Market experiences U.S.-style growth and growing pains

Editor’s note: Tim Sevenoaks is projects director of IBS Research and Consultancy, Istanbul.

Many to its west suffer from misconceptions about Turkey. Six hundred-odd years of intermittently suspended political and cultural antipathy to the Ottoman Empire, spiced with fascination for some of its more outré practices, and lousy PR that has been comprehensively extended into the republican period, have contributed to this. The recent burgeoning of its Internet sector is evidence that Turkey is not the place you may believe it to be. The Internet and the business models it enables have been hot subjects for the last couple of years in Turkey’s commercial capital, Istanbul. Dot-com start-ups and tech subsidiaries are proliferating there, often headed by foreign-educated Turks. Their amplified tones at the several e-business-related conferences hosted recently in Istanbul dispel much of what the West believes about Turkey: These business leaders are young, they speak MBA American, they wear DKNY suits and subscribe to Red Herring magazine. Some of them are even women. It’s all a long way from carpet dealers and apple tea.

Such young entrepreneurs have long led a chorus, with descants added by brokerage houses and some research companies, whose main theme has been something along the lines of: how great the Internet sector is in Turkey, how much it has grown, how much more it will grow and just how much money will be made.

While in essence true, such noise was often premature; the sound of the market talking itself up. The pity of it was that it obscured from more conservative types the real, and quite impressive enough, revolution that was taking place. Now, anyway, reality is catching up. You still hear no less blarney in Istanbul than you would in, say, Seattle, but the fact is that Turks really are going online in larger numbers, and that the recent expansion of its telecommunication and PC markets seems finally to have given Turkey the critical mass needed to enter the New Economy.

After the forgoing, a note is perhaps in order on the numbers that follow. It is difficult, in the absence of an independent watchdog, accurately to estimate Internet penetration in Turkey. These figures are the result of many interviews with major ISPs, Turk Telekom (the largely monopolistic state telco), and companies involved in the construction of TTNet, Turk Telekom’s Internet infrastructure provider. Additionally, for its End User Survey, IBS visited 4,700 homes across Turkey in order to interview a representative sample of the Turkish Internet user population. For a full explanation of the methodology and sampling employed, please see the survey itself. Details are available at www.IBSResearch.com.

Chart 1

In the first nine months of 2000, the number of subscribers to ISPs rose by about 110 percent to 850,000. We believe that the end-year total will be around 1 million, representing a subscriber penetration rate of 1.5 percent of Turkey’s forecast population of 66 million. The user per subscriber rate is shrinking, from well over 3:1 in the past, it is approaching 2:1 as 2000 unwinds. This would imply a growth of Turkey’s home-accessing1 online population from 1.35 million at the end of 1999 to around 2 million at the end of 2000. This would represent a penetration rate of some 3 percent.

This is still lower than some other emerging European markets, but Turkey’s large population, approximately 37 million of whom are under 24, should be borne in mind here.

Chart 2

What, then, is holding things back? The main problem has been low PC penetration levels, because of low spending power and highly uneven income distribution, and a frustratingly poor Internet backbone.

In Turkey, only around 14 percent of the population have the income levels required, at present prices, readily to buy PCs. Beyond this, the sector will develop as fast as social pressures prevail over low purchasing power. The cost of a new PC ($1,600) in Turkey represents five months’ wages for the statistically “average” Turkish citizen.

That said, the Turkish GSM (global system for mobile communications) experience - subscribers have leapt from around 7 million to about 14 million in the first nine months of 2000 - teaches us that Turks are fond of technology, are status- and fashion-conscious, particularly in urban areas, and are willing to pay for the privilege. Turkish buyers are in fact inclined to spend a far higher proportion of their income on communications technology than would seem plausible in a plain reading of income statements.

Moreover, PCs are becoming more available to upper-middle- and middle-income groups with new promotions for both generic and branded hardware. The campaigns of several companies, who have taken to bundling ready-to-go PCs with ISP subscriptions with long-term repayment schemes at low or zero interest, are also driving PC ownership. Currently, PC sales are concentrated in Turkey’s three metropolitan cities, Istanbul, Izmir and Ankara. In 2005, we assume that overall PC penetration in Turkey will be a little over 14 percent.

