Staying in touch: The growth of the mobile sector and internet use are driving competition and innovation among providers

As in many other countries, telecommunications in Turkey was originally a component of a larger state monopoly Post, Telegraph and Telephone (PTT). On April 24, 1995, the government split PTT, giving its postal and telegraph services to the General Directorate of Posts and its telecommunications responsibilities to a newly created state company, Türk Telekom.

SECTOR DEVELOPMENT: The company maintained a monopoly until the government altered the laws governing the sector in the midst of the twin economic crises of 2000 and 2001. Leading up to that point, the country had been adjusting its telecommunications policies, largely in harmony with those of the EU. As a result of changes made between 2000 and 2001, Ankara created the Information and Communication Technologies Authority (ICTA), the country’s first sector-specific independent regulator. Together with the Ministry of Transportation, ICTA oversees the sector. Currently, the laws most relevant to telecommunications are the Telegram and Telephone Law No. 406 (the Telecommunications Law), the Wireless Law No. 2813 and Ministry of Transportation law No. 3348.

FIXED SEGMENT: The fixed voice segment was largely shaped by the role of former-monopoly Türk Telekom, which was owned by the state between 1995 and 2005. The last two Turkish governments led a broader privatisation drive in the country, which included Türk Telekom in its provisions. The government set a deadline of 2004 for the liberalisation of fixed-line telephony services, which would bring an end to the firm’s monopoly. In 2005, the Saudi-based Oger group bought a 55% share of Türk Telekom, becoming its majority stakeholder. It retains a controlling stake of the company, while the Turkish government has a 30% share and additional 15% is traded on the Istanbul Stock Exchange. Since its privatisation in 2005, Türk Telekom has leveraged the benefits wrought by the strong infrastructure that it inherited from its former days as the state monopoly. This network has helped the company remain the fixed voice segment’s juggernaut, with a market share that has hovered around 90% throughout the privatised era. At the end of the third quarter of 2011, the market share was roughly 91% measured by income, according to data from the ICTA. The other 9% of fixed voice was shared among a number o f alternative fixed service providers. Between the third quarter of 2010 and third quarter of 2011 income in the segment fluctuated, but held to around TL1.3bn (€552.5m) overall.

FACING CHALLENGES: Newly developed mobile technologies have begun to supplant the role of fixed lines in Turkey. Between 2005 and the third quarter of 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.

Despite shrinking user rates and fears of obsolescence, Türk Telekom has demonstrated that operators in the fixed-line segment can find ways to retain substantial revenues. The firm has run a number of campaigns that bundle fixed voice minutes with calls to mobile phones and international destinations. The company has also been working to maintain partnerships with different business sectors, including travel, energy and electronics. So far these campaigns seem to be effective. Fixed-line revenues slipped only about 2% year-on-year (y-o-y) between the third quarter of 2010 and third quarter of 2011, from TL3.18bn (€1.35bn) to TL3.12bn (€1.33bn) according to the company’s financial data. At the end of the third quarter of 2011, fixed voice still made up 33% of the company’s revenues.

MOBILE SEGMENT: Since the dissolution of state monopoly PTT in the 1990s, the combination of a burgeoning youth demographic, growing disposable incomes and increasing interest in new technologies, has led to rapid growth in mobile penetration and revenues. Between 2001 and 2007 subscriber numbers have more than tripled, rising from 19.5m to 61.9m, then peaking in 65.8m in 2008, according to data compiled by Turkish Statistical Institute (TurkStat). Although the figure dipped during the 2008-09 financial crisis, estimates for 2011 yearly results indicate that subscriber numbers have topped the 2008 peak, reaching 66.7m, according to data compiled by ş Investment.

Call traffic has been on the up as well. Between 2007 and 2010, total mobile calls ballooned from 57.3bn minutes to 125.8bn, rising continuously through dreary global economic conditions. Likewise, use of SMS saw continual growth as well, more than quadrupling from 36.1bn units to 147.9bn during the same period. Despite increasing demand, the mobile area is one contested with stiff competition among three major players: Turkcell, Vodafone and Avea.

