Virtual connections: Infrastructure expansion is aiding growth in spite of piracy challenges

Bolstered by growth in mobile broadband and fibre-optic services, plans for massive 4G expansion, and a young population keen to embrace the latest in technology, IT is one of the fastest-growing sectors in the Turkish economy. Under the government’s expansive Vision 2023 strategy, the country plans to make major strides in internet penetration, technological innovations and research leadership within the sector, although censorship and piracy issues have created a need for progressive regulatory reforms.

The popularity of mobile broadband has led internet growth, and a recent multibillion-dollar public-private partnership is set to expand 4G and 4G long-term evolution (LTE) services across Turkey by 2016, joining a planned nationwide fibre-optic network set to roll out by 2015. Overall demand for IT services and infrastructure is expected to rise in the years to come, while the e-commerce and social networking segments have seen especially rapid take-up of late.

Progress On 2023 Targets

The government has set a range of targets for the sector as part of its Vision 2023 goals for the 100th anniversary of the founding of the Turkish republic, including reaching 30m broadband subscribers, supplying 50% of the information and communications technology (ICT) sector with domestic products and services, having the ICT sector generate 8% of GDP, providing all public services electronically by 2019, and achieving 80% computer literacy throughout the population.

Recent statistics indicate that Turkey is well on its way to achieving these goals. In March 2013, a report sponsored by Google estimated Turkey’s internet economy will grow by 19% annually though 2017, as Turkish firms increasingly embrace web-based business. The report, commissioned by Boston Consulting Group, found that Turkey’s internet economy will grow to 2.6% of GDP, or TL64.3bn (€27.76bn), by 2017, up from 1.7% and TL22bn (€9.5bn) in 2011. The report also found that in 2011, Turkish consumers spent TL8.8bn (€3.8bn) on internet access and charges, and more than TL4.4bn (€1.9bn) on e-commerce, which is expected to become the largest IT growth driver in the coming years.

User Numbers

Between 2002 and 2011, the internet user count rose from 11.4 to 42.2 users per 100 people, according to the World Bank. In the past two years alone, the number of internet users in Turkey has increased by 6.45m, with that figure set to grow substantially in 2013. There were 36.45m internet users in Turkey representing 45.7% of the population in 2012, according to Internet World Stats, compared to 30m in 2010. Turkey ranks 13th worldwide in terms of global online population, and sixth overall in Europe.

In 2011 data aggregator comScore reported that Turkey ranked third in engagement out of 372m users in Europe, with Turkish users spending an average of 32.7 hours online and visiting 3706 pages per month, the highest consumption among all countries surveyed. Turks are also highly engaged in social media: the country ranks fourth worldwide in global usage on Facebook, and eighth on Twitter. Facebook is the most popular website in the country with 40m page views per month as of 2011. Four Turkish websites are included in the top 10 list, including Mynet (fourth), Blogcu.com (sixth), zlesene.com (eighth) and Sahibinden.com (10th).

In April 2012 the Turkish Statistical Institute’s ( TurkStat) “ICT Usage Survey in Households and Individuals” found that 47.2% of households have internet access, compared to 42.9% in April 2011. Further, 43.2% of households have a broadband connection, and ADSL was used to access the internet in 31.3% of all households and 66.4% of households with internet access.

Providers

The majority of internet connections in Turkey are made by the telecoms giant Türk Telekom through its subsidiary TTNET. TTNET ADSL2+ service (telephone broadband) is the most widely used internet service in Turkey, offering speeds from 1 to 16 MB ps. Provision of internet services is split among TTNET, with an 81.34% market share, and operators including Turkcell Superonline (8.85%), Doğan Telekom (4.62%), Vodafone Net (1.64%) and Millennicom (1.54%). Turkcell Superonline has achieved speeds up to 43.2 Mbps using its ASDL broadband technology, and plans to offer 84 Mbps to customers in the near future.

Currently TTNET also offers VDSL2 service with speeds ranging from 32 to 100 Mbps. Alternative broadband companies using TTNET infrastructure, including SmileADSL and Biri, are also available to subscribers. Cable internet coverage is provided to some 500,658 subscribers in Turkey by companies including UyduNET, which offers speeds as high as 100 Mbps.

