‘Telecommunication Sector in Turkey, Economic Regulation, Mergers and Acquisitions

UNIVERSITY OF PORTO
FACULTY OF ECONOMICS

‘Telecommunication Sector in Turkey, Economic Regulation,
Mergers and Acquisitions’

SUBMITTED TO:
Helder Valeta da Silva

________________________________________________________________________ 1
Telecommunication Sector in Turkey, Economic Regulation, M&A
Faculty of Economics – University of Porto
Applied Economic Studies 2006/2007

ABSTRACT

The telecommunication sector in Turkey had significant changes in the last few years. At the
end of 2003, the monopoly of the incumbent company over fixed-lines and voice services
finished. In 2000, an independent regularity authority founded: The Telecommunication
Authority. The incumbent firm had been privatized in 2005. The competition is slower than
expected, with exception of the mobile industry.

Turkish mobile industry had rapidly grown over the past last decade. This paper examines the
telecommunication sector in Turkey, focusing on the mobile industry; structure of the sector,
main changes and the regulations in the sector.

The paper commences with the main definitions and characteristics of the mergers and
acquisitions. In chapter three, the economic regulation is discussed; main definitions,
regulations instruments and the theory of regulation. In chapter four, the telecommunication
sector in Turkey; the structure of the sector and the sector regulations; is reviewed. The paper
terminates with a case study which emerges the main changes in the sector in case of an
occurrence of a merger; the merger of two mobile operators Aria and Aycell under name
Avea.

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CONTENTS

1. INTRODUCTION.................................................................................................................3
2. MERGERS AND ACQUISITIONS.................................................................................... 4
2.1. DEFINITIONS.................................................................................................................4
2.2.TYPES OF MERGERS AND OTHER BUSINESS COMBINATIONS........................ 5
2.3. REASONS FOR M&A................................................................................................... 8
2.4. BENEFITS AND COSTS OF M&A............................................................................ 10
3. ECONOMIC REGULATION........................................................................................... 13
3.1. ECONOMIC REGULATION AND ANTITRUST LAWS.......................................... 13
3.2. REGULATION INSTRUMENTS................................................................................. 15
3.3. THE THEORY OF REGULATION..............................................................................15
4. THE TELECOMMUNICATION SECTOR IN TURKEY ............................................21
4.1. THE STRUCTURE OF THE SECTOR....................................................................... 21
4.2. SECTOR REGULATIONS.......................................................................................... 25
5. CASE STUDY: AVEA (MERGER OF AYCELL AND ARIA) ....................................29
5.1. OVERVIEW.................................................................................................................. 30
5.2. MARKET STRUCTURE BEFORE MERGER............................................................ 31
5.3. CHANGE ON MARKET AFTER MERGER............................................................... 32
5.4. TECHNOLOGY, PRICES AND ECONOMIC REGULATION.................................. 34
6. CONCLUSION................................................................................................................... 37

1. INTRODUCTION

The competition is a new concept in Turkey’s telecommunication sector. Until the past few
years, the fixed-line segment was ensued with a state-owned statutory monopoly, Turk Telekom. In
the mobile sector, in mid 1990s, there were two operators: Turkcell and Telsim; having revenue
sharing agreements with Turk Telekom: these operators were not free to set prices; they were under
control of Turk Telekom.
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In 1998, after the revenue sharing agreements transformed to 25-years licenses agreements of these
two operators, a duopoly competition began to arise in Turkish mobile industry. In 2000, additional
licenses also accepted: Aria and Aycell. The monopoly power of Turk Telekom on voice services and
fixed line ended in 2003. In 2000, an independent regularity authority, the Telecommunications
Authority, founded.

The end of the monopoly power of Turk Telekom and the foundation of the Telecommunication
Authority were seen as changes which would prepare atmosphere for a competition, an introduction to
new investments and a growth. It was predicted also Turkey's quest for European Union membership
would facilitate this environment of competition.

Since 1994, so the creation of 2G GSM technologies in Turkey, Turkcell is dominating the industry
with a market share 60-70%. In 2000, the government offered two licenses and two more operators
entered to the market: Aycell and Aria. The entrance of these two new operators didn't cause a big
change in the market.

Horizontal mergers can be motivated by a desire for greater market power. With this idea, in 2004, a
new brand Avea was introduced to the market. Avea, a merger of Aycell and Aria, expressing a new
synergy, reached a larger market share and had more important place in the competition in the end of
the year 2006.

This paper examines the telecommunication sector in Turkey which has a young and modern
telecommunication infrastructure, focusing on the mobile industry; structure of the sector, main
changes and the regulations in the sector.

2. MERGERS AND ACQUISITIONS

2.1. DEFINITIONS

Mergers and acquisitions is the fact of combining different firms across buying and selling
process for a corporate strategy finance and management. The main idea behind buying a

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company is to create a higher value of shareholder than the sum of the two companies.
Actually, two companies together are more powerful than two companies separately which is
the principle reason to engage firms to mergers and acquisitions.

A merger occurs when two firms agree to combine as a single firm rather than remain
separately owned and operated, on the other hand an acquisition happens when a firm
purchases completely a target firm and named itself as a new owner.

A merger is the combination of two or more firms, which only one firm survives, and the
combine organization continues with the name of surviving firm. In a merger, the target firm
exchanges its assets and liabilities for those of the acquiring firm.

An acquisition is when one company takes the controlling ownership interest in another firm,
a legal subsidiary of another firm, or selected assets’ of another firm. An acquisition might
involve the buying of firm’s assets or stocks, with the acquired firm continuing to exist as a
legally owned subsidiary of the acquirer.

2.2.TYPES OF MERGERS AND OTHER BUSINESS COMBINATIONS
.
Mergers are generally classified as horizontal, vertical and conglomerate mergers depending
on merging firms are acting in the same industry or different industries.

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Types of Mergers

Horizontal Merger Conglomerate Merger Vertical Merger

Horizontal Merger:

Horizontal merger is when the merging firms are in the same industry that means when a firm
merges with a rival firm. This can make merging firms to have an important market power in
the industry which in turns negatively affects the competitiveness. There can be a decrease in
the number of competitors and can cause a market power for the merging firms while it can
also causes cost saving which is socially beneficial.

Conglomerate Merger:

Conglomerate merger consists of firms that operate in different industries. That is these firms
are not rivals or not a part of same supply chain. It could be an acquisition of complements or
products of neighbor markets. Conglomeration merger can be an acquisition of a company
which is planning to enter that market and means that eliminating a potential competitor since
in the absence of merger, company will compete with the acquiring company. This will
restrict the competition by preventing another firm’s entry and so it can be harmful.

Vertical Merger:

Vertical merger is when merge occurs between firms which are operating at different stages
of production of the same good. Suppose for example that a jewelry retailer purchases a
company that manufacture jewelry. According to corporate value chain or production chain,
the firm is not the owner of each operation. Firms are locating at different stages of
production such that one of them producing an input is used by the other. The attenders are

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acting in different production stage and when there is a backward integration, the firm
acquires a supplier and in terms of forward integration, firm acquires a distributor.

Figure 1: Corporate Value Chain

In-Bound Operations/ Distribution/ Customer
Markting
Logistics Productions Sales Support

Purchases of Manufacturing/ Product Post-Sale
Strategy/
Raw Materials IT Operations Delivery Support
Promotion
& Services

Forward Integration

Backward Integration

Source: ‘’M&A, and Other Restructuring Activities” by Donald DePamphilis

As you can see from the figure 2, between 1990 and 1999 around 60% of mergers are
horizontal mergers, around 35% is vertical mergers while vertical mergers are in very low
level.

Figure 2: Horizontal, Conglomerate and Vertical Mergers 1990-1999 (%)

80
70
60
50 Horizontal Merger
40 Conglom erate Merger
30 Vertical Merger
20
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Source: UNCTAD, World Investment Report, Cross- Border Mergers and acquisitions and Development,
p. 102

Joint ventures (JVs), strategic alliances, franchises can be seen as other important alternative
structures to business combinations.

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Joint Ventures:

It is a legal entity that two or more parties undertake economic activity together. The
participants agree to set up a new entity in order to achieve strategic objectives and share
revenues, expenses and control. It is generally set up for a limited time and therefore does’ t
represent a long term commitment. Joint venture would be a corporation, partnership or other
legal structure. Also it provides participants new opportunities such as letting them to enter
new markets or obtain technological knowledge and also obtaining new capacity.

Strategic Alliances:

It is a form of collaboration or cooperation between two or more companies and set up a
separate legal entity in the expectation of the outcome of alliance is greater than individual
efforts. The arrangement may not be as formal as a joint venture agreement. Each participants
can sell each product to customers of one another that is access to other’ s products or
technology. Strategic alliances provide with new technology, products or process that of
distribution channels, project funding, knowledge and manufacture capability.

Franchises:

Is a kind of agreement or license between two parties in which the franchisee sells franchisor’
s products or services in which franchisor who is the owner of the trademark provides
supports such as training, advertising and marketing, on the other hand franchisee pays fees
and runs the business by using the support. This makes franchisor to grow with a lower cost
as franchisee pays fees and provides the capital.

2.3. REASONS FOR M&A

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There are several reasons and motives that firms can engage in mergers and acquisitions. One
of the most important motives for M&A is “growth, expansion”. When firms want to expand,
they are usually faced with a choice between internal growth and growth through mergers and
acquisitions. Internal growth is generally slower and fallible process. But growth through
mergers and acquisitions is a faster process even it has some uncertainties.

Another motive of using growth through mergers and acquisitions is when a firm wants to
expand geographically. It may be less risky and rapidly to expand geographically through
mergers and acquisitions then internal development.

Companies often merge in an attempt to diversify into another line of business. Companies
experience greater success with horizontal combinations, which results an increase in market
share which provide to a firm to improve ability to set prices above competitive levels.

An important reason that why mergers and acquisitions occur is to eliminate the competition.
Acquiring a competitor is an important way to improve a firm’s position in the marketplace. It
reduces competition, and allows the acquiring firm to use the target’s resources and expertise.

Another reason that firms engage in mergers and acquisitions is the belief that “synergy”
exists; allowing the two companies to work together more efficiently than either would
separately. Horizontal mergers might also be motivated by a desire for greater market power.
The main two types of synergy are operating synergy and financial synergy.

Operating synergy aims to increase revenues and cost reductions. Financial strategy refers to
possibility that the cost of capital might be lowered by combining one or more companies.
Operating synergy can be divided as “economics of scale” and “economics of scope”.

Economies of scale aim to separate the fixed costs over increasing production levels.
Economies of scope, by the way, is for making a proper set of skills or an asset currently
employed in producing a proper product or service in order to produce related product or
service. The mostly frequent reason that economies of scales are formed is that combining

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two or more product lines in one firm is cheaper than producing them in separated firms. We
can summarize the motivations of synergy as in the figure 3.

Figure 3: Motivations of Synergy

THEORY MOTIVATION
Operating Synergy Improve operating efficiency through
economies of scale or scope by acquiring a
customer, supplier, or competitor
Economies of Scale