Turkcell Gains in Turkish Mobile Turmoil
With its young and relatively affluent population of 73 million people, Turkey has been one of the biggest emerging-market growth stories for the mobile industry in recent years. But something grim happened in the past 12 months: Hit hard by the global economic crisis—including a record 14% decline in Turkish gross domestic product in the first quarter of 2009—the mobile-services business in Turkey shrank for the first time in history. All told, some 3 million accounts went out of service, pulling down mobile penetration from 92% of the population to 88%. A decline in the number of subscribers would be bad enough, but Turkey also has witnessed a nearly suicidal price war among its three fiercely competitive mobile operators, Turkcell (TKC), Vodafone (VOD), and Avea, a unit of the country's dominant fixed-line provider, Türk Telekom (TTKOM.IS). The market share battle has been great for consumers, who have been able to snap up aggressive new service plans at enticing prices. But it has wreaked havoc on financial results at all three carriers. Vodafone's first-half Turkish revenues, reported on Nov. 10, were down nearly 8% from a year earlier, and the company booked a $118 million loss at the unit. Avea's profit margin (for earnings before taxes, depreciation, and amortization) fell to just 1.6%, from nearly 25% a year earlier. And on Nov. 12, No. 1 operator Turkcell reported that third-quarter profits were down 45%, partly because of heavy marketing spending to hang on to customers. All three suffered profit deterioration during the recession, says telecom analyst Mehmet Agyuz at EFG Istanbul Securities. "Margins are down overall," he says. But while he does not expect competition to ease until 2010, Agyuz now sees a strong incentive for carriers to behave more rationally. "The price war was clearly not sustainable," he says. building its billed subscribersAs the dust settles, the clear winner from the fracas is Turkcell, which is the third-largest mobile operator in Europe by subscribers and is the only Turkish company to be listed on the New York Stock Exchange. Although it has lost some customers this year, Turkcell managed to add a half-million "post-paid" subscribers—those on contracts who receive monthly bills rather than prepaying for service via scratch-off cards or other means. Billed subscribers spend, on average, 3.5 times as much per month on mobile services as do prepaid. Turkcell has now managed to move over 25% of its customers to postpaid contracts, compared with just 14% for Vodafone Turkey. That lets Turkcell earn the highest margins among the three Turkish rivals and helped cushion the impact of the downturn. "Turkcell fared better than its competitors," says EFG Istanbul's Agyuz. Turkcell also has parlayed its size and higher profitability into more capital spending. The company invested 1 billion Turkish lira, or $675 million, to build up its network last year and doubled capital expenditures to $1.42 billion in 2009. "How many companies in the current economic climate are doubling their capital investment?" boasts Turkcell Chief Executive Süreyya Ciliv, a Turkish native who spent 25 years working in the U.S., including 10 years as an executive at Microsoft (MSFT) before returning home in 2007 to run Turkcell. Ciliv's success in keeping Turkcell on top is all the more remarkable because of the threat he faced from Vodafone soon after he took the helm. When the British mobile giant—which is still the No. 1 mobile operator in the world by revenues—bought Turkey's No. 2 operator, Telsim, for $4.5 billion in late 2005, it was expected to pose a major competitive challenge to Turkcell. But it hasn't worked out that way. Vodafone relaunched Telsim in 2007 under its own name but then got distracted by corporate restructuring and its expansion plans elsewhere in the world, including in India. discrepancy between quality and priceEven as it underinvested in its Turkish network, Vodafone continued to market and price itself as a premium provider. But as customers began to notice the discrepancy between quality and price, they defected in droves. Vodafone lost close to 2 million customers in the first six months of this year alone, plunging its share to 23.5% at the end of June from 27.3% a year earlier. In fact, the surprise contender in the Turkish market has turned out to be No. 3-ranked Avea. When Turkish telecom authorities introduced mobile number portability a year ago, Avea launched a price war to grab customers from the other two providers. Its groundbreaking flat-price tariff for calls made to any network upended the industry's prevailing business model and pulled in millions of new subscribers. By the middle of this year, Avea was on the brink of overtaking Vodafone as Turkey's No. 2 mobile operator, especially in terms of revenue. But a lackluster rollout in the third quarter of new third-generation, or 3G, mobile services caused it to slip back to a 19% share. All three carriers are hoping to gain a revenue and earnings boost from the introduction of 3G in Turkey last July. Although Turkey is years behind other countries in rolling out 3G, Turkcell's Ciliv says the delay has a number of hidden benefits. The network equipment is less expensive and more advanced than the bleeding-edge gear deployed in major European cities a half-decade ago. As a result, Istanbul is now blanketed with mobile broadband service three times faster than what's available in London, Paris, Frankfurt, or Moscow. Analysts at local brokerages such as Finansinvest figure 3G will help lift industry profits in Turkey. But they won't know the financial impact until sometime next year, when a critical mass of consumers will have signed up for the service and started to use it. Ciliv is convinced of the potential. "Mobile broadband is the biggest opportunity we see," he says. "Less than 5% of the Turkish population now gets e-mail on their mobile phones, so we see 95% upside." Now he just has to hope the economic turnaround forecast for Turkey next year erases all memory of the year the market shrank.
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