The telecoms sector in Turkey has long been viewed as a rising star, with a young, digitally adept population and rising personal incomes driving demand in the mobile voice and data segments. In recent years, the industry has been affected by less-strong macroeconomic fundamentals, including a weaker lira, as well as some restrictive regulatory changes. Even so, Turks spent more than TL35.5bn (€12.5bn) on telecoms in 2014, compared to TL32.2bn (€11.34bn) in 2013, according to Turkey’s Information and Communication Technologies Authority (ICTA).
Fixed-line services continued a decade-long trend of dwindling subscribership and revenues, although value-added services and new promotional packages will keep the segment stable in the medium term. While heavy tax burdens and fierce competition have hampered growth prospects, comparatively high voice usage and a growing base of mobile internet subscribers will help the market maintain an upward trajectory in 2015. The country’s four major telecoms providers – Türk Telekom, Turkcell, Vodafone and Avea – are investing heavily in new infrastructure and services, with mobile operators turning to domestic smart-phone production as a result of customer demand, creating an increasingly consumer-friendly environment that should see smartphone purchases, mobile subscribership and data usage increase in 2015.
Background
Turkey’s telecoms sector underwent modernising reforms in 1995, when the post, telegraph and telephone monopoly was split into two divisions. Türk Telekom became the first service provider in the country in that year, and today holds a majority of the fixed-line market. Mobile telecoms followed in April 1998, when the Ministry of Transport, Maritime and Communication signed a $500m, 25-year Global System for Mobile Communications (GSM) licensing agreement with Turkcell and Telsim, the country’s first two mobile providers.
The economic crisis of 2000-01 spelled the end of Türk Telekom’s monopoly, when the government moved to liberalise the telecoms sector and reform it through legislation similar to that of the EU. In 2000 the government created the ICTA to act as sector regulator and oversee private development, in partnership with the Ministry of Transport.
Market liberalisation kicked off with the ICTA’s creation in 2000, and the corresponding 2004 deadline to begin privatising the fixed-line sector. In 2005 these plans came to fruition as Saudi Arabia’s Oger group bought a 55% majority stake in Türk Telekom, setting a precedent for foreign investment in Turkish telecommunications. Today the Turkish government maintains a 30% share of Türk Telekom, while 15% was publicly listed in 2008. Plans for a secondary public offering of 6.67% of the government’s share were put on hold indefinitely in March 2013, as the lira’s depreciation rendered the deal disadvantageous.
Recent regulatory changes are aimed at improving the consumer environment and making the sector more competitive. In July 2013, the ICTA enacted new regulations to set minimum on-net voice and SMS tariffs, a move meant to improve operating conditions for non-incumbent operators, as well as reduce mobile termination rates (MTR) – the charge levied when a call or SMS ends on a different network – by 20% for voice services and 75% for SMS. For example, an Avea subscriber texting a Vodafone subscriber used to pay an MTR of TL1.87 (€0.66), but now only pays TL0.43 (€0.15). Although the mandatory MTR cuts have kept tariffs low, they have curbed operator revenues.
Fixed Line
With the advent of mobile technology, Turkey’s fixed-line services have been in steady decline for the past 10 years. Fixed-line subscribership stood at 18.98m in 2005, but has since dropped to 12.74m as of the third quarter of 2014, according to ICTA data, down 6.3% on 13.6m in 2013. Fixed-line penetration is now 16.6%, although the ICTA notes that, with an average household size of 3.7, these services likely reach a majority of the population. “As far as telecoms infrastructure is concerned, Turkey is one of the top countries in the world,” Barı partner at Globalturk Capital, told OBG. “Some 99% of the population is covered for fixed-line and mobile services, and it is getting closer to 100%.”