Fibre-optic development offers exciting potential for the Turkish market. While take-up is relatively low, the market grew enormously in 2012. There are now 645,092 fibre-optic subscribers in Turkey, representing growth of 141.5% from 2011, according to ICTA. Turkcell Superonline took a 65% share of the fibre subscribers, or 425,000. The firm offers fibre broadband in limited areas in eight cities, with speeds of up to 1000 Mbps, and is one of the fastest-growing fibre providers in Europe. The country currently has 210,285 km of fibre-optic cable, with a little over 167,000 km belonging to Türk Telekom. In January 2013 Türk Telekom’s new CEO, Tahsin Yılmaz, announced plans to expand a fibre-optic network across the entire country by 2015.

4G 

Mobile broadband subscribership is set to increase in the next several years as the country rolls out an extensive 4G LTE network. In February 2012 a $46.8m deal to build a network by 2016 was announced between Aselsan Elektronik Sanayi & Ticaret, an Ankara-based electronic systems firm; Netaş Telekomunikasyon; Argela, an Istanbul-based software company owned by Türk Telekom; and the Turkish government.

The 4G LTE network will provide mobile services at 100 Mbps and fixed-line broadband at 1000 Mbps, compared to the current 10-40 Mbps offered by the country’s 3G networks. In 2012 Turkcell Superonline launched speed tests for 4G through a limited LTE network in Istanbul. LTE technology is expected to reach speeds between 600 and 1000 Mbps after 2015, according to İlter Terzioğlu, the deputy director general of network operations at Turkcell.

IT Services

Turkey's ICT industry is dominated by telecoms, which constitute approximately 73% of the market by value, with the IT sector, which includes hardware, software and IT services, comprising the other 27%. However, Turkey’s Investment Support and Promotion Agency reported in 2010 that the growing demand for IT services and infrastructure is expected to see IT spending rise from $7.2bn in 2009 to around $10.5bn in 2014. Zeynep Keskin, the managing director of SAP Turkey, told OBG, "Spending on IT services in Turkey is only one-fourth of the amount in Europe, which indicates that the domestic market has huge potential for growth." At present, the IT services market is characterised by an abundance of smaller players – over 3000, according to Mehmet Nalbantoğlu, general manager of Koç- Sistem – meaning there should be ample room for consolidation going forward. In the meantime, however, the sheer number of firms has led to intense competition for business, according to Levent Sensezgin, an Istanbul-based IT professional. "Profit margins in Turkey’s IT business are dropping due to intense competition, and regional uncertainty generated by the decline in the eurozone and the fallout from the so-called Arab Spring,” Sensezgin told OBG.

The financial sector has long been the largest customer base for local IT solutions providers, although many financial firms still prefer to keep IT in-house. Other major buyers of IT services include telecoms operators and the government, although the latter is expected to spend less on IT in the future, given the need to rein in the budget, and this is likely to have an effect on providers that rely on public sector contracts.

According to Keskin of SAP, other sectors that have seen growing demand for IT solutions include education, health, energy and defence. "In the last two years the business analytics segment has seen rapid growth, as quantitative methods have become more important for firms seeking to gain a competitive edge by streamlining their operations and more precisely targeting customers,” she added.

As is the case in many other countries, the sector is seeing a shift from a market based on the sale of hardware to one based on services, and this is being driven by larger domestic players in particular, as they look to outsource more of their internal operations. Conservative attitudes regarding control over commercial data present an obstacle to this shift, however. Some sector players interviewed by OBG noted a reluctance to make significant investments in new technology because of fears about data security. Although large firms are often eager to join the cloud as they recognise that it offers a competitive advantage, they are sometimes reluctant to let third-party service providers control their data.

Nevertheless, if companies’ concerns can be allayed, there should be significant room for expansion in this area. As Nalbantoğlu told OBG, “The simple fact remains that most businesses do not have the in-house expertise needed to manage complex IT systems. And even if they can, doing so requires them to divert resources away from core business segments.”

Increased take-up of IT services among local companies should have a wide range of benefits, particularly in terms of increasing productivity. "Greater IT adoption would undoubtedly spur the productivity growth that Turkey needs to climb the value chain and become a high-income country,” Nalbantoğlu told OBG.

Development Zones

The Turkish government is well aware that the country’s expanding IT sector will have a much more influential role in future growth than it currently does. As the government pushes its Vision 2023 plan, which includes a number of ambitious IT targets, major multinationals are being offered attractive incentives and benefits should they choose to invest.

