TURKISH INFORMATION AND COMMUNICATION TECHNOLOGIES - Industry Report

Executive Summary
The Turkish ICT sector is a fast growing sector with a CAGR of 14% between 2005 and 2009. Future trends, global and local developments present more opportunities each year. Since 2005, many large international players have invested in Turkish ICT sector companies.
The fact that the size of the Turkish ICT sector is still below EU averages gives Turkey great potential for growth.
The overall size of the ICT market in Turkey is estimated as US$29 billion in 2009. The sector can be considered to comprise four main categories: telecommunications, internet & broadband, hardware and software. The Turkish ICT market is dominated by telecommunications, constituting approximately 73% of the total, with the whole IT market comprising the other 27%. The IT market has experienced double-digit growth over recent years ever since the 2001 financial crisis, but the share of software and services are significantly behind western markets and CEE countries, signalling significant growth potential.
The telecommunications sector in Turkey has grown rapidly in recent years as a result of increases in the disposable income level and government support for liberalization and privatization of the telecommunications sector. However, Turkey still has low fixed-line, internet and broadband penetration rates compared to its European peers.
The large population in Turkey as well as the demand for high-tech telecommunication services are expected to increase total IT spending to a level of US$9.1 billion in 2013 from US$6.1 billion in 20091. Mobile penetration levels are expected to increase further.
Turkey is an attractive market for the development of telecommunications with its young population and its network infrastructure covering the whole country. Turkey's fixed line operator is Türk Telekom which was wholly state owned until 2005. Türk Telekom was privatized and 55% of its shares were acquired by Oger Telekomünikasyon in that year, and the State's ownership was further reduced by a public offer in 2008. Mobile communications is the most competitive sub-sector of the Turkish telecommunications market. There are 65.8 million registered mobile subscribers in Turkey as of 2008 year end. There are currently three licenced mobile operators namely Turkcell, Vodafone and Avea. Average mobile penetration rate for EU countries was 119% as of October 2008 whereas Turkey's penetration rate is 92%. the mobile penetration rate is expected to increase further.
Multinational players constitute a large part of Turkey's technology sector. Companies such as IBM, Hewlett Packard, Dell, Siemens, Cisco and NCR have local subsidiaries in Turkey. Recently, there has been a huge increase in the number of technology improvement areas and where the Turkish IT companies are located.
Technology Development Zones (“TDZ”) have been established. Software houses benefit from significant tax and investment incentives provided by the government in these technoparks. The Turkish government has implemented new legal frameworks to encourage R&D and IT spending, which will support the growth of the sector. Income earned as a result of R&D activities by companies located in technology development zones is exempt from tax. Additional incentives include contributions to the social security payments of R&D employees.
Global Sector
Global IT spending reached a level of $2.4 trillion in 2008, from $2.2 trillion in 2007, with a growth rate of 8%. The US is the largest IT spender in the world, with $810 billion of spending in 2008. The Western and Central Europe region is the second largest IT spender, with $663 billion ( 483 billion) in 2008. Asia Pacific's IT spending followed closely at $588 billion and is estimated to have grown at double-digit rates in 2008.
Eastern European, Middle East and African IT spending was also growing at double-digit rates in 2006 and 20072. In 2009, global IT spending is forecast to fall by 7.1% in US$ terms due to the global economic conditions.
Within the global IT market breakdown, the largest category is IT staff costs with 30% share, estimated to have amounted to $699 million in 2008. The second largest category in the global market is the IT services and outsourcing category with 22%. The global software spending is lower than the computer or communications
In 2008, the global telecommunications market size reached US$1,377 billion, up from US$ 1,246 billion the previous year, a growth rate of 11%. Due to the global economic conditions, the global telecommunicationssector is expected to shrink by 5.3% from 2008 to 2009. The major telecommunication players in the world have been suffering from the unfavourable currency fluctuations and shortage of new growth opportunities.
During the slowdown, customers in western markets have switched to cheaper tariffs and limited their usagewhich placed serious pressure on the largest telecommunication operators. Accordingly, a movement towards consolidation is expected in global telecommunications markets. The global operators are actively seeking toacquire the few new licences and takeover targets left in under-penetrated emerging markets.
The internet market has been facing difficulties in 2008 however the number of people with internet accessis expected to reach c.31% of the global population in 2009, up from 28% in 2008. Broadband, which as yet has a small base, is also growing rapidly. Total broadband subscribers globally are projected to reach c.396m in 2009. However, the growth rate is expected to be higher in emerging markets than in the developed saturated markets.