THE BIG THREE: With more than 34m subscribers and a market share of 53.13% as of September 30, 2011, Turkcell has grown to be by far the largest mobile operator in Turkey. The firm traces its history back to 1994, when it became one of two GSM operators following the dissolution of state monopoly PTT. In that year, Ankara granted Turkcell a 25-year GSM licence contract with the Ministry of Transportation for $500m. Since its inception, Turkcell has held onto a majority of mobile market share. The company’s hold on the market, however, is by no means a forgone conclusion. Turkcell’s market share slid from 61.9% to 52.9% between 2005 and 2011. This decline has been gradual, and has settled just above 50% of the market. Although the company’s share of the market has shrunk, the growth of the overall market has yielded record-breaking revenues. In the third quarter of 2011, Turkcell announced its highest quarterly revenue, TL2.52bn (€1.1bn), and 8.6% increase y-o-y from TL2.32bn (€986m) in third-quarter 2010.

The second-largest mobile operator, Vodafone Turkey, had a market share of 27.53% as of September 30, 2011, according to the ICTA. The firm is a subsidiary of UK-based Vodafone, the world’s the largest mobile operator by revenue. It joined the Turkish market via the $4.55bn acquisition of Telsim, the company that had joined Turkcell as one of the Turkey’s two first GSM operators in 1994. Vodafone announced the plan on January 13, 2006 and entered the market soon after. Although it entered Turkey with a market share less than half the size of Turkcell’s, the company’s leadership has been working dispel the idea that it is playing second fiddle. In the time since its entrance to the Turkish market, Vodafone has grown its market share from around 21.3% to 27.6% and subscriber count from 9.2m to 17.99m, according to data compiled by ş Yatarım, the investment banking Arm of ş Bank.

Aves, the third-largest of Turkey’s mobile operators, has a customer base of 12.5m and market share of 19.33% as of third-quarter 2011, according to the ICTA. The company was founded in 2005 as the result of a merger of Aycell, Türk Telekom’s GSM operator, and Aria, owned by ş Bank and Telcom Italia Mobile (TIM). The companies merged and combined their names, creating Avea in the latter half of 2004. In the mobile operator’s early years, Türk Telekom consolidated its ownership of the company, buying Telecom Italia’s 40.6% stake. Currently, Avea’s shares are split among Türk Telekom (81.37%) and ş Bank (18.63%).

TAX CHANGES: The Turkish mobile sector bears the highest industry tax burden in Europe and is in the running to be the highest in the world. This is in large part due to a new tax levied on the sector following two earthquakes that struck urban centres in the Marmara and Black Sea regions in August and November of 1999. Called the special communications tax, it required a 25% levy on “all types of installation, transfer and telecommunications services given by mobile phone operators”, according to the Revenue Administration of Turkey. Although the state originally planned for the tax to be a temporary measure, the government extended the tax and eventually adopted it as part of the tax system. Since mobile communications are also subject to the 18% value-added tax, mobile communications companies and their customers pay an effective rate of 43%.

The government has also included mobile phones in a series of tax hikes announced in October 2011 in order to reduce the budget deficit. The tax rate on handsets was raised from 20% to 25%, while a flat rate tax applying to sales of mobile phones increased from TL40 (€17) to TL100 (€42.50). Politicians expect that the measure will raise TL660m (€280.5m) for state coffers. The state also levies a tax on the act of signing up for a GSM network, or buying a SIM card. In 2012 this tax was increased from TL34 (€14.50) to TL37 (€15.70).

Mobile majors in the country point out that reducing tax burdens on new mobile technology could help boost overall subscription rates, which over time could mean tax revenues of equal or even higher value than those the government currently receives. In addition, operators point out that lower costs for communications technology could lead more businesspeople to adopt new technologies, which could boost productivity and competitiveness across the economy.

