After the government began privatisation in the 1990s Turkey’s telecommunications network attracted significant foreign direct investment and underwent rapid modernisation. The country’s mobile network is now comparable to that of North America and Western Europe in terms of penetration and services, with fixed-line services already reaching a majority of the population. While government statistics indicate that the fixed-line market may have peaked, the mobile sector still holds great potential. The increasing popularity of smartphones, speedy mobile broadband expansion, and a strong push for long-term evolution (LTE) development should bolster performance in 2013.
Market Matters
After a period of growth between 2001 and 2007, mobile subscriptions dipped slightly as a result of the global financial crisis. Recovery in 2011 and 2012 brought Turkey’s market above pre-2009 levels, and further growth is anticipated in 2013. Turkey’s four major telecoms providers – Türk Telekom, Turkcell, Vodafone and Avea – experienced strong revenue increases in 2012. State-owned Türk Telekom continues to command a majority of the shrinking fixed-line market, but the mobile market is dynamic and poised for further expansion despite high levels of penetration. Though the telecoms sector is hindered by heavy taxes, an increasing number of young Turks (a rapidly expanding group) are embracing new technologies and mobile broadband services – developments that are in line with the government’s ambitious Vision 2023 plan, which seeks exponential growth in the telecoms sector over the next decade.
Fixed Line
The Turkish telecoms sector underwent its first modern reforms in 1995, when the government split its Post, Telegraph and Telephone monopoly into separate divisions. Telephone service provision was handed over to the newly created Türk Telekom, the country’s first individual provider, which still holds the majority of the fixed-service market. In April 1998, a $500m 25-year global system for mobile communications (GSM) licensing agreement with the Ministry of Transportation allowed the country’s first mobile providers, Turkcell and Telsim, to expand their operations in the country’s fledgling mobile market.
Regulation
Türk Telekom maintained its monopoly until a liquidity crisis and stock market crash shook the country in 2000 and 2001. In the wake of these dual crises, the government took further steps towards liberalisation by passing new laws regulating the sector, which were on par with telecoms developments within the EU. The Information and Communication Technologies Authority (ICTA) was created in 2000 to act as the country’s telecoms and internet regulator, working in partnership with the Ministry of Transportation in overseeing growth and private development.
Important laws pertaining to the Turkish telecoms industry include the Telegram and Telephone Law No. 406 (80-year-old legislation amended to become the Telecommunications Law in 2008), the Electronic Communication Law No. 5809, the Wireless Law No. 2813 and the Ministry of Transportation Law No. 2048.
After the ICTA’s creation, the government set a 2004 deadline to begin liberalisation within the fixed-line market. Saudi Arabia’s Oger Group bought a 55% stake in Türk Telekom in 2005, opening the company to private market forces. Today, the Turkish government maintains 30% control of Türk Telekom, while 15% of the company has been publically listed since 2008, and plans for further privatisation are in the works.
There is no doubt that mobile technologies are moving to replace fixed lines in Turkey. Fixed-line subscribership has been in slow but steady decline since the mobile market began to flourish. Between 2005 and 2011, the number of fixed-line subscribers fell from 18.98m to 15.47m and overall penetration dropped from 26% to 21%, according to data from ICTA. The trend continued into 2012, when fixed-line penetration decreased to 13.9m subscribers, an 18.3% penetration rate. The ICTA suggested that fixed lines likely reach the majority of the population, due to Turkey’s average household size of 3.76. The fixed-line market saw a total of 19.4bn minutes in call volumes in 2012, a decline from 21.8bn minutes in 2011.
Legacy Operator
Having inherited well-developed infrastructure, Türk Telekom has remained the country’s major fixed-line player since privatisation. Indeed, the firm has maintained a stable market share of about 90% since the 1990s, a number that is not expected to change dramatically in 2013. As the company moves to expand its fibre-optic network, pre-existing telephone lines will add substantial value to its portfolio. In March 2013, Turkish newspaper Sabah announced that Türk Telekom could generate as much as $10bn in revenues by selling off unused copper wire currently in storage, a move the company is set to make in 2013 as it shifts to fibre-optic development.