As the country’s first and long its largest operator, Türk Telekom commands the majority of the fixed-line market, serving 85.6% of local calls, 67.2% of national calls and 59.3% of international calls. Of its 2014 revenues – which reached TL13.6bn (€4.79bn), up 3.7% on 2013 – some 71.7% came from fixed-line services. As home usage declines – average minutes used per month for fixed-line subscribers fell from 98.7 to 88.9 in the year to end-2014 – the company has adopted new strategies to maintain its non-mobile segment. “Fixed-line voice is a declining business, but we approach the problem differently than other operators,” Onur Öz, the firm’s investment relations director, told OBG. “We’re hoping to keep as many customers as possible during the transition from fixed-line voice to broadband and mobile products. Keeping the line in the house is critical because we can build on that; there are services like naked broadband and IPTV packages that make the fixed segment an important cash generator.” With this in mind, Türk Telekom has launched several initiatives to hold on to these customers, including an agreement with Alliance Insurance to provide free home insurance for those with fixed-line contracts, and a new home smartphone called the TT-E4, an Android device that acts as a smartphone but is tied to a customer’s home line.
Mobile
A young, engaged and dynamic population makes Turkey the ideal market for growth in the mobile segment. The median age of Turkey’s 75m residents is 29, compared to 40 in the UK and 37 in the US, with nearly 25% of the population under 14 years old.
With such a high proportion of “digital natives” – those born roughly after 1980 who have thus grown up with the internet – plus strong domestic demand for new products and services, mobile operators are in a good position to capitalise on growth in the Turkish market. Although the industry is facing several challenges, such as the world’s highest mobile taxes and fierce competition among major operators, high voice usage, increasing subscribership and a growing data segment will help drive the market forward in the next decade or so.
Turkey’s mobile market has grown significantly since 2001, leaping from 19.5m users to some 65.8m in 2008 before declining due to the twin effects of the global financial crisis and the advent of mobile number portability, which allows customers to keep their phone numbers when switching providers. Since then, however, recovery and new growth have brought mobile subscribership above and beyond pre-crisis levels. Mobile subscribership climbed to an all-time high of 71.9m in the third quarter of 2014, compared to 68.9m four quarters earlier. Moreover, the overall mobile penetration rate now stands at 93.8%, a figure that rises above 100% if you exclude 0-9-year-olds.
Sector Players
The mobile market is dominated by three providers: Turkcell, Vodafone and Avea. Turkcell was formed in 1994 and become one of the country’s two initial mobile operators in 1998 alongside Telsim, which rebranded as Vodafone following a $4.55bn (€3.43bn) acquisition in 2006. Avea entered the market in 2004 after Türk Telekom’s GSM operator, Aycell, merged with Is-TiM, which was owned by Türkiye İş Bankası Group and Italian operator TIM. Türk Telekom held a 89.99% stake in Avea as of April 2015, when it offered to buy the remainder from İş Bankası, citing a “nominal value” of TL820m (€288.7m).
Turkcell held the largest market share as of the third quarter of 2014, at 48.3% – a slight decline from 50.77% in 2013 but still enough to retain the title of incumbent operator. The company reported 34.6m subscribers in 2014, down from 35.2m in 2013. Although Turkcell’s market share has dropped as new players entered the market, income and revenues grew in 2014. Turkcell added 75,000 subscribers in 2013, with monthly blended average revenue per user (ARPU) climbing 3.8% to reach TL21.7 (€7.60). MTR cuts excluded, the company reported TL12bn (€4.23bn) in revenues, compared to TL11.64bn (€4.1bn) in 2013. However, net income fell from TL2.33bn (€820m) in 2013 to TL1.87m (€658m) in 2014. Voice revenues fell by 1%, although mobile broadband revenues grew by 34%, with strong demand for data. For 2015 the company has projected revenues in the range of TL12.8bn-13.1bn (€4. 51bn-4.61bn), with growth driven especially by its mobile and fibre broadband segments.
The second-largest operator in the Turkish market, Vodafone, commanded a 29.13% market share in the third quarter of 2014, a slight improvement over 28.75% in 2013. The company announced revenues between April and September 2014 of £998m, down from £1064m during the same period in 2013. It also reported 20.6m mobile subscribers at the end of September 2014, up from 19.6m a year earlier.