Worldwide fibre-based broadband subscribers are expected to reach 44.7m by the end of 20095. Most of the growth in this area is expected to arise in the Asian and US markets, where leading fixed-line operators are expanding their networks in the major cities. South Korean and Japanese markets, which are already strong in broadband, are expected to continue to grow in this area. The emerging markets are suffering from the weak investment in broadband services.

The Semiconductor Industry Association, a US lobby group that tracks global markets and Economist Intelligence Unit, 2009 The hardware segment was heavily impacted by business spending cuts during the financial crisis in 2008.However it has started to recover from the effects of the crisis, and personal computer sales have started to grow above expectations. Chip sales in the US have been increasing consistently for several months in 2009 and the Q3'2009 sales were 19.7% higher than Q2'20096. However, these figures are still 10.1% lower than in the previous year and hardware spending is expected to contract by more than 12% in 2009 after a slow growth rate of 4% in 2008.
The Domestic Sector
Overview
The Turkish ICT sector is a fast growing sector with a CAGR of 14% between 2005 and 2009. Future trends, global and local developments present more opportunities each year. The fact that the size of the Turkish ICT sector is still below EU averages gives Turkey great potential for growth. The overall size of ICT market in Turkey is estimated to be US$29 billion in 2009. The Turkish ICT market dominated by telecommunication, constituting approximately 73% of the total, with the entire IT market constituting the other 27%. The IT market has experienced double-digit growth over recent years except during the 2001 financial crisis.
The size of the IT market and the share of software and services are significantly behind western markets and
CEE countries, indicating significant growth potential.
The export and import volumes in ICT sector have reached a level of US$4 billion and US$10 billion respectively
as of 2008. The foreign trade volumes in Turkish ICT sector are as follows:
The sector can be broken down into four main categories as follows:
• telecommunications,
• internet & broadband,
• hardware and
• software.
The four categories are further analyzed in the following sections.
Telecommunications
Turkey is an attractive market for the development of the telecommunications sector with its young population and its network infrastructure covering the whole country. The liberalisation of the telecommunications sector
in Turkey has led to higher quality services offered at more suitable prices. Total telecommunications revenuein Turkey, comprising both fixed line and mobile, reached US$ 13 billion in 2008 and is expected to reach US $16.9 billion in 20098. In 2008, 33% of total revenue consisted of fixed line revenues whereas 67% was mobile revenues. In parallel with the revenues sector, investment in electronic communications is also growing. Total investments for fixed and mobile operators reached to US$ 3.2 billion in 2008 with an increase of 68% compared to the previous year. Mobile sector investments amounted to c.62% of the investment total in 2008. The fixed line penetration rate reached a peak in 2001 at 28.5% and has been slightly decreasing starting from 2004 due to the growth of mobile usage
Turkey's fixed line operator is Türk Telekom which was state owned until 2005. In November 2005, Türk Telekom was privatized through a 55% shareholding being sold to Oger Telekomünikasyon (a consortium led by Saudi Oger and Telecom Italia). Following that block sale, a further 15% of Türk Telekom's capital was privatized through a public offering on the Istanbul Stock Exchange, where Türk Telekom has been traded since May 15, 2008. Turkey's fixed line and mobile sector revenue level is below mature markets such as Germany, Italy, France and the UK.
Mobile communications is the most competitive sub-sector of the Turkish telecommunications market. There were 65.8 million registered mobile subscribers in Turkey as of 2008 year end. There are currently three licenced mobile operators namely Turkcell, Vodafone and Avea. Mobile Number Portability was introduced in Turkey on November 9, 2008 to strengthen the free competition in the market.
Average mobile penetration rate for EU countries was 119% as of October 2008 whereas Turkey's penetration rate is 92%. The penetration rate in Turkey is expected to increase further towards the EU level.
Internet & Broadband
As shown in the graph below, the household broadband penetration rate in Turkey appears low compared to EU average; however penetration rate in Turkey still exceeds some European countries such as Italy, Bulgaria and Romania, and is very close to the rates in Poland, Portugal, Hungary, Estonia and Spain. On the other hand, the personal computer (PC) penetration level in Turkey in 2008 was only about 22.5%, compared to 72% in the UK. Since internet usage depends on PC penetration, increasing PC usage and ownership in Turkey should create opportunities for the broadband market.
After the migration from dial-up and cable Internet to ADSL, ADSL has become the most widely used Internet access tool in Turkey. The number of ADSL subscribers had risen to a level of 5.8 million in 2008 from 1.5 million in 2005.
Considering internet usage in Turkey, the ratio of subscribers per 100 people is expected to reach 41% in 2009, compared to 37% in Greece and 45% in Bulgaria. The number of internet users in Turkey has grown with CAGR of 225% between 2005 and 2009.
