| David Tonge | ||||||
Following aggressive promotion and advertising, take-up of internet subscriptions in Turkey is booming. According to a recent report from Istanbul-based research company IBS, last year internet subscriptions grew by 609%, creating a penetration rate of 5.5%. That’s still modest compared with western Europe’s average 21%, so there’s room for even further growth. This, however, seems to be the extent of the good news. The internet game in Turkey up to now has been almost exclusively one of capturing market share. Acquisition costs, averaging $40 per subscriber, are high. Revenues are small and no-one is making money.
Over the next 12 months the sector in Turkey is expected to consolidate, as in other markets. This will not be easy because mergers and acquisitions are alien to Turkish corporate culture. The private sector is dominated by family-owned businesses and their philosophy can be summed up by the adage: ‘let it be small, but let it be mine’. But small is no longer beautiful. Turkey is entering the second year of a three-year IMF-supported stabilization programme. The 20-year binge in which both government and the private sector gorged on borrowed money, subsidized loans and cronyism is coming to an end. It is beginning to dawn on the families that even the biggest of them is very small by world standards.
New economy, new business culture
For the first time last year, the top families formed alliances to bid for the third cellular telephone licence. They include the Koc Group and Media Holding, which linked up with America’s SBC Communications; a consortium of Sabanci, Dogan, Dogus Holdings linked up with Spain’s Telefónica; Is Bank linked up with Telecom Italia; and a consortium of Fiba Holding, Enka construction conglomerate, Suzer Group, and Finansbank linked up with France Télécom. The prize went to Is Bank and Telecom Italia. Similar consortia are lining up to bid for Turkish Telecom, which is being privatized in one of the biggest telecoms deals in the emerging markets.
Investment bankers expect similar alliances to emerge among internet service providers (ISPs) in Turkey. “This may force old family barriers to be broken down,” says a Merrill Lynch report. “If this doesn’t happen then we expect some high-profile withdrawals from this space.” This is in line with its global forecast: “The internet spoils will increasingly go to the few and not the many. Most business-to-consumer (B2C) companies will be forced to merge, go bankrupt or just disappear.”
“I don’t know which will blink first,” says IBS director David Tonge. “There is no money in the business. The business plan was that they would be bought by a large foreign company, but that model is done now. The rules of the old economy are applying to the new economy as well.” Tonge believes that internet subscription growth will “dwindle” to 90% in 2001.
Already one of the larger companies – Turkport, belonging to the troubled Sabah group – has fallen by the wayside. Ixir, now third in the market, laid off 110 people, almost one-third of its staff, last December. “This was the first, but surely not the last, such cost pruning,” says Tonge.
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Eventual winners will be determined by revenues from e-commerce and advertising.
Revenues remain paltry. ISPs generate their revenue almost exclusively from dial-up subscription fees. Advertising revenues are small and e-commerce, as all over Europe, is embryonic. Morgan Stanley Dean Witter says each Turkish ISP generated revenues of $5 million to $6 million in 1999 and, according to IBS, only slightly more in 2000. Merrill Lynch estimates the internet advertising market to be less than 0.5% of the total $1 billion advertising spending in 2000. This could be as large as 5% to 6% of total advertising by 2005, or an estimated $150 million.
For ISPs to profit solely from subscription fees, internet penetration rates will need to grow substantially. By 2004 Turkey should have 10 million internet users, generating over $4.5 billion of revenues, although $3 billion of this will derive from business-to-business (B2B) activity. The major players – all subsidiaries of listed large companies – seem to understand that profits are yet to come and are concentrating mainly on building a large subscriber base.
Last year’s growth in subscriptions was three times as much as the highest forecast. It indicates that, although it is one-sixth of the EU average, limited Turkish consumer spending power is not proving such a drag on internet user growth as some had feared. Purchasing power is in any case higher than the officially reported $2,880 GDP per capita might suggest. The Turkish black economy is variously estimated to be worth half to 100% of the country’s official GDP of some $200 billion. The top 20% of the population receives 55% of total income and can easily afford internet access devices.
This may not be true for a substantial proportion of the population. Some 60% of the population share 26% of total income and these people will find it extremely difficult to afford computers. This is evidenced by the profusion of internet cafés catering for those who don’t own PCs. IBS reports that Turkey’s concentration of internet cafés is bigger than any other country’s. And 40% of their respondents have stated that they access the internet at cafés. This tallies with the findings of ACNielsenZet that 37% access the internet from cafés as opposed to 41% from home. Morgan Stanley Dean Witter predicts that the growth rate will slow when household penetration reaches 20%.
“The boom in usage has been made possible in part by creative and costly marketing,” says IBS’s Tonge. This includes the bundling of PCs with ISP subscriptions, and marketing to a young, technology-hungry Turkish population. But, says Tonge: “To what extent internet companies – including the ISPs that have largely funded the growth – will be able to translate subscriber boom into profits is as uncertain in Turkey as elsewhere.”
According to IBS’s research, subscriptions claimed by Turkish ISPs grew from 322,000 at the end of 1999 to 2.3 million at end-2000. This followed a 280% increase in 1999. End-user research shows that each subscriber has an average of 1.5 ISP subscriptions. Thus, the number of individual internet subscribers is approximately 1.5 million. IBS’s research further shows a subscriber-user ratio of 2.4:1, meaning that Turkey has around 3.7 million residential users (for further information on the IBS research, see www.IBSResearch.com).
“Saturation advertising has been the fuel for this growth,” says Tonge. “It has been expensive, and it has not so far come near to paying for itself.”
Three-quarters of Turkish users interviewed by IBS in October 2000 were aware of e-commerce. But only 4.1% of these had actually shopped online, leading to a meagre 2000 Turkish e-commerce market of around $13 million. “A majority of users were thinking of buying online but, if these are not quickly convinced to act, the successes seen in subscriber acquisition will soon come to seem preliminary indeed,” says Tonge. As Merrill Lynch puts it: “the main challenge [in Europe] is to get consumers to make their first online purchase”.
There are over 60 ISPs in Turkey, but six of them account for nearly 80% of the subscriber base. They are Super Online, Ixir, Vestelnet, Dogan Online, Turk.Net&Koc.net. KocNet is different from the rest in that it is concentrating on B2B. None is listed on the Istanbul Stock Exchange (ISE) but all are subsidiaries of blue-chip ISE companies. Dogan Medya Holding, the biggest media company in emerging Europe, owns 60% of Dogan Online. Sabanci Holding owns 70% of Turk.Net. Vestel owns 96% of Vestelnet. Yapi Kredi Bank has a 20% stake in Superonline through an affiliate. Garanti Bank owns 38% of Ixir.
In terms of positioning, the number of registered subscribers and brand recognition, Superonline is the clear market leader. Its relationship with Turkcell, Turkey’s largest mobile operator, is an advantage that remains to be exploited. Dogus Group has lured the management team of Superonline and, in a short time, made big progress towards catching up with the market leaders. Dogan Online is in the stable together with Turkey’s best-selling newspaper, periodical and TV station but has not so far succeeded in leveraging content from these sources. Ixir’s advertising campaign was one of the most aggressive and imaginative of the past decade “and they are winning the perception campaign,” says one analyst.
The principal Turkish banks use the internet for B2C transactions, including Akbank, Garanti Bank, Is Bank and YKB. The reason is obvious: compared with the average cost of dealing with a customer at a branch (for Garanti this was $3.14 at the end of 1999) the average internet transaction cost is minuscule ($0.04 for Garanti).