Additionally, promotional campaigns bundling fixed voice minutes with calls to mobile phones (along with long-distance savings packages) enabled the company to retain considerable fixed-line revenues. Despite decreased subscribership, the Türk Telekom group delivered a strong performance in 2012, with 6.4% growth and record revenues of TL27.7bn (€11.96bn). Although this was largely driven by growth in the company’s mobile provider Avea, broadband revenues through fixed-line networks increased by 6% in 2012.
Mobile Segment
Turkey’s mobile market offers significant potential, with much room to grow in terms of penetration rates and subscribership. Turkey leads all other European countries for mobile phone use, with 299 minutes per person per month on average, according to figures from the Ministry of Transport, Maritime Affairs and Communications. Turkey has also shown itself to be a regional leader in wireless data usage. As Turkey’s young population continues to embrace wireless technologies, adoption of new mobile broadband platforms and applications is high.
Turkey’s mobile market grew significantly between 2001 and 2007, with subscriptions tripling from 19.5m to 61.9m and peaking at 65.8m subscribers in 2008, before suffering the effects of the global financial crisis. Since then, steady recovery has brought mobile subscribership above pre-crisis levels. The mobile industry experienced 10% growth in 2012, according to ICTA’s president, Tayfun Acarer, and is expected to see the same level in 2013. Mobile subscribership hit 67.7m people in 2012, and mobile penetration rates now stand at 89.5% within the country, compared to 85% in 2010, according to ICTA data. While this figure is lower than the US and much of Europe, Turkey’s mobile penetration rate exceeds 100% when the 0-9-year-old population is excluded from statistics. In 2011 research firm Market Research forecast Turkey’s mobile subscribers to grow at a compound annual rate of 8% from 2011-14, with the country’s mobile penetration rate exceeding 108% by the end of 2014.
Mobile Providers
The mobile market is controlled by three main providers – Turkcell, Vodafone and Avea. Turkcell was created in 1994, and joined Telsim as the country’s first two mobile providers, when both were issued 25-year GSM licensing agreements in 1998. Avea was formed in 2004 after a merger between Aycell, Türk Telekom’s GSM operator, and İş-TİM, a partnership between İş Bankası Group and TİM, the Turkey Exporters Assembly. Today Türk Telekom holds an 81.4% interest in Avea, with the remaining belonging to İş Bankas›. Telsim was acquired in 2006 by Vodafone, the world’s second-largest mobile operator, for $4.55bn, and re-branded under the Vodafone name in 2007.
Turkcell boasts 35.2m subscribers and a 51.9% market share as of the fourth quarter of 2012, making it the largest mobile operator in Turkey. However, its market share has been declining in recent years. In 2005 Turkcell’s held 61.9% of the market, dropping by 10% over five years as Vodafone and Avea entered the picture. A decreasing mobile market share has not translated into losses, however. The group added 590,000 new subscribers in Turkey in 2012, and average monthly minutes of usage per subscriber reached 243.3 in 2012, a 13.8% increase from the previous year. Indeed, in 2012 the company’s revenues rose by 12% to TL10.5bn (€4.53bn), with voice revenues growing by 6% and mobile broadband revenues increasing by 44%.
The company’s 2013 results could be affected by a ruling from the Council of State in February 2013 to render a stay of execution with regards to a TL92m (€39.73m) fine imposed on Turkcell in 2011 by the Turkish Competition Authority. At the time the authority had judged that the firm had abused its dominant position and used unfair practices when dealing with its distributors and dealers. At the time, it was the largest fine ever imposed on a company in Turkey.
Vodafone, Turkey’s second-largest operator, commanded a 28.17% market share as of fourth-quarter 2012, according to ICTA data. A subsidiary of UK-based Vodafone, the company began operations with a market share less than half the size of Turkcell’s, but has since grown it from the 21.3% it held in 2006. It announced its first operating profit in four years at the fiscal year ending March 2012, earning TL3.5m (€1.5m) after a loss of TL174m (€63.47m) the previous year. The firm now has 18.78m subscribers in Turkey.
Avea has seen strong success since entering the market in 2004. The company holds a 19.93% market share as of the fourth quarter of 2012, a slight rise from 19.3% in 2011, and now has 13.5m subscribers, adding 730,000 in 2012. Revenues in 2012 increased a record 13% year-on-year (y-o-y) to TL3.5bn (€1.51bn), making Avea the fastest-growing mobile operator in Turkey in terms of revenue. Strong mobile data growth was the key profit driver, according to company statistics, with data revenues growing by a market-leading79%.