The rates of internet access, the computer usage as well as internet usage have increased consistently between 2007-2009 in Turkey13. As shown in the chart below, the internet and computer usage of the enterprises in Turkey has reached high levels between the same period.
Quarterly market shares of the broadband operators are indicated below. The market share of TTNet which is owned by the fixed line operator (Türk Telekom) decreased slightly to 93.3% in the Q4'2008 and the shares of alternative operators reached 5.6% of the market; however TTNet's dominance remains clear.
Hardware
The stock of PCs in Turkey was at a level of 92 per 1,000 people in 2006 have grown rapidly and reached an estimated level of 225 per 1,000 people in 2008. Compared to European markets, this figure corresponds to c.500 per 1,000 people in Italy and c.720 in France and Germany. The value-added tax (VAT) reduction on consumer durables, introduced in March 2009 in the Turkish market to counter the impact of the financial crisis, has improved the sales of PCs and laptops in 2009.
Major multinational institutions, such as IBM, Hewlett Packard, Dell, Siemens, Cisco, and NCR, account for a considerable share of Turkey's technology market. These multinationals typically have local subsidiaries, which assemble PCs and other IT hardware components imported from overseas. Sales are realized both domestically and for export to the EU, Eastern and Central Europe, and the Middle East.
Software
The Turkish software industry is a dynamic and fast developing sector. However, the software market is not big as other developing countries such as India, Ireland, Israel, Brazil and China. Turkey has implemented a new export promotion system which is in line with the rules set out in international treaties. There are currently 10 different state aid programs. Four of these programs target only SMEs. Recently, there has been a huge increase in the number of “technology improvement areas” where the Turkish IT companies are located.
Technology Development Zones (“TDZ”) have been established. Software houses located in these technoparks and technology development zones benefit from significant tax and investment incentives provided by thegovernment. Law No: 4691, the “Technology Development Zones Law,” was enacted on June 26, 2001. By November 2009, the number of companies located in TDZ's reached 1,217.
Today, there are about 40 Computer Engineering Departments in Turkey in various universities. In addition to that, it is estimated that around 15,000 graduates of other disciplines with IT knowledge enter the market each year. Moreover, the number of private computer training courses under the support of the Ministry of Education is 727. Turkey has highly qualified human resources in the IT software sector. Very competent, young and dynamic computer engineers and software developers have been trained and fulfilled the increasing demand in the sector. It is believed that the rates of employee turnover are lower and loyalty is higher than in many of the
low cost base countries developing software around the world. Software piracy is one of the biggest problems in the sector. The software piracy rate in Turkey is around 64%.
The Turkish government is taking the necessary actions to prevent copyright theft. Turkish software companies are increasingly obtaining various certifications which are mandatory for large scale projects. The Turkish government is giving high priority to market friendly policies in order to improve the environment for foreign direct investors. Various incentives, tax exemptions and waiver mechanisms introduced in the law create important potential opportunities and benefits to universities, academics and companies that have R&D activities and/or are developing software in technoparks. Accordingly, the participants are exempt from corporate taxes on the revenues generated by software development and R&D activities until December 31, 2013. Additionally, the wages of R&D and software development personnel in the technopark companies are exempt from any taxes until December 31, 2013. The companies can also benefit from the other government support determined by the law.
Main Players
Reform of the communications market started in accordance with the Telecommunications Law in 2000. The law established an independent regulator, “the Information and Communication Technologies Authority” and predetermined full market liberalisation starting from January 2004.
Until 2001, the GSM operators Turkcell and Telsim enjoyed a duopoly in the mobile market. In 2001 the government awarded two further GSM licences, to Aycell, owned by Turk Telekom and to Aria, owned by telecom Italia. The two new mobile operators competed to gain market share and merged in February 2004.
The ownership of Telsim was transferred to the government after its owners were convicted of fraud in relation to different areas of their activity. The operator was afterwards privatised in an international tender won by Vodafone in December 2005. 3G mobile licences were awarded to all three operators in 2008 and services commenced in 2009.
Sector Outlook
The Turkish telecommunications and IT markets have grown rapidly in recent years as a result of increases in disposable income levels and the government support for liberalization and privatization of the telecommunications sector. However, Turkey still has low fixed-line, internet and broadband penetration rates compared to its European peers. The large population level in Turkey as well as the demand for high-tech telecommunication services is expected to increase total IT spending to a level of US$9.1 billion in 2013 from US$6.1 billion in 2009 12. Mobile penetration levels are expected to reach 115 per 100 people during the same period14. Increasing competition in the telecommunication sector is also expected to motivate operators such as Turk Telekom, Turkcell and Vodafone to continue looking for new business expansion and customer retention strategies to sustain and gain market share. These companies are likely to invest in new technologies such as WiMAX, IPTV and 3G, pushing the deployment of network infrastructure in the country.
