Approach With Caution

Economic and political turbulence has given Turkey's telecoms sector a rough ride over the last few years. Last year, however, saw partial recovery. CommsMEA looks at whether this progress, as well as fixed deregulation and consolidation in the mobile market, will provide some much-needed stability.

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By  Richard Agnew Published  June 3, 2003

Introduction|~||~||~|After two years of shrinking revenues and volatility, the Turkish telecoms market has seen signs of a recovery. Consumer spending has picked up and and the sector has regained some of the considerable ground that was lost during the crisis of 2000 and 2001. However, there is a long way to go if the sector is to get back on track.

One of the main impacts of the political and economic turbulence has been the delays that have dogged the planned liberalisation of the fixed telecoms market in Turkey and the privatisation of the incumbent operator, Turk Telekom.

While the mobile market was opened up to two licencees a decade ago, and a further two operators were brought in during 2001, progress towards liberalisation of the fixed and data sectors has been tentative at best. And although deregulation and privatisation is expected this year, there are fears that the delays that have hit the process so far will continue to pervade.

“They have announced that they want to privatise [Turk Telekom] this year but let’s just see what happens,” says Mohsen Malaki, senior analyst, telecommunications group, IDC, CEMA region..

Privatisation, of course, is likely to see a very different and more modern Turk Telekom emerge. The process, being worked out by consultancy Ernst and Young, may see the operator forged into a holding company with around eight divisions focusing on different fields.

The fixed sector, however, is expected by Malaki to grow by only 9% this year as telephony users switch to mobile, and ISDN users move to DSL. Additionally, he sees only flat growth until 2005 and negative growth after that. As a result, the operator will be faced with the challenge of finding new revenue streams at the same time as increased competition comes in.

Liberalisation, which is scheduled for the end of the year as per the government’s WTO commitments, will also force Turk Telekom to contend with a range of new competitors, particularly on the data communications side of the market with offerings such as international frame relay and IP virtual private networks (IP VPNs).

||**||Competition|~||~||~|

While the operator has been building a dominant position in the data market, growth has been slower than expected. The sector grew 22% in 2002, and is expected to expand by a further 28% in 2003, giving new providers the opportunity to cash in.

“Most of the competition is going to happen on the business side,” says Malaki. “Turk Telekom hasn’t provided [businesses] with the best of service, so that’s a market where [new entrants] can come in with better quality of service (QoS), more attractive packages and grab market share,” he says.

“On managed services, we’re expecting quite a few [entrants]... at least three or four. Virtually all the big internet service providers (ISPs) will get licences for IP telephony and provide it to their customer space,” Malaki adds.

Both Turk Telekom and the new applicants are expected to invest heavily as they jostle for position. Ayhen Dikmen, general manager of equipment vendor, Alcatel Teletas, says he expects investment to pick up next year, “after the deregulation goes through and the new regulations are clarified.”

“I would expect concrete steps in local loop unbundling and to see emerging operators to pop up and invest, as well as carriers focusing on the corporate market,” Dikmen says.

Accordingly, Turk Telekom is expected to answer the challenge of the new entrants with investment in areas, such as network digitalisation, IP backbone, metro networks, longhaul SDH, customer care and billing. “Because it took a long time for privatisation, there has not been a great deal of investment for the last few years. In order to complete its infrastructure and compete, it will have to invest heavily in almost every field,” says Dikmen.

Broadband is one particular area that could see significant development, despite the cancellation of a tender for DSL equipment by Turk Telekom earlier this year. “It is already planning a fairly significant increase in broadband connections. That should provide for additional revenues to compensate for the loss that telephony revenues would make,” says Malaki.

By contrast, the mobile sector is increasingly nearing maturity in terms of penetration. As a result, the operator’s attempt to reap growth from the mobile industry — an area singled out for growth going forward despite the economic climate — has made little impact.
Aycell, Turk Telekom’s loss-making wireless arm, along with Aria, Telecom Italia’s subsidiary, which both came into the market in 2001 to compete with incumbents Turkcell and Telsim, have struggled due to ongoing legal difficulties, as well as the effects of economic turbulence. The same year they launched, end-user spending on mobile services shrank by a whopping 29%. As a result, despite a small, 12% recovery in 2002, the two operators had only managed to build up 2% and 5% shares respectively by the end of last year.

||**||Consolidation|~||~||~|

“They launched under full economic recession, [as well as] the devaluation [and] currency crisis, and tried to sell to a consumer that was already hit very hard,” says Malaki. “The business segment was [also] unwilling to invest, so they really suffered throughout 2001 and 2002, and basically didn’t get much market share,” he adds.
Aria’s strategy has also been held up by a costly dispute with Turkcell, the incumbent mobile operator, over an agreement to provide it with access to its network and coverage outside the major cities - a pre-requisite for its ability to sign up higher value, business customers.