The arguments for lower mobile taxes have not fallen on deaf ears. On February 18, 2009, the government lowered the special communications tax rate on mobile internet from 25% to 5% and on alternative electronic communications services not covered in the original law from 25% to 15%. In addition, Sezgin Tanrıkulu, the deputy chairman of the Republican People’s Party, and a number of other members of parliament have announced their intention to push for lower taxes. They point out that in other developed countries only value-added taxes apply to electronic communications, and that the resulting lower rates could lead to wider usage, recovering revenues lost from eliminating the special communications tax.

SMARTPHONES: Despite high taxes and high costs, smartphones are increasingly popular in the country. One factor contributing to growth has been the development of Turkey’s 3G infrastructure. This service is relatively young in Turkey, and did not exist in the market as recently as 2008. By the third quarter of 2011, the number of subscriptions had reached 28.6m, or more than 40% of all mobile users, according to the ICTA.

The advent of smartphones and 3G has opened new avenues of competition for providers. Vodafone signed an agreement with mobile phone manufacturer HTC in early 2011 to increase the range of HTC products sold in Turkey. “Although Turkey has had a 3G mobile network for only two years, its smartphone market has grown surprisingly during the period so that we decided to put a lot of resources in the country,” Peter Chou, the CEO of HTC, told the Taipei Times in May 2011.

Turkcell, meanwhile, has designed its own branded smartphone models, the T10, T11 and T20, all of which run Google’s Android mobile operating system. The first incarnation, the T10, became the number-one Android smartphone in the country in the first five weeks after it was introduced in the market, and the data plans sold with the phone have been an important source of revenue for Turkcell. The company has also partnered with Mastercard to design the Cep-T Cüzdan wireless payment app for the device using near-field technology.

DEVILS IN THE DETAILS: Turkcell, although quite successful in maintaining its dominant position as Turkey’s largest mobile operator, has the type of size and success that can invite increasing amounts of legal and regulatory scrutiny. In recent years the company has been holding its own in a legal dispute with the Turkish Competition Board, which announced a TL91.9bn (€39.1bn) fine for alleged violations of sales regulations. In June 2011 Turkcell released a statement denying the charges and announced its intent to submit a stay of execution and annulment of the decision.

Legal disputes have also arisen among major shareholders of the firm. Stockholm-based TeliaSonera, Moscow-based Alfa Group and Istanbul-based Ç ukurova Group – the company that founded Turkcell – are embroiled in a dispute dating back to 2005, when Çukurova backed out of a deal to sell its 13% stake to TeliaSonera for $3.1bn and instead sold it to Alfa Group.

Together, these three shareholders control just over 51% of Turkcell. TeliaSonera holds 38% of the company through indirect and direct holdings, while Alfa directly holds 13%. Çukurova nominally owns 0.05% of Turkcell, but also has interest in Turkcell Holding, which controls a 51% majority of the mobile company.

This sale provoked a lawsuit from TeliaSonera, and a series of court rulings from European courts followed, with the result being rulings that demanded the shares be transferred back to TeliaSonera. In September 2011 the International Chamber of Commerce (ICC), further ordered Çukurova to pay $932m in damages. These decisions have not been enforced, however, and Ç ukurova is still challenging them.

In October 2011 the Turkish government announced changes in corporate law that are set to affect the makeup of Turkcell’s board. Previously, Turkcell’s seven-member board was made up of two members from each of the three major shareholders and an independent. Under the new rules three seats will be occupied by Alfa and TeliaSonera, one seat by Çukurova, and two by independents. These changes could affect disputes by reducing the number of shareholder representatives on the board in favour of independents.