Avea has seen considerable success since entering the market in 2004. As of the third quarter of 2014, the company had a market share of 22.57%, up from 20.48% in 2013, and saw substantial growth in subscribership in 2014, reaching 16.23m from 14.12m a year earlier. In its 2014 annual report, Avea’s majority stakeholder, Türk Telekom, announced that the company’s revenues had risen by 3.4% on the previous year to TL13.6bn (€4.79bn), owing largely to growth in the mobile segment. Avea’s ARPU stood at TL22.87 (€8.05) as of the third quarter of 2014.
Voice vs Data
Voice service usage is the leading revenue generator in the mobile sector: the ICTA reported that Turkish mobile subscribers’ average minutes used per month stood at 370 as of the third quarter of 2014, which was well above the European average of 170. Voice services provide 62.17% of Turkcell’s revenues, 52.26% of Avea’s and 61.67% of Vodafone’s, according to the ICTA.
“Voice is still king in Turkey,” Zehra Öney, president of Turkey’s Mobile Marketing Association, told OBG. “Voice and SMS are huge, whereas data has a lot of room to grow.” In Turkey, as globally, voice revenues have been declining as data usage grows. In 2011 voice services accounted for 76.99% of overall mobile revenues, but this dropped to 68.81% in 2012 and 65.60% in 2013. SMS services showed a similar decline, dropping from 11.61% to 9.78% between 2011 and 2013, while data services nearly tripled, from 7.31% of revenues to 19.03% during the same period.
Smartphones
High taxes and prices have not quelled strong demand for smartphones in Turkey. The rapid expansion of 3G infrastructure and services since 2008 has boosted smartphone popularity enormously. 3G subscribership hit 56.8m in the third quarter of 2014, according to ICTA data, a 13.2% increase over 49.3m in 2013. Of these, some 29.8m used 3G services from their mobile phones.
According to data released by ICTA in March 2015, smartphone penetration stood at 93.8% as of the end of 2014, a dramatic increase from February 2013, when a Google report found that smartphone penetration in Turkey stood at 29.6%, with research firm Euromonitor International predicting in July 2013 that smartphone adoption will increase 124.4% between 2012 and 2017. In January 2014, consultancy firm Mediacells ranked Turkey 11th worldwide in terms of expected smartphone uptake, predicting that Turks will purchase 11.6m new smartphones in 2014. Turkcell in particular is pushing smartphone expansion: the company added 3.1m smartphones to its customer base in 2014, and now has 12.7m smartphone subscribers on its network, representing a penetration rate of 40%, up from 19% in 2012.
However, growth in smartphone ownership has brought with it new fears about rising debt, particularly after a rise in non-performing loans (NPLs) in the banking sector, and given the relatively high cost of imported devices. “The government is actually trying to slow demand for smartphones,” Bora Tezgüler, an analyst at Ak Investment, told OBG. “They’ve just introduced the mobile phone credit card cap, so smart-phones can no longer be financed when purchased. One of the reasons for this is that they’re concerned about the rise in NPLs, and the other is to control the current account deficit.”
In addition to financing plans, mobile operators are looking to new research and development (R&D) activities to improve the affordability of smartphones. Turkcell launched Turkey’s first domestically designed smartphones, using Qualcomm technology, in September 2013. The T-series phones offer all the standard features of an iPhone or Android for an average price of $232 (€175) per unit, about half the average price of other smartphones on the market. The Turkcell T50, Turkey’s first operator-branded smartphone with 4G capability, was launched in 2014, and was the country’s best-selling smartphone in the third quarter of the year. “Every 1m phones that will be sold will create TL500m (€176.1m) against the deficit. This money will remain in Turkey,” Koray Öztürkler, Turkcell’s chief corporate affairs officer, told local media.
Avea also has a line of in-house, low-cost smart-phones called inTouch, developed in partnership with the ZTE Corporation, which costs TL399 (€140) and offers mobile music, navigation and social media applications. The company launched the inTouch2, with upgraded features and a price tag of TL449 (€158) in May 2013. Vodafone, for its part, announced in November 2013 that it plans to develop locally produced smartphones in partnership with Turkish electronics maker Vestel, which will carry a lower price tag than imported models. Design and assembly would take place in Manisa, and Vestel plans to make many components locally, including batteries.
