits fix.tv TV Deko CNBC Soundtrack Channel Europa Europa Extreme Sports Channel Spektrum AXN Sci-FI Performance Channel Information Channel 13 MORGAN JOSEPH & CO. 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14 Table 12: DigiTV - Satellite TV Service Pricing (prices in HUF - 1 HUF = USD) Base Package 2700 per month Extra Packages HBO Package DunaTV Minimax Hir TV 1,800 per month Sport Klub Hungary Jetix Viasat Explorer HBO Cartoon Network (Central Europe) MTV Europe Eurosport HBO 2 VH1 Europe Viva TV (Hungary) Hallmark Channel East Europe ATV Travel Channel Reality TV Europe Cinemax Package MTV 1 CNN Discovery Channel Europe 1,200 per month MTV 2 RTL Klub Animal Planet Europe Cinemax 4! Story TV TV2 Discovery Civilisation Romantica Viasat 3 Discovery Science HBO MaxPak Spektrum TV Hungary Cool TV Discovery Travel & Adventure 2,400 per month Sport 1 Hungary Film + Hungary Viasat History HBO Sport 2 Hungary AXN Central Europe Private Spice HBO 3 Cinemax Source: Company Reports Satellite Competition Poland There are two primary pay satellite providers in Poland, Cyfra+ and Cyfrowy Polsat. In addition, there are reports that the ITI Group, Poland's largest commercial broadcaster and the parent company of TVN, is planning to launch its own satellite service. We note that Cyfra+ is a wholly-owned subsidiary of Canal+ Cyfrowy (V - $ NYSE), which is itself 25% owned by Liberty Global's chellomedia subsidiary. Canal+ Cyfrowy owns not only Cyfra+ but also the domestic versions of the Canal+ programming and a number of thematic channels. Cyfra+ was launched in 1998 and now has over 800,000 subscribers as of March 31, The company offers access to four different tiers of service: these tiers range from a Starter Package, which features 34 channels, to its high-end Premium Package, which includes access to 66 channels (see Table 13 below for a look at the company's offering). Cyfra+ also offers a number of premium packages available to subscribers on an a-la-carte basis. We also note that via the HotBird satellite, subscribers can access a wide range of free-to-air programming, which supplements their paid viewing offering. 14 MORGAN JOSEPH & CO. INC.

15 Table 13: Cyfra+ - Satellite TV Service Packages (prices in PLN - 1 PLN = 0.32 USD) Starter Package Thematic Package Comfort Package Premium Package Extra Channels/Packages per month per month per month per month A La Carte Channels Super Premium TVP1 TVP1 TVP1 Jetix TVP1 ZigZap Kino Polska per month per month TVP2 TVP2 TVP2 National Geographic Channel TVP2 Cartoon Network Mezzo per month Canal+ TVP3 TVP3 TVP3 Animal Planet TVP3 TCM AXN per month Canal+ Film TVP Polonia TVP Polonia TVP Polonia Planete TVP Polonia Jetix Cinemax per month Canal+ Sport TVN TVN TVN Discovery Channel TVN National Geographic Channel Canal+ Sport 2 TVN24 TVN24 TVN24 Polonia 1 TVN24 Animal Planet Discovery Package HBO TVN 7 TVN 7 TVN 7 Mango24 TVN 7 Planete 8.00 per month HBO 2 TV 4 TV 4 TV 4 Podroze TV TV 4 Discovery Channel Discovery Travel & Living Kino Polska Tele 5 Tele 5 Tele 5 Fashion TV Tele 5 Discovery Travel & Living Discovery Science Telewizja Puls Telewizja Puls Telewizja Puls ITV Telewizja Puls Discovery Science Discovery Civilization Mega Premium TVP Kultura TVP Kultura TVP Kultura TVN GRA TVP Kultura Discovery Civilization per month TVN Turbo Ale Kino Ale Kino EDUSAT Canal+ Sport 2 Polonia 1 Canal+ Canal+ TVN Style Hallmark Hallmark MTV Polska Canal+ Mango per month Canal+ Film MiniMini Eurosport BBC Prime MTV2 Canal+ Film Podroze TV Canal+ Canal+ Sport Hyper Extreme Sports Channel Eurosport VH1 Canal+ Sport Fashion TV Canal+ Film Canal+ Sport 2 ZigZap TVN Turbo Eurosport 2 Trace TV HBO ITV Canal+ Sport HBO Planete TVN Style Extreme Sports Channel VIVA Polska HBO 2 TVN GRA Canal+ Sport 2 HBO 2 Polonia 1 Zone Club ESPN Classic Sport 4Fun.tv Ale Kino EDUSAT Kino Polska Mango24 Zone Reality TVN Turbo TVN Meteo Kino Polska MTV Polska Relaxxx Cinemax Podroze TV MiniMini TVN Style TV Biznes Hallmark MTV per month Fashion TV Hyper Zone Club CNN BBC Prime VH1 XXL HBO ITV ZigZap Zone Reality BBC World AXN Trace TV AB Moteurs per month TVN GRA Planete MiniMini CNBC Europe Cinemax VIVA Polska Chasse et Peche HBO EDUSAT Discovery Channel Hyper TV5 Eurosport 4Fun.tv HBO 2 Trace TV Polonia 1 ZigZap Kultura+ Eurosport 2 Mezzo VIVA Polska Mango24 Cartoon Network Cyfra+ Extreme Sports Channel TVN Meteo 4Fun.tv Podroze TV TCM ESPN Classic Sport TV Biznes TVN Meteo Fashion TV TVN Turbo CNN TV Biznes ITV TVN Style BBC World BBC World TVN GRA Zone Club CNBC Europe CNBC Europe EDUSAT Zone Reality TV5 TV5 MTV Polska MiniMini Kultura+ Kultura+ VH1 Hyper Cyfra+ Cyfra+ Trace TV VIVA Polska 4Fun.tv TVN Meteo TV Biznes CNN BBC World CNBC Europe TV5 Kultura+ Cyfra+ Source: Company Reports Cyfrowy Polsat is owned