Chart 3

Digital TV and wireless access is expected to become increasingly significant in Turkey over the coming 12 months and beyond. However, the public’s response to a vigorous marketing campaign from GSM operators and handset manufacturers, extolling the virtues of - thus far slow and expensive - WAP (wireless application protocol, the universal standard for bringing Internet content to mobile phones and other wireless devices) has been underwhelming, in Turkey as elsewhere. But:

  • Sales of mobile telephones are growing rapidly. Turkish consumers across the social spectrum have taken to mobile telephones in a big way.
  • Turkish GSM operators have already begun implementing new technologies like GPRS (general packet radio service) (Telsim claims to be only the third operator in the world to set up a - very limited - GPRS network) that will eventually facilitate cheaper Internet access.
  • The entry of two further GSM operators, namely the Isbank-Telecom Italia consortium (Is-Tim) and Turk Telekom, is likely to stoke competition, bringing down prices and connection charges.

The poor backbone may be blamed on the slow pace of telecom liberalization. In Internet sector offices all over Istanbul, the mere mention of Turk Telekom, the state telco, brings an almost unanimous and withering response. “If Turk Telekom didn’t monopolize Net infrastructure, there would be better service quality, higher penetration, and lower fees,” is a polite summary, from Beyza Isik, CFO at VestelNet. Among the most vociferous of TT’s critics are the Turkish ISPs, many of whom are well-enough funded, and strategically inclined, to lay their own fiber optic networks. What frustrates the industry is that until, at the latest, 2004, nobody but TT is allowed to lay cable. And TT has been unwilling - or unable – to do a decent job of it itself.

Chart 4

Among ISPs, Superonline currently dominates the market, though tough and well-funded competition is catching up fast. There are about 80 ISPs in Turkey, but the top five command a combined 72 percent share of the market as of October. Consolidation is expected, leading to the long-term presence of possibly five companies competing for residential and corporate access, the latter, evidenced by the considerable ignorance of Turkish companies exposed in IBS’s Business User Survey2, a niche with considerable growth potential. “The corporate market will grow in an incredible way. Companies will soon have to have a Web site and will have to provide services on that Web site. Furthermore, they must go beyond presenting their products on the Web to selling their products there,” says Ahmet Dalman, CIO at Dogan Online.

But currently dial-up access fees constitute the vast majority of revenue, representing between $80-100 million in 2000.

2000 saw the main media groups of the country all start determined efforts to put the same stamp on the Internet as they have on TV and the press. Ixir.net was launched by Dogus Holding (owner of NTV, Turkey’s premier news channel, and Kanal E), Turkport by the Sabah Group (Turkey’s second largest media group), and E-Kolay.net by Dogan Holding (owners of Hurriyet and Milliyet, Turkey’s best-selling daily broadsheets). All have used substantial promotional and advertising campaigns. All are expected to capture a sizeable share through their big marketing, availability and low access fees.

As competition escalates, ISPs are developing new strategies. E-kolay.net, for example, is offering lifetime subscriptions and Ixir.net customized subscription fees. As in the global market, ISPs have started price wars. Many companies are offering value-added services in addition to low-cost connections. Others are cooperating with hardware suppliers, as in the case of Superonline and Hewlett-Packard. Some hardware companies, (e.g., Vestel) have established their own ISPs. Vestel.net launched a new value-added marketing strategy for three-year subscribers, which comprises a low connection fee, a free PC and a credit card from the Group’s bank. In less than six months, the company sold approximately 40,000 “Veezy” Internet packages. RTNet, the ISP owned by Rumeli Telekom, itself the owner of Telsim, the country’s second GSM operator with 32 percent market share, has an aggressive revenue strategy based almost solely on e-commerce. Its access charge is only around $2 per month, against a break-even point in Turkey of around $6 per month. Other ISPs interviewed were dismissive (but a little uncomfortable?) about the practicability of such a structure in Turkey - yet.