While Aria set out plans at its launch to cover 50% of the population within two years and 90% within five, and laid out considerable investment up front, the operator ended up in entangled in a three-way dispute with the regulator and Turkcell over the terms of the deal.

“That’s basically why its [Aria’s] market share is so low,” says Malaki. “It launched on the expectation that it would have national roaming and [be able to] market aggressively to businesses and churn some of the wealthy customers from Turkcell, but it couldn’t do that,” he adds.

The dispute, however, would appear to have reached a conclusion after Telecom Italia stated this month that Aria and Aycell would merge. Under the plan, Telecom Italia and Turk Telekom will hold 40% stakes in the new company, with the remainder being held by the Turkish bank Is. More details are set to be announced by the end of June.

The merger is likely to signal the end of the four-player system in Turkey until UMTS licences are offered by the regulator — a move which Mehmet Faith Yurdal, the head of the Telecommunications Board, has said will happen late next year but is not expected by Malaki until 2006.

However, the move would also allow the two smaller operators to pare spending and gain a more stable footing in a recovering market. And despite the Telecoms Board’s assertion that it will bring an end to the national roaming dispute, the two could shift to a lower cost base and share their infrastructure, decreasing the need for such an arrangement.

“The merger... would consolidate the market and perhaps make it more profitable for the third entrant. That way [Aria and Aycell] could move forward without a national roaming agreement,” Malaki contends.
However, he also expects the new entity to remain a small player in the market for the forseeable future, and with only steady growth in mobile subscribers expected in Turkey going forward, the company must begin to attract higher-spending customers if it is to reap growth.
“That should be their strategy,” Malaki says. “Obviously they need to pursue pre-paid [users] but they also need to develop some kind of marketing [plan] and tariff packages that gain from the current subscriber base of Turkcell, particularly the business segment and wealthy population,” explains Malaki.

Turkcell, however, has managed to retain its grip on the market so far, despite the efforts of number two operator Telsim and the new entrants.

||**||Going Forward|~||~||~|

The operator actually raised its 64% share in 2000 to 74% by the end of 2001, a move put down partly to the ongoing legal dispute over vendor financing between Telsim and equipment manufacturers, Nokia and Motorola, which saw Telsim suffer a “significant” loss of users.
“Most of them [customers lost by Telsim] were contract customers, mostly to Turkcell,” says Malaki. Telsim managed to recover ground last year, but Turkcell still had a 67% share by December, he adds.
If the Turkish mobile market can regain stability, there is still room for growth. Penetration currently stands at 34.7%, and the market is expected to become saturated at 51% by 2007. In terms of mobile data, SMS revenues are expected to rise from 8% of end-user spending currently, to 12% by 2007, while MMS (multimedia messaging services) is expected to contribute 4.2% by the same point.

Much of the growth, however, is expected to come from the recovery of voice revenues, which were hit hard during the during the economic crisis. According to IDC, outgoing voice ARPU (average revenue per user) plummeted 51% during 2001 and 8% last year. Overall ARPU is expected to remain steady, however, as subscriber growth will see mainly lower-spending customers coming on board.
“Basically recovery is coming from voice, as well as SMS and MMS usage,” says Malaki.

A stabilised market is also expected to offer opportunities for equipment vendors in these areas, as well as the build out of mobile networks into areas outside cities and the implementation of messaging platforms and GPRS upgrades.

“Much of the opportunity is going to lie in increasing capacity in urban areas. The operators are going to need more capacity in congested areas such as Istanbul and Ankara,” adds Malaki.

Turkcell, however, remain cautious. In its last results, it predicted its ARPU would head downward throughout the remainder of the year, a trend it blames partly on the economic difficulties of the last few years and the resulting fragility of consumer confidence.

According to Turkcell CEO Muzaffer Akpinar, the war in Iraq had also had a limited, destabilising effect during the period. “The military operation in Iraq created both political and economic tension in Turkey... this also had a negative impact on already-fragile consumer confidence,” he adds.

Akpinar’s words underscore the volatility surrounding the telecoms sector. Malaki, however, points to the partial reverse of last year and the end of much of the political uncertainty as a sign that “cautious recovery” will characterise the next few months.

“People are starting to spend more, so we’re expecting that by the end of this year or by early 2004, consumer spending will have recovered substantially. It’s a lot slower, but it looks positive,” he concludes.
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