One example of government support for IT innovation is the Research and Development (R&D) Law, which came into effect in April 2008 and introduced incentives and supports for investors in R&D activities through tax breaks, land allocations and other financial instruments. Another is the increasing number of technoparks cropping up across the country.

Turkey currently has a total of 27 operational Technology Development Zones (TDZs), with an additional 12 approved and under construction. TDZs benefit from various incentives, including an exemption from corporate taxes on the revenues generated by software development and R&D activities until end-2013. Additionally, the salaries of TDZ workers are exempt from personal income tax until 2023.

New Entrants

A number of international players are eyeing Turkey, attracted by its growing market and tax incentives. In 2012, Chinese telecoms giant Huawei announced plans to invest $100m in the Turkish IT sector in 2013, on top of an additional $20m allocated for upgrades at its existing R&D lab in Istanbul. The company is hoping to become the country's top software exporter, and its Istanbul facility is the largest among 20 located outside China with around 350 engineers working in software development.

“R&D incentives were one factor in Huawei's decision to locate one of our 23 R&D centres in Turkey. However, we think that regulations regarding R&D promotion should be more clear and stable,” Wu Congcheng, Huawei’s general manager, told OBG.

In addition, Microsoft’s CEO Steve Ballmer met with the Turkish government in 2011, and expressed interest in establishing an R&D facility similar to the company’s labs in Israel and India. At the time, Ballmer told local media that Microsoft’s VoIP product Skype’s development could take place in Turkey.

Intel, the world’s largest semiconductor company, also announced in March 2013 that it plans to establish a large R&D facility in Turkey as part of its bid to participate in the Fatih Project, a multibillion-dollar initiative aimed at providing 600,000 classrooms and 40,000 schools with state-of-the-art IT technology, including tablets, PCs and smartboards.

Investment

A 2013 report by Ernst & Young found that Turkey’s IT sector will attract significant new investments in 2013, particularly from angel investors and web-based firms founded by private funds. According to the report, Turkey’s IT sector was the second busiest after energy in terms of mergers and acquisitions (M&A), with 43 transactions completed, compared to 48 in energy. In 2013 transaction volumes could rise even further as new investors buy stakes from former investors, according to Müşfik Cantekinler, the institutional financing department chief of Ernst & Young. Cantekinler reported that medium- and large-sized M&A operations will surge specifically in cloud computing, payment systems and mobile application fields. M&A activities are expected to take place mainly in shopping websites, although computer equipment and IT consultancy companies could also see increased activity.

E-Commerce 

Turkey is fast becoming one of the largest and most sophisticated markets for online shopping and e-commerce in Europe. As of January 2013, there were between 8m and 9m online shoppers in Turkey, and e-commerce generated $7.2bn in turnover in 2012. Internet card payments rose by 30% to TL30bn (€12.95bn) in 2012, and are expected to more than double by 2015, according to Interbank Card Centre.

TurkStat reports that 21.8% of Internet users aged 16-74 bought goods or services over the internet in 2012, compared to 18.6% in the previous year. TurkStat found that 44.4% of online shoppers bought clothes and sporting goods, 25.5% electronic equipment, 21.2% household goods, 18.3% food or groceries, 17.4% travel arrangements (transport tickets, car hire, etc.), and 15.6% print media between April 2011 and March 2012. In total, some $450m was spent on clothing and accessories, $395m on grocery and food shopping, and $2.1bn on electronics purchased online in 2012.

A report by comScore found that more than 19m people in Turkey visited retail sites in September 2012, up 13% from the same month in 2011. According to the report, beauty products were the fastest-growing retail sub-category, up 61% compared to the year before, followed by computer software and home furnishings.

Strong growth in e-commerce has seen a host of foreign multinationals rush to invest in the industry. California-based auction website eBay initially invested in its Turkish counterpart GittiGidiyor in 2007, later acquiring 93% of the firm in 2011; South Africa’s Naspers bought 68% of Markafoni in 2011. Flower delivery site Çiçeksepeti and private shopping club Trendyol have received investments from Amazon and global tech hedge fund Tiger Global, respectively. Consultancy firm Deloitte found that 17 merger and acquisition deals were made in Turkey’s e-commerce sector during 2012, with an estimated $500m invested since 2010.