Chart 5

Indeed, in the future, many of the ISPs anticipate e-commerce as their main revenue stream. As of mid-2000, around three-quarters of Turkey’s Internet user were aware of e-commerce, but only 3.37 percent of the end users interviewed for IBS’s Turkish Internet User Survey had carried out an online transaction. Most, however, were thinking of doing so, and the value of e-commerce transactions in Turkey is forecast to grow exponentially over the next five years.

Current online spending is very low and concentrated on CDs, books and clothing. This is expected to change as the number of retail stores, travel and leisure sites on the Internet increases. In order to project e-commerce revenues, we first forecast online spending per person.

Chart 6

These forecasts suggest that the share of online spending in per capita GDP will be 2 percent in 2005. In 1999, e-commerce spending in Turkey was around $1 million. In 2000, the Koc Group’s Kangarum targets earning that revenue each month.

Net advertising, too, is developing at a gentle pace. Turkish Internet advertising revenue was around $500,000 in 1999. As of mid-2000, that figure was being earned every three months, according to one leading ISP.

Turkey is expected to follow the pattern observed in the United States, with the number of companies advertising on the Internet soon greatly to increase. Total advertising expenditure in the United States was $206 billion in 1998, 2 percent of which was spent online. In 2001, this share is expected to rise to 5 percent. A similar trend is forecast for Asia. Considering the lag in adoption and penetration between the Asian and Turkish markets, we project that online advertising expenditure will reach 2 percent of total advertising revenues in 2002 (that is around $25 million and 4 percent in 2005).

Despite - or perhaps because of - its short history and current low penetration, the Turkish Internet sector is growing fast and has tremendous potential for further growth.

Chart 7

Turkey has distinct advantages.

  • Lessons learned the hard way in the United States and Western Europe may be applied in Turkey more or less from the outset. Those e-business models that have proved successful in the evolutionary struggle of developed Net economies may be reproduced with relative safety in the Turkish market.
  • Telecommunications deregulation, though still slow, is paving the way for improved infrastructure.
  • ISP fixed fees are falling, as companies prepare to seek advertising and, primarily, e-commerce revenue generated from traffic rather than subscription fees.
  • Strong local companies have been established early, with deep pockets. In addition, the funding of parent companies is not likely to be too fickle, given the high tag on emerging market subscribers in company evaluation, and the increasing share of little-brother Internet companies in their overall corporate value.

Such financial confidence has helped Turkish companies to be innovative in at least two areas in their efforts to generate revenue and improve subscriber levels. One is an e-commerce revenue stream where, instead of taking a commission or percentage from buyer or seller, the portal retains the sale fee for one month for investment. The other, far more important, is the alacrity with which well-funded Turkish ISPs have bundled PCs with ISP services, attempting to spread Internet access infrastructure across the all-too-large Turkish economic divide.

This is why some international investors and financial institutions place Turkey at the top of their emerging European league for Internet investment opportunities. Analyses by several brokerage houses project for Turkish ISPs the highest future values in the region. Underpinning such valuations are Turkey’s large and young population, its overall strong economic growth, and possible access to the further 40 million Turkic-speaking peoples in the Central Asian republics.

A problem for investors into Turkish ISPs and portals may be the entry of international giants such as Yahoo!, who have been looking at establishing a Turkey office. Further - most agree corrective - reverses to tech stock valuations may limit Turkish companies seeking to augment capital and expansion through public offerings. This will give further advantage to those with rich parents - a happy status shared by six large Turkish ISPs.

Notes

1 This figure excludes users accessing from Internet cafés and work. Taking into account cafés, the figure could easily rise by over 25 percent, according to the IBS End User Survey. Corporate access is notoriously difficult to calculate on an individual basis, but corporate usage would significantly augment the online population.

2 Three interviews (with G.M./owner, chief technology officer and one staff member employed for at least one year) at 70 top companies in 16 Turkish sectors.