According to ICTA, mobile phone imports decreased by 7.5% in 2014, with 14.6m mobile devices imported that year, mainly from South Korea, Taiwan, China and Vietnam, compared to 15.8m in 2013.
Investment
In addition to smartphones, new demand for 3G mobile and fibre-optic internet has led operators to invest heavily in infrastructure and network maintenance to retain and attract subscribers, with investment slowly increasing in recent years.
Türk Telekom leads in capital expenditures, with a total of TL2.17bn (€764,000) invested in 2014, down slightly from TL2.21bn (€778,000) in 2013, largely in fixed-line maintenance and fibre infrastructure. The company is currently undergoing significant network expansions involving millions in loans from China, Europe and North America; in December 2012, Türk Telekom obtained $600m (€452m) in financing from the China Development Bank (CDB) and $172m (€129.6m) from Export Development Canada, followed by another $300m (€226m) loan from the CBD and a $138m (€104m) from the European Investment Bank in October 2013.
Turkcell has seen investments of TL2.14bn (€754,900) in capital expenditures for 2014, up from TL1.82bn (€641,500) in 2013. Moreover, the company announced plans in February 2014 to increase investment in mobile and fibre-optic infrastructure, after investing TL1.8bn (€633.8m) to improve its mobile and fibre networks in 2013. Vodafone, meanwhile, has invested over TL11bn (€3.87bn) since entering the market in 2006, and budgeted an additional TL300m (€105.6m) in 2014 to extend its fibre-optic internet network (see IT overview) and TL40m (€14.1m) to build a new call centre in the south (see analysis). Vodafone investments reached TL463.14m (€163.1m) as of the third quarter of 2013, compared to TL588.5m (€207.2m) in 2012.
Challenges
Turkey’s mobile sector boasts the dubious honour of having the highest industry tax burden in the world, which many analysts say is the industry’s biggest obstacle to growth. The special communications tax (SCT), which charges a 25% levy on “all types of installation, transfer, and telecommunications services given by mobile phone operators”, was imposed as an emergency measure following a devastating earthquake in 1999 and never abolished. When added to the 18% value-added tax applied on all mobile services, the SCT imposes an effective tax rate of 43% on mobile companies and customers. The government reduced the SCT to 5% for data usage in 2009, but this reduction has not had a significant impact for operators. “Data is still a very small portion of overall revenues,” said Tezgüler. “However, if this reform sets a precedent for further reductions, it could be quite positive.”
Other fees include a special consumption tax of 25% on the cost (including insurance and freight) of handsets, a 6% tax paid to the Turkish Radio Television Foundation, an initial subscription charge and a wireless license fee, paid by consumers when a new connection is purchased. Providers also pay standard corporate and numbering fees to the ICTA, as well as a Telecommunications Regulation Authority Share, calculated to 0.35% of net sales per year. Operators have taken particular issue with a mobile-specific treasury share premium, applied to all mobile providers and amounting to 15% of turnover before taxes.
A 2012 report commissioned by the Global System for Mobile Communications Association, an international lobby organisation, found that mobile operators in Turkey provide a direct contribution of TL11.3bn (€4bn) to the country’s economy. “Despite the economic contribution, mobile consumers and operators in Turkey suffer a taxation regime which is specific to this industry and more severe than that faced by consumers in European countries,” read the report. Indeed, local producers have urged the government to impose emergency import tariffs on mobile phones to boost local production further, adding to already strict controls on mobiles being brought into the country.
Outlook
The sector is expected to expand in 2015 on the back of smartphone up-take, growth in data usage and growing subscribership. The fixed-line segment is likely to continue its gradual decline, but high demand for smartphones has bolstered the mobile segment and created a fledgling domestic industry that could help boost mobile subscribership and user revenues substantially. Taxes and competition remain prohibitive to growth, but a young, tech-savvy population and high domestic demand have kept prospects bright for all telecoms operators in the medium term.
