Turkey’s IT sector is in the midst of a busy and prosperous period marked by rapid, widespread development in internet services, infrastructure investment and ecommerce activity. Internet growth is being driven by extensive fibre-optic expansion, increased adoption of 3G mobile internet and planned nationwide 4G network services that will require heavy investment from both the public and private sectors.
The youthful, tech-savvy population in Turkey has led its IT industry to become one of the fastest-growing in the country. As new innovation and infrastructure creates faster, high-quality internet access and personal incomes continue to rise, online shopping will be a major IT driver in the coming years. Piracy, counterfeiting and opposition to controversial new legislation on web censorship have shaken the industry, but these troubles are unlikely to significantly diminish the sector’s long-term growth prospects.
Background
The Turkish IT sector is governed by the Ministry of Science, Industry and Technology, which had been the Ministry of Industry and Trade from 1971 until June 2011. Decree Law No. 635 changed the ministry’s name to reflect its role of pushing development in the IT sector, in line with the goals of Vision 2023, the country’s development plan. Among these goals are reaching 30m broadband subscribers (attained in 2012), supplying 50% of the ICT sector with domestic products and services, raising the ICT sector’s economic contribution to 8% of GDP, becoming one of the top 10 countries in e-transformation, providing all public services electronically by 2019 and achieving computer literacy for 80% of the population. The High Council for Telecommunications (TIB) acts as internet regulator and monitors online activity in the country. The TIB has seen its role come under international scrutiny following the passage of laws in 2014 that gave it tighter control over website censorship and resulted in domestic protests and international condemnation.
Internet access was first introduced in 1993 when Türk Telekom, the country’s first telecoms company and today its leading internet service provider (ISP), introduced dial-up connections for its customers. Cable internet began a nationwide expansion in 1998, and fibre-optic services, the fastest-growing internet segment today, were first introduced in 2007 by Tellcom, a firm later acquired by Turkcell Superonline, now the country’s second-largest ISP. In 2008 mobile 3G services were introduced, while 4G-LTE services began trial runs in 2012 and are forecast to be offered to consumers by the end of 2015.
Growth
Despite Turkey’s phenomenal expansion in internet services and subscribership over the past decade, there is still plenty of room for growth. Between 2002 and 2014, internet users in the country jumped from 11.4% to 53.8%, according to the World Bank. Turkstat, the official statistics agency, reported in its 2014 ICT usage survey that 44.9% of those aged 16-74 use the internet regularly (at least once a week), up from 39.5% in 2013, while 58% of users accessed the internet using a smartphone. Moreover, 60.2% of households had internet access, up from 49.1% in 2013.
The country’s strategic location and demographics are driving internet development and drawing international acclaim. In April 2013 the Internet Corporation for Assigned Names and Numbers (ICANN) – the global organisation responsible for coordinating domain names, IP addresses and autonomous system numbers – announced it will open its first hub office in Istanbul. ICANN’s president and CEO, Fadi Chehadé, said Istanbul was chosen for its quality infrastructure, growing ICT sector, business-friendly environment and close cultural and geographic proximity to Europe, the Middle East and Africa. ICANN also held a forum on Turkey’s Domain Name System in Istanbul in November 2014 as part of efforts to build a stronger domain name industry in Turkey. This came two months after ICANN signed a protocol with the Istanbul municipality to register .ist and .istanbul as domain extensions.
The government has also announced plans to develop a technology centre in Gebze, about 50 km east of Istanbul. Inspired by Silicon Valley, Turkey’s “Informatics Valley” will take up 3m sq metres of land and focus on creating a regional centre for research and development. According to the Minister of Science, Industry and Technology, Fikri I şık, in March 2015 infrastructure work had neared completion, while superstructure work was due to start in April 2015. “Looking at the five- and 10-year trends, we see the ICT sector was growing between 10-12% each year in dollar terms, except during crisis periods,” Levent Kızıltan, vice chairman of the Informatics Industry Association (TUBISAD), told OBG. “We expect this to continue for the years to come due to large government projects and uptake in 3G, 4G, fibre, and machine-to-machine services.”
Over the past several years, Turkey has consistently logged double-digit annual growth in internet subscribership. The country’s Information and Communication Technology Authority (ICTA) puts Turkey’s broadband internet subscribership (including fixed, modem, cable modem, and fibre) at 40m as of the third quarter of 2014, a dramatic increase from just 6m in 2008. The ICTA reported at the same time that Turkey’s annual growth in internet subscribers stood at 28.2%.