Shake Up
Mobile virtual network operator (MVNO) development could shake up the market in 2013. Virgin Mobile announced in September 2012 that it is in discussions with Turkcell to become a MVNO in Turkey, meaning the company would offer mobile services through Turkcell’s network. The MVNO market has been hindered by double-taxation legislation (Turkey takes 15% tax on gross sales from both mobile operators and their MVNO partners), and Virgin has yet to file an application to launch as an MVNO, but the possibility of another operator entering the market could have positive implications for price-conscious subscribers.
Smartphone Revolution
High taxes and prices have not quelled the feverish demand for smartphones in Turkey. The rapid expansion of 3G infrastructure and services, which began in 2008, has helped boost smartphone popularity: Binali Yıldırım, the minster of economy, announced in December 2012 that 59% of mobile phone subscribers use their handsets to access the internet, compared to 30% in Europe. In 2012 there were around 40.3m 3G subscribers in Turkey, according to ICTA data, with some 9.86m mobile users subscribing to mobile broadband services, representing y-o-y growth of 141.7%. These numbers are likely to rise as the country moves towards building a 4G network by 2016.
Mobile marketing company Brandtone reports that smartphone penetration in Turkey has doubled since 2010, though it remains relatively low at 20%. Growth is primarily being driven by the country’s youth population, including university students who access affordable smartphones and data packages to facilitate their social interactions. Indeed smartphone penetration has reached 38% among the student demographic in Turkey, according to Brandtone.
Innovation, Investment, Expansion
The advent of smartphones, along with 3G and 4G network expansion, has created an intensely competitive environment among Turkey’s major mobile operators. Under the government’s ambitious Vision 2023 economic plan, Turkey’s ICT sector is planned to continue substantial growth over the next decade. In line with Vision 2023’s objectives to increase internet penetration, broadband subscribership and e-service activity, the government has been pushing for increased research and development (R&D) activities in Turkey, especially in the mobile sector. At the same time, Turkey’s big three mobile providers are moving quickly towards developing the latest in mobile technologies, investing heavily in R&D and helping expand the country’s telecommunications infrastructure.
ICTA data shows that investment among the top three mobile providers grew from TL3.37bn (€1.46bn) per year in 2008 to TL3.7bn (€1.6bn) in 2012, peaking in 2009 with TL5.8bn (€2.5bn) in overall investment. The market has a way to go before it returns to 2009 investment levels, and Turkcell remains the country’s largest mobile investor, with TL947m (€409m) in investments in 2012, compared to Avea’s TL765m (€330m) and Vodafone’s TL588m (€254m).
Brand New Phone
Intense competition has spurred aggressive investments in R&D and infrastructure in Turkey’s mobile market. Turkcell took the initiative to design its own smartphones starting in 2010, including the T10, T11 and T20, all of which run Google’s Android mobile operating system. The T10, the company’s inaugural offering, became the number-one Android smartphone in the country in the first five weeks after it was introduced, and the phone’s data plans became an important revenue stream for Turkcell.
In February 2013 Turkcell moved to capitalise further on its smartphone successes when it announced the development of Turkey’s first locally designed smartphone, named “Gebze” for the city in which Turkcell’s R&D centre is located. The product of Turkish designers and engineers, Gebze is targeted for export, initially to other countries in the region. The phone will be equipped with distinctive features such as an interface unique to Turkcell, hardware developed based on the latest technologies and tailored for the needs of Turkish customers, as well as rich application content. It is slated for release by the end of 2013.
Avea opened the country’s first government-certified R&D facility in 2010, with the goal of developing technologies that will differentiate the company from its competitors. AveaLabs Customer Experience Centre opened to the public in February 2012, showcasing the company’s developments in online bill payment, e-government services, smart home services, digital publishing, handover technology, and health care apps.
Vodafone has spent less than Turkcell and Avea on R&D since 2008, but now plans to move to the forefront of innovation. In February 2012 Vodafone CEO Vittorio Colao said the company’s operations in Turkey leads the company in the new products and services category. He further announced plans to roll out near-field communications technology to launch Vodafone’s own mobile payment system. The company is currently working in partnership with Visa to offer its own mobile wallet, and Oksijen, (Vodafone Turkey’s R&D arm, acquired in 2000) is designing software solutions that will be used in the domestic market as well as exported to all Vodafone networks internationally.