INVESTMENTS: Despite tumult in its corporate boardroom, Turkcell has maintained impressive investment inside and outside of Turkey, indicating that these ownership disputes have not prevented the firm from manoeuvring a competitive mobile market. Turkcell has made nearly $8m in investments, including in 2G and 3G infrastructure, as of the end of the third quarter of 2011, by its own calculations. In April 2011 the company began moving its directly owned operations outside of Turkey with its subsidiary, Turkcell Europe. The new operation, based out of Cologne, Germany, was made possible by a five-year wholesale traffic purchase agreement with Deutsche Telekom. Turkcell Europe is targeting Germany’s 3.5m strong Turkish population, using promotions like local rates for calls to and from Turkey to draw in customers. As of August 2011, the company had attracted 132,000 subscribers.

In addition to its wholly owned subsidiaries, Turkcell has extensive partially owned investments outside of Turkey, largely in post-Soviet areas such as Kazakhstan, Georgia, Ukraine, Belarus and Moldova. Many of these have also seen significant growth in recent years.

R&D: Driven by competition, other telecoms firms have also been aggressive with investments. In August 2010, Avea became the first mobile operator in the country to receive a research and development (R&D) centre certificate from the Ministry of Industry and Commerce. The goals of the centre, located in the Ümraniye district of Istanbul, are to provide a central facility for research activities and work on the long-term plan of developing technologies that could differentiate Avea from its competitors, the company said in a statement. Indeed, the firm has been active in mobile application development, an area that could provide a competitive edge in the market. Between 2006 and 2010, Avea invested over TL65m (€27.6m) in R&D.

Vodafone has been making investments in its Turkey-specific infrastructure. The company opened a call centre in Samsun, a city in the Black Sea Region, at the cost of TL16m (€6.8m). The Samsun call centre is part of a growing wave of call centres opening in the country’s eastern and south-eastern regions to serve subscribers. As factors like trade between south-east Turkey and Iraq’s northern regions help improve the economic situation in the country’s less-developed regions, rising disposable incomes could create greater demand for telecommunications services, and as a result, investments in telecommunications infrastructure as well.

MVNO DEVELOPMENTS: The mobile virtual network operator (MVNO) market in Turkey received a boost when Ankara resolved a double taxation issue for the industry. MVNOs operate by leasing data from mobile network operators (MNOs), or operators that own and operate data infrastructure such as cables and broadcasting towers. By leasing at wholesale prices and then re-selling to customers, MVNOs can turn a profit. In Turkey, however, MVNOs were included in a regulation that requires all telecommunications companies to pay 15% of their revenues to the Treasury. Since both MVNOs and the MNOs had to pay 15% of their profits, the regulation effectively double-taxed MVNO traffic. On August 1, 2010, the parliament amended the law, allowing for an exemption from the 15% tax on MVNOs.

So far brands are largely closely integrated to larger firms, such as Kartalcell and Fenercell and their ties with Avea. Named for two of the three most successful sports clubs in the country, these two brands have been using the intensely competitive football culture in Istanbul to attract customers. Still, with the double-taxation issue only recently resolved and the stiff competition among the three incumbent operators, Turkey’s MVNO potential has been heretofore largely untapped. With the new tax rules implemented, it is possible that these firms could find gaps to fill in the mobile sector.

OUTLOOK: Enjoying the benefits of a young population, rising disposable incomes and a growing interest in technological developments, Turkey’s telecommunications sector enjoys substantial growth potential. The sector will likely to have to manage a number of changes. Fixed-line voice, for example, has been profitable in recent years, but these services are slowly shrinking as customers shift to mobile services. These operators will likely search for ways to utilise their existing infrastructure by bundling voice services with mobile offers and using wire backbones to provide internet services to maintain their relevance in a changing market.

Mobile operators are also set to face the issue of how to approach 4G mobile internet technology that is even faster than its predecessor. With smartphones becoming increasingly affordable and tech companies innovating new apps to utilise their capabilities, a strong internet backbone is set to be key in coming years.

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