Providers
Although the ICTA lists 237 ISPs operating in Turkey, most internet connections in Turkey are made by the country’s dominant telecoms company, Türk Telekom, through its subsidiary TTN et, followed by Turkcell’s internet subsidiary, Turkcell Superonline. TTN et commands a 77.53% market share, followed by Superonline (14.16%), Do ğan TV Digital (4.49%) and Vodafone Net (0.95%), with the remainder split among smaller operators. TTN et’s xDSL is the most widely-used internet service in Turkey, accounting for 65% of total fixed broadband subscribers. According to the ICTA, 53% of fixed broadband subscribers in Turkey prefer offers providing speeds of 4-8 Mbps, with 81% of those users connecting to mobile internet via computer having data usage of 100 Mbps and above, and 15% of subscribers within the 0-50 Mbps interval. While these speeds are on par with much of Europe and North America, new fibre growth could see internet speeds increase exponentially within the next several years.
Fibre-Optic
Offering speeds up to 1000 Mbps, more than 10 times that of traditional broadband and cable, fibre-optic services have experienced phenomenal growth, and are easily the fastest-growing segment in Turkey’s internet sector, having soared in 2013, with network roll-outs leading Turkey to become Europe’s fifth fastest-growing fibre-optic market. In January 2014 the OECD revealed that Turkey has one of the highest fibre-optic growth rates in the world, with fibre subscriptions growing by 54.6% between June 2013 and June 2014, the eighth-highest rate out of 40 OECD countries and fourth-highest in Europe, ahead of Japan (5.9%), the US (14.9%), Germany (31.6%) and Switzerland (44.4%), and well above the OECD average of 12.4%. According to the ICTA, growth rates for other internet segments in the year to the second quarter of 2014 were 41.36% for mobile internet from handsets, 0.88% for xDSL and 6.61% for cable internet services. Subscribership, though low, is also growing fast: the ICTA reports 1.39m fibre subscribers as of the third quarter of 2014, a 43.7% rise on a year earlier.
Infrastructure
Turkey currently boasts roughly 245,000 km of fibre-optic cables laid, with nearly 182,000 km belonging to Türk Telekom and 33,000 km to Turkcell. Türk Telekom is aggressively pushing developments in fibre to the home and fibre to the building, offering speeds of 100-1000 Mbps, as well as fibre to the curb, which makes it easier to deliver fibre services to a cluster of customers, rather than building expensive direct fibre lines to each individual household. These developments will make a profound impact on the country’s internet landscape, owing to the substantial speed and quality improvements fibre services offer customers. “With fibre services, we don’t charge people any extra to make the switch,” Onur Öz, the firm’s investor relations director, told OBG. “We want to get people from limited plans to unlimited plans, and switching to fibre helps us up-sell. We triple their internet speed, and triple their usage, with the expectation that they will pay more for better service.”
In January 2013 Türk Telekom announced it plans to extend its fibre network nationwide by 2015, and would allocate a significant portion of its planned TL2.1bn (€739.4m) in 2014 investments to this end. These developments could see speeds jump even higher than 1000 Mbps: in November 2013 the company announced it had successfully completed a 2-terabyte-per-second (Tbps) field trial of a “wavelength division multiplexing optical transport system” capable of delivering a total of 40 Tbps on its existing fibre-optic network.
More promising developments came in December 2013, when Vodafone announced it would pay TL128m (€45.1m) to use part of the state power transmission company’s fibre network for the next 15 years. As a result of the deal, Vodafone will more than double its fibre network to 16,000 km, adding lines from Ankara’s Teias and investing TL300m (€105m) in overall network expansion, in addition to the original access fee. Vodafone’s network will eventually link to Syria, Georgia, Iraq, and India, according to its CEO, Gökhan Ö TurkNet, a smaller player commanding just 0.87% of the internet market, is a fast-growing company whose success is indicative of the potential for new investment in the fibre market. In May 2013, the European Bank for Reconstruction and Development announced a €9.5m loan to TurkNet, to be used on capital expenditure to extend fibre-optic coverage across Istanbul, Izmir, Izmit and Bursa. Dubai-based Gulf Capital followed suit in July 2013 when it announced $15m (€11.3m) in funding to TurkNet to be used for infrastructure upgrades and expansion. “SMEs comprise the majority of Turkish companies, and we anticipate that, as productivity and competition are becoming a major concern, SME activities will drive the IT sector in the years to come,” said Kızıltan at TUBISAD.