by Telewizja Polsat, a Polish television broadcaster owned by Zygmunt Solorza. The company, as of the end of March 2006, had nearly 800,000 subscribers to its digital services. Unlike Cyfra+, the service offerings from Cyfrowy Polsat are much more limited, and cover one primary "Family Package" and a number of other extra premium programming items, which can be added on an a-la-carte basis (see Table 14 below for a look at the company's offerings). Table 14: Cyfrowy Polsat - Satellite TV Service Packages (prices in PLN - 1 PLN = 0.32 USD) Family Package per month Kids Extra Packages Cinemax Polsat 4Fun.tv 5.20 per month per month TVN TCM Boomerang Cinemax TVP 1 Travel Channel Jetix Play Cinemax 2 TVP 2 TVN Style TV 4 TVN Meteo Film Sports Polsat Sport TVN Turbo 5.90 per month 8.90 per month TV 4 CNN AXN Polsat Sport Extra TVN24 Polonia 1 Europa Europa ESPN Classic Sport TVN Siedem Zdrowie I Uroda Kino Polska Extreme Sports Channel Discovery Channel TV Puls Discovery Science Polsat 2 Music Playboy TV per month Discovery Civilization Reality TV 4.90 per month Animal Planet Club MTV Polska Cartoon Network TVP Polonia VH1 Jetix TVP Kultura VIVA Polska Source: Company Reports 15 MORGAN JOSEPH & CO. INC.

16 Hungary Much of the major satellite competition in Hungary has already been mentioned above. While it does not compete with UPC's cable business, UPC does offer a nationwide DTH satellite service that reaches both the areas covered by its cable network and those it does not currently service with cable television. Antenna Hungaria also offers some limited satellite services in addition to its pilot DTT program. Regulatory Environment Poland The Polish telecommunications market has been largely liberalized since that process began back in 2001 following the privatization of the industry beginning in This has created a fairly healthy industry with solid competitors across the board. Liberalization of the market began with telephony, where individual licensing of domestic local, domestic long distance, fixed to mobile, and international calling began in Despite this shift in the market, the expense of deploying the infrastructure needed to provide service over an unbundled loop has kept the local market highly fragmented, leaving Telekom Poland with over 80% share of the market despite competitive efforts. As a result, the local market remains highly fragmented and full of very small competitors. The one major difference in the telephony market is international long distance, where, again according to Telekom Poland, the incumbent has only about 64% of the market. Local loop unbundling began in 2004 but the terms of access to Telekom Poland's infrastructure have kept unbundlers away from the market. Much like the local access market, Internet access is highly fragmented given the additional avenues of access provided to subscribers, including cable access. The Polish market continues to evolve and recent decisions of the main regulator are moving towards improved unbundling and bitstream access terms, which should help to increase the rollout of unbundled services and further competition in the Polish market. In terms of major outstanding regulatory issues, the Polish market is relatively stable and we see few issues that could impact UPC's operations in the near- and mid-term. Hungary The Hungarian government began to liberalize the telecommunications market with the passage of its first major act in 2001, which laid the foundation for making it easier for competitors to enter the market and provide some initial competition with the incumbent provider. In 2003, the government enacted Act C of 2003 on Electronic Communications, its second major telecommunications act, which laid out similar market definitions to the ones used in most other European Union nations. In terms of UPC's involvement in the Hungarian market, the company is currently working with regulators following the determination that its Monor Telephone business was found to have significant market positioning in the call termination, origination, and ADSL markets. While this determination has lead to a number of requirements that directly affect this business' operations (interconnection, access and use of network facilities, non-discrimination, transparency, accounting separation, price control), we believe UPC is fully complying with these requirements and has been able to deal sufficiently with these requirements. In our view, the most onerous of these requirements is the need on UPC's part to deliver wholesale ADSL at a discount to its retail prices. Beyond these wholesale areas, Monor has SMP (significant market power) in some retail markets, which has capped the company's available price increases to the rise in Hungarian CPI. 16 MORGAN JOSEPH & CO. INC.