Call Centers
THE call centre segment, which grew at 20% annually in 2010, could also help telecoms providers raise their value. Vodafone opened a call centre in 2011 in Samsun in the Black Sea Region, Avea has its own call centre in Izmir on the West Coast, and Turkcell operates an Istanbul-based centre.
Taxes
Despite its success, Turkey’s mobile market has the highest industry tax burden in the world, a major factor inhibiting its growth. The country’s Special Communications Tax (SCT) was introduced as a temporary tax imposed in 1999 following earthquakes that struck cities in the Marmara and Black Sea regions, but was never abolished. The tax imposed a 25% levy on “all types of installation, transfer, transfer and telecommunications services given by mobile phone operators.” Added to an 18% value-added tax applied to mobile services, the SCT created an effective tax rate of 43% for mobile communications companies and their customers.
Although a reduced rate of 5% was rolled out for data usage in 2009, mobile taxation in Turkey remains prohibitively high. Handsets are subject to heavy taxation, including a Special Consumption Tax of 25% levied on the cost, insurance and freight price for each imported handset, and a 6% tax that benefits the Turkish Radio Television Foundation. A subscription charge of TL37 (€16) is also in effect, as well as a wireless licence fee of TL14.56 (€6.29) assessed when a customer purchases a new connection.
Providers pay standard corporate and numbering fees, and unlike their fixed-line counterparts, they are also subject to a mobile-specific licence fee of 15% of their turnover. Operators are also subject to a Telecommunications Regulation Authority share, calculated as the 0.35% of the operator’s net sales.
A 2012 report by consultancy Deloitte commissioned for the Global System for Mobile Communications Association (GSMA), an organisation representing the interests of mobile operators worldwide, found that mobile operators in Turkey provided a direct contribution of TL11.3bn (€4.88bn) to the country’s economy, while their indirect impact amounted to TL9.2bn (€3.97bn), with a multiplier effect of TL8.2bn (€3.54bn). The GSMA called for the government to lower taxes on the mobile market to encourage growth and help operators improve their profit margins. Given the sector’s importance to Turkey’s economic development, politicians including Sezgin Tanrıkulu, the deputy chairman of the Republican People’s Party, have joined other parliamentarians and business groups in calling for an reduction of mobile taxation, which could boost overall subscription rates and eventually allow companies to exceed tax revenues the government is currently receiving.
Further Privatisation
In January 2013 the finance minister, Mehmet Şimşek, announced that the government planned to sell a 6.68% stake in Türk Telekom in 2013. Plans intensified after the government successfully raised TL4.5bn (€1.94bn) from selling part of state-controlled lender Halkbank (officials predicted a block sale would be unlikely, given the size of the deal). Although the sale was put on hold in March, the government remains committed to further privatising Türk Telekom. Şimşek said that plans to sell stakes in the operator have been in the works for three years, as the government considers increased privatisation critical to realising its long-term economic vision for Turkey.
Türk Telekom is currently undergoing massive expansions involving millions in loans from China and Europe. In January 2013, Türk Telekom obtained $600m in financing from the China Development Bank and an additional $172m from Export Development Canada to purchase goods and services and finance capital expenditures. This was in addition to a $131m loan in 2012 from the European Bank of Reconstruction and Development, which will be used to expand the company’s fibre-optic and broadband networks. Profit-boosting privatisation measures will help the company achieve its end goal of bringing fibre-optic and broadband infrastructure to the entire country by 2015, according to newly appointed CEO Tahsin Yılmaz. The company currently has 167,921 km of fibre-optic coverage across Turkey.
Outlook
While fixed-line services remain profitable, this segment of the market is slowly shrinking in Turkey, and the country’s major fixed-line operator is taking bold new steps in privatisation and fibre-optic development to diversify its revenue streams and maintain strong growth into 2013. A heavy tax regime is impeding further growth of the mobile market, but the expansion of mobile broadband services and a huge demand for smartphones have created high growth potential for Turkey’s mobile market. The young, tech-savvy population is driving demand for new technology, and as Turkey moves to construct an expansive 4G network across the country by the end of 2016 (see analysis), the mobile market is poised for strong, steady growth.
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