Mobile Networks
Outside of fibre-optic services, the highest growth potential in Turkey’s internet market lies in 3G and 4G-LTE services. The country’s “big three” mobile operators – Turkcell, Vodafone and Avea, a Türk Telekom subsidiary – each received government licences to develop 3G networks in 2008. 3G services were rolled out commercially in July 2009, when Turkcell and Vodafone launched services nationwide, with Avea launching in 16 provincial centres the same month. Turkey has seen a substantial uptick in 3G adoption since its market entrance, with subscribership growing from 49.3m in 2013 to 58.3m by the end of 2014, an increase of 18.3%, according to the ICTA.
4G-LTE services, which offer significant potential to operators, investors and consumers alike given their faster speeds and smoother delivery, are currently in nascent stages. In March 2015 the transport and communications minister, Lütfi Elvan, announced a tender for 4G mobile data services, which was recently delayed to August 26, 2015. Bids will be sought in a range of bandwidths, with an initial roll-out planned by the end of 2015 (see analysis). Turkcell, Vodafone and Avea are all expected to participate in the tenders.
In terms of 5G, which has yet to reach many of the most advanced Western markets, Avea took the first step in Turkey by joining an international consortium creating roadmaps for 5G networks through the Mobile Opportunistic Traffic Offloading Project, funded by the EU Framework Programmes in November 2012. Moreover, in July 2014 Türk Telekom decided to deploy new Alcatel-Lucent routers in three locations across Istanbul, as well as consolidate its existing ones, so as to keep up with the growing bandwidth demands of its residential and business customers.
E-Commerce
With internet usage and connection speeds rapidly increasing, e-commerce activities hold significant untapped potential for the Turkish IT sector. TurkStat found that 30.8% of internet users aged 16-74 purchased goods or services on the internet in 2014, compared to 24.1% in 2013. Electronics and apparel are the most popular online products: according to TurkStat, 51.9% of web shoppers buy clothing and sporting goods, 24.9% buy electronic equipment, 27% buy household items and 26.8% travel products.
E-commerce is poised for huge expansion in the next few years. Tech website Ecommerce Europe found that in 2012, total business-to-consumer (B2C) e-sales reached $7.42bn (€5.59bn) in Turkey, an increase of over 50% on 2011, while a March 2013 report commissioned from Google by Boston Consulting Group estimated that the country’s internet economy would grow by 19% a year to 2017, on the back of technological developments, a young population and a rise in online shopping, reaching 2.6% of GDP, or TL64.3bn (€22.64bn).
Research website yStats.com reports that private shopping clubs Markafoni.com and Trendyol.com rank among the top local e-commerce companies in Turkey, while the largest player on the Turkish B2C e-commerce market was online mall Hepsiburada.com ( Turkish for “everything is here”), which reported sales growth of 50% y-o-y in 2013 and total sales of TL1bn (€352.1m) in 2014. Other notable players include electronics retailer TeknoSA and local online food delivery company Yemeksepeti (“food basket”), which was purchased by Berlin-based Delivery Hero for $589m in April 2015. Turkey’s most-visited e-commerce websites in 2013 were automotive marketplace Sahibinden.com and auction website Gittigidiyor.com, followed by Trendyol, Markafoni, Hepsiburada, and Amazon-style retailers Limango.com and Morhipo.com.
Piracy & Counterfeiting
Turkey’s technology retailers are also poised to see significant growth in the next few years, with Turkey’s Investment Support and Promotion Agency reporting that spending on hardware, software, IT services and telecoms services in Turkey is expected to reach $25bn by 2016. ICT spending is projected to grow at 7.4% a year between 2012 and 2017, higher than the world average, due to its large domestic market and under-tapped potential. Technology multinationals like Xerox, Microsoft, Foxconn and Huawei are opening regional offices and investing heavily in research and development within the IT sector (see Education & Research chapter).
