Scaling 3G peaks

Turkey is a country that straddles the east and west, incorporating European, Asian and Middle East cultures. Often classified as belonging to the wider Middle East, it is the region’s largest single telecom markets counting over 60 million mobile subscribers. Despite this large number of users, the country only recently awarded 3G licences, with the three incumbent mobile operators expected to launch services in the middle of 2009

In November, the Telecom Authority of Turkey announced that the country’s largest mobile operator Turkcell had won the largest block of 3G spectrum or ‘A licence’ with a bid amounting to US$462 million. The reserve price for the concession had been set at US$405 million.

Vodafone and Avea also won licences for lower 3G bandwidths, with bids of US$323 million and US$276 million respectively.

Turkcell expects to launch its 3G network in June 2009, while Avea previously stated its network was ready as soon as the licence was available.

An original tender was set in 2007, but Vodafone and Avea refused to participate unless mobile number portability was also offered, thus at the time Turkcell’s 3G licence was cancelled due to lack of competition.

At the beginning of November, mobile number portability was introduced into Turkey, with third-placed operator Avea estimating that as many as nine million subscribers will port numbers, with its own subscriber numbers set to be boosted by a net figure of 2.5 million as a result of the introduction of the regime.

Given that Turkey lies at the door-step of Europe, a continent that first started awarding 3G spectrum about a decade ago, it is intriguing that the development has taken so long to occur in the country. Turkey’s demographics make the ‘delay’ in the award of spectrum even more curious given that the Turkish population is a young one with an estimated average age of just 29 years.

As of the end of December 2007, market leader Turkcell estimated there were approximately 62 million GSM lines in the country representing mobile line penetration of around 88 per cent, according to the regulator.

Market dynamics
Turkcell operates under a 25-year GSM licence, which was granted in April 1998 upon payment of an upfront licence fee of US$500 million.

Second-placed operator Telsim also received a 25-year licence at the same licence fee in 1998, but which was seized by the Savings Deposit Insurance Fund (SDIF) in February 2004. The operator was put up for sale by the SDIF in August 2005, and an auction was held for Telsim on December 13, 2005 with Vodafone submitting the winning bid of US$4.55 billion. The sale process was completed in May 2006.

In 2000, two new GSM 1800 licences were issued. One of the licences was awarded to Is-TIM, a company that began offering GSM services in March 2001 under the Aria brand name, and was formed by Telecom Italia Mobile (TIM) and Isbank.

Is-TIM paid a licence fee of US$2.5 billion for the concession, while the other GSM 1800 licence was awarded to Turk Telekom. Turk Telekom began offering GSM services in December 2001, through its brand Aycell, bringing the number of mobile operators in the Turkish market to four. However In February 2004, Is-TIM, and Aycell merged to form “TT&TIM” which was owned by Turk Telekom (40 per cent), Telekom Italia Mobile (40 per cent) and Isbank (20 per cent). TT&TIM operated under the brand name of Avea.

In November 2004, the Turkish Privatisation Agency announced that 55 per cent of Turk Telekom, which owns 40 per cent of Avea, would be privatised. The public auction for the Turk Telekom stake was concluded in July 2005, with the winning bid being made by a consortium led by Oger Telecom, and which included Telecom Italia and BT Consult. The consortium bid US$6.55 billion, payable over five years and totalling US$7.4 billion with interest.

Telecom Italia Mobile later announced that it would sell its 40 per cent stake in Is-TIM to Turk Telekom and the sale was concluded in September 2006.

By Q308, Turkcell reported a 50.5 per cent rise in net profit year-on-year to US$603.8 million. Revenue was up 19.3 per cent to US$2.06 billion, while earnings before interest, tax, depreciation and amortisation (EBITDA) rose 8.6 per cent compared to the same period in 2007 to US$837.8 million. The operator’s subscriber base stood at 36.3 million at the end of the quarter, while its churn rate rose to 6.2 per cent. Average revenue per user (ARPU) increased by 13.1 per cent from a year earlier to US$17.3.

Turk Telecom on the other hand stated that its consolidated revenues had risen 10 per cent year-onyear for the nine months to end-Q308 to TRY7.6 billion (US$5.02 billion), while operating profit for the first three quarters of the year reached TRY2.2 billion, up 15 per cent year-on-year. Net profit for the nine months amounted to TRY1.68 billion, down six per cent from the same period a year earlier.

Mobile subscriber numbers at Avea reached 11.7 million at the end of September 2008, with 700,000 additions in the third quarter. Blended ARPU for the period reached TRY16.4 (U$10.82), three per cent higher than Q208.

Turkey’s mobile line penetration rate was estimated at around 88 per cent at the end of 2007, representing around 62 million subscribers. That figure is now closer to 70 million

Impact of 3G
Turkcell strongly believes the future of mobile communications is in the development of broadband, and has confidence that its launch of 3G services will capture the imagination of its customers.

“We are the trusted agent for customers and will carry them from GSM to 3G,” forecasts Tayfun Cataltepe, chief corporate strategy and international expansion officer of Turkcell. “We expect to launch 3G in June as it is likely to take another 60 days to receive official authorisation from the High Court, then a further three months after that to deploy.”

Cataltepe views 3G as an opportunity to build a larger ecosystem whereby operators and applications providers work together in the satisfaction of customer needs. “I don’t think that operators can be as creative as those Internet players who don’t wear suits and ties like us,” he says, referring to the entrepreneurial zest that exists in many Internet companies such as Google, Yahoo! and Facebook.

The levelling of licence fees in Turkey at less than US$500 million each is a prudent move that is likely to pay dividends in the pace and variety of services the operators look to bring to market. Given that GSM licences rose in value five-fold in Turkey in just two years between 1998 and 2000, it was conceivable that the Turkish treasury could have looked to maximise potential upfront fees for 3G spectrum, but in the end opted for a relatively cautious approach.

Turk Telecom, which has an equity position in third player Avea, is likely to be best placed to leverage mobile broadband given its extensive investment in fixed line infrastructure already. The telco provides integrated telecommunications services from PSTN, GSM, and fixed broadband Internet, counting 17.8 million fixed line customers; 5.2 million ADSL customers; and 11 million GSM subscribers as of end-June 2008.

Turk Telecom has been investing significantly in integrated telecommunications services during the course of 2008, especially in terms of convergence technology which enables unique combination of Videofon, WiFi phones, 3G devices, computers and IPTV/television sets. The telco is integrating the technologies developed by its group companies Argela, Innova and Sebit to the services offered by TTNET, Avea, and Turk Telekom.

Turkcell’s Cataltepe confirms that fixed broadband is already developing at quite a rate in Turkey, which is in turn raising PC penetration rates. Given the introduction of mobile broadband, he foresees an increase in the number of smartphones and other mobile devices capable of online browsing.

“Affordable dongles are going to be key in expanding mobile broadband in Turkey,” Cataltepe believes.

Avea is arguably the best placed of the mobile operators to move quickly to commercialise its 3G network having stated that it will invest US$800 million in 3G services in 2009, excluding the cost of the licence. Avea management had previously stated that it had completed the deployment of its 3G infrastructure in the middle of 2008, ahead of 3G licences being awarded.

In the middle of December 3G old-hand Vodafone selected China’s Huawei Technologies to supply infrastructure equipment for its planned 3G network in Turkey.

“We signed a five-year agreement with Huawei, which we believe will offer the best technical solution for 3G,” Ian Gray, head of Vodafone Turkey, said in a statement.