Fixed-line penetration has been declining since a peak around 2001-2004 in Turkey, similar to most developed and developing countries. Accordingly, the penetration rate is estimated to have decreased to 24.5% in 2008, from around 28% in 2004. The penetration is low compared to EU countries, for example c.40% in France, 45% in Germany, 55% in Greece and 33% in Hungary.
Population growth and the increasing use of the Internet are the main demand growth drivers for telecommunications services in the forecast period. Fixed-line penetration is expected to decline to under 20 telephone main lines per 100 population by 2013, as more individuals choose to rely only on mobile telephony. Demand for broadband is expected to be the main revenue growth driver for fixed-line operators in the future.

Turkish mobile telecommunications segment has achieved a considerable size with its share of c.60% within the total sector revenue in 2008 and is expected to continue growing. The mobile number portability (MNP) which was launched in November 2008, as well as the 3G mobile services which were introduced into the market in July 2009, have accelerated the competition between the three market players. The mobile virtual network operators (MVNO) are also expected to start operating in the market along with the three mobile operators by the end of 2009. The mobile-phone subscribers are expected to grow by an annual growth rate of 5.5% between 2009 and 2013. This will increase the mobile-phone penetration rate in Turkey to about 115% in 2013, similar to most EU countries, where penetration rates are generally around 100-120%15. There were 24.5m internet users in 2008 in Turkey, compared to c.9.4m in 2004. The ratio of subscribers per 100 people reached a level of 34.1% in 2008, compared to 13.6% in 2004. The ratio is still low compared to European countries.
The stock of PCs increased with an annual growth rate of 38% between 2004 and 2008 and reached 16.2m in 2008. Sales were supported in recent years by declining international PC prices and the strong Turkish Lira (particularly until October 2008), making imported PCs less expensive. The reduction in value-added tax (VAT) on consumer durables, introduced in March 2009 to combat the impact of the financial crisis, has lifted PC and laptop sales. The number of PCs per 100 population is expected to rise to 36 per 100 population in the forecasts.
SWOT Analysis
Strengths
• Demand for high-tech telecommunication services,
as well as the large Turkish population, are expected
to increase total IT spending
• Huge potential for growth considering the young
population compared to Western developed countries
• Companies that have R&D activities in TDZs are exempt
from income tax for these activities
• Government institutions are one of the biggest IT buyers
• Share of IT in total public investment is growing WWeaknesses
• High (though reducing) software piracy rate
• High taxation (VAT and Special Communication Tax)
in the sector
Opportunities
• Increasing budget allocation by government for public
IT investments
• Mobile phone subscriptions are expected to continue
to grow
• The ability to train highly qualified, young and dynamic
computer engineers and software developers in ever
increasing numbers T Threats
• Undeveloped collaboration culture of R&D and
innovation in sector
2.5 Investment Opportunities
The ICT sector in Turkey has witnessed strong growth in recent years. The mobile penetration rate and internet usage are expected to continue to increase in line with higher demand in the country. Personal computer usage is also increasing, creating a sustained demand for the hardware sector.
The Turkish government has implemented new legal frameworks to encourage R&D and IT spending, which will support the growth of the sector. The income earned as a result of R&D activities for companies located in technology development zones is exempt from tax. Additional incentives include contributions to the social security payments of R&D employees.
Turkish companies operating in the ICT sector have great potential for growth. Of the top 500 IT companies within the Deloitte Technology Fast EMEA 2009 list, 30 companies were from Turkey, following the UK, France, Netherlands, Norway, Sweden and Germany.
Since 2005, many large international players have invested in Turkish ICT sector companies. Below is a list of M&A transactions by foreign investors in the Turkish ICT market between 2005 and 2009:
Sector Establishments and Institutions
Abbreviations
ADSL Asymmetric Digital Subscriber Line
BMI Business Monitor International
CAGR Compound Annual Growth Rate
CEE Central and Eastern European Countries
CMMI Capability Maturity Model Integration
EIU Economist Intelligence Unit
EMEA Europe, the Middle East and Africa
GDP Gross Domestic Product
ICT Information and Communication Technologies
ICTA Information and Communication Technologies Authority, Turkey
IDC International Data Corporation
IPTV Internet Protocol Television
ISO International Organization for Standardization
MNP Mobile Number Portability
PSTN Public switched telephone network
SME Small and Medium scale Enterprise
SPICE Software Process Improvement and Capability Determination
TDZ Technology Development Zone
US United States
US$ US Dollars
VAT Value Added Tax
WiMAX Worldwide Interoperability for Microwave Access
3G 3rd Generation