However, online piracy and product counterfeiting are major problems in Turkey’s IT sector. According to the Business Association to Stop Counterfeiting and Piracy, Turkey is the second-largest counterfeit product market in the world after China, with 58% of Turkish consumers admitting to regularly purchasing pirated products. The Business Software Alliance estimates piracy costs the economy $526m each year.
Counterfeiting activities harm IT retail suppliers especially in the printing and imaging segment, with as much as half of revenues from A4 printing machines lost to counterfeiting activities every year. Police have responded with recent crackdowns – in January 2014, for example, raids of several warehouses in Istanbul seized over 2000 counterfeit Xerox products. “Counterfeiting is hurting us a lot, because a significant portion of our income comes from back-end sales,” Burak Özer, general manager at Xerox Turkey, told OBG. “Security-wise, police have been very cooperative, but until strong legislation is passed, it is hard to successfully prosecute counterfeiters, and to prevent recidivism.”
Intellectual Property
After a 2012 report by the International Intellectual Property Alliance (IIPA) placed Turkey on an international watch list for the third year, the government moved to enact new regulations protecting intellectual property. In July 2012, the Directorate General of Copyright announced new revisions to the Law for Intellectual Property and Artworks, making sharing and downloading copyrighted materials a criminal offense, with the government planning to target the IP addresses of computers found to be breaching the law. When pirated content is detected, the ISPs are issued warnings, and if the material is not removed, fines of up to TL50,000 ($17,605) can be imposed. Although no official draft copyright bill has yet been published, the government has consulted with local stakeholders, creating a draft proposal in September 2013 that has raised hopes among stakeholders.
There is still room for improvement. In its 2014 report, the IIPA once again advised that Turkey be kept on the international watch list, arguing that “incremental but uneven progress” had been made in addressing piracy. While noting that enforcement against unauthorised software usage had improved – the industry brought 80 civil and criminal actions in 2013, up from 60 in 2012 – the IIPA said the software piracy rate remained high at 62%, compared to a global average of 42%.
Censorship
Türk Telecom, the country’s largest (and partly state-owned) operator, holds significant influence over the country’s internet access. All internet traffic in Turkey passes through its infrastructure, giving it central control over online content. As Turkey moves closer towards EU accession, censorship has become a point of contention in recent years.
Online censorship was introduced in 2007 under Law No. 5651 on the “Regulation of Publications on the Internet and Suppression of Crimes Committed by Means of Such Publications”. The law lists eight areas in which content can be censored: child pornography, obscenity, suicide, gambling, drugs, prostitution, dangerous goods and any material seen as disparaging Turkey’s founding father, Atatürk. The TIB, ICTA and private individuals can sue to block or shut down a site if there is sufficient evidence that it violates the law.
Following this legislation, international media reported that as many as 20,000 websites had been blocked by 2011. That year, the government proposed new regulations requiring ISPs to make state-supported censorship software available to consumers, prompting civil protests that led the government to back down.
However, censorship intensified in 2014. In the run-up to the country’s March municipal elections, the administration of President Recep Tayyip Erdo blocked Twitter and YouTube, prompting public protests and international criticism. Although a constitutional court lifted the Twitter ban in April on grounds of freedom of speech, YouTube remained blocked until June. Erdo ğan later announced plans to prosecute Twitter for tax evasion. As a result, according the Economic Policy Research Foundation of Turkey, the country now ranks second after China for internet censorship.
Further to this, in February 2014 the government passed legislation giving the TIB the right to block websites accused of “privacy violations” without a court order, again sparking political controversy. The tensions between the government’s hostile actions towards leading tech companies and Turkey’s attractiveness as a destination for foreign investment were further highlighted when Istanbul hosted the UN-backed Internet Governance Forum in September 2014, an annual discussion of internet policy, at the same time as more than two dozen Twitter users were on trial for tweets considered critical of the government.
Outlook
While internet censorship and online piracy remain two major challenges to IT investment, the sector’s recent history of tremendous growth have helped it retain its attractiveness and long-term potential. As operators rush to adopt the latest fibre-optic, 3G and 4G-LTE services, internet speeds are increasing and Turks are embracing the latest offerings in record numbers. Infrastructure investment by both domestic and foreign firms is on the rise, buoyed by demand from a young and tech-savvy population. Recent growth in e-commerce and online shopping also demonstrates the IT sector’s high potential and should continue to drive demand into 2015 and beyond.
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