Piracy Woes

In terms of challenges facing the sector, online piracy continues to be a major problem for IT firms. In a 2012 report by the International Intellectual Property Alliance (IIPA), Turkey was again placed on a watch list; the IIPA reported that while the country’s copyright system shows incremental progress, it has not kept pace with technological developments, and has not been effective enough to reduce most forms of piracy. As Keskin told OBG, “Policymakers have avoided this issue of intellectual property because it does not affect local IT businesses; however, this is shortsighted, because what our economy needs is more innovation and value-added product development.”

The usage rate of illicit software in Turkey now stands at 62%, according to the Business Software Alliance, creating an estimated $526m in losses annually. At a 2012 symposium on intellectual property rights in Istanbul, lawyer Cahit Suluk from the Suluk & Kenaroğlu Law Office decried Turkey’s high level of counterfeiting and piracy. While Turkey leads Europe with the highest number of trademark applicants (some 117,723 submitted in 2011), it ranks 59th out of 130 countries in intellectual property rights.

“Turkey’s ICT sector will never realise its potential if the government does not establish a more robust legal framework to protection of intellectual property. Indeed, stronger legislation would support local brand development across every sector of the economy,” Mehmet Sezer, general manager of Xerox Turkey, told OBG. The issue of illicit sales extends beyond software; Sezer also noted that “the existence of a large grey market in Turkey has created many challenges for original equipment manufacturers operating in the country’s ICT market. In particular, the sale of items through unauthorised distribution channels has exerted strong downward pressure on prices and thus profit margins for companies in the sector.”

Other multinationals have been troubled by piracy. In December 2012, Microsoft officials announced that Turkey is second only to China in software piracy, and that as a result, the company had dropped the country off of its top 20 markets list. “We are a country that does not like to pay for labour. We do not let others steal our assets, but we can accept using others’ possessions without paying for it, even at the company level. This has to change socially,” Tamer Özmen, the CEO of Microsoft Turkey, told Reuters.

Official Response

The government has taken notice, and has recently taken steps towards combating online piracy. In July 2012, the Directorate General of Copyright announced revisions to the current Law for Intellectual Property and Artworks. Under the new bill, sharing and downloading copyrighted material is a criminal offense, and IP addresses of computers downloading or sharing material can be targeted by authorities. According to the draft revision, the hosting provider will be issued a warning when pirated content is detected, which will then be passed on to the content provider, owner, operator and registrant of the site. If the copyrighted material is not removed within 48 hours, site access will be blocked and fines of TL10,000-50,000 (€4318-21,590) will be levied.

Censorship

All internet traffic passes through Türk Telecom’s infrastructure, granting centralised control of online content and expediting any possible shutdown decisions. While Turkey has pursued progressive policies, in line with its goal of joining the EU, some critics have questioned its censorship policies over the past six years. Law No. 5651, enacted in 2007, defines a set of eight “catalogue crimes” and identifies classes of content that may be censored: child pornography, obscenity, suicide, gambling, drugs, prostitution, dangerous goods and material disparaging the nation’s founder, Mustafa Kemal Atatürk. The Telecommunications Directorate, the ICTA and private individuals can sue to shut or block sites if there is sufficient evidence that a website fits within the parameters of the country’s eight catalogue crimes.

The government began blocking a number of websites in 2007 following the release of a controversial video on YouTube mocking Atatürk. Blocking orders issued under Law No. 5651 have been applied to a number of other sites; the BBC reported in 2011 that as many as 20,000 politically sensitive and sexually offensive websites have been blocked in the country.

In spite of widespread protests, the government enacted regulations in 2011 that required internet service providers to make state-supported censorship/blocking software available to all consumers. Consumer use is voluntary, however, after the government backed away from its original plan to make its use mandatory. YouTube was un-blocked in 2010, and has since grown in popularity to become the country’s fifth most-visited website.

Outlook

With 4G services set to expand across the country and fibre-optic development well under way, Turkey’s IT sector offers huge potential for growth across a number of channels in 2013. Growth in internet usage and penetration, a young and engaged population of internet users and a rapidly expanding e-commerce sector have already spurred triple-digit annual increases in key areas.

As the country begins the labour- and capital-intensive process of meeting its Vision 2023 goals, overcoming longstanding problems of grey market products and intellectual property theft will be all the more important. As Sezer noted, “Turkey has an impressive growth story, but investors need to look beyond the macroeconomic indicators and see the challenges foreign firms often face in this market in terms of dealing with taxation, IP protection, and uncertain regulations.”

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The Report: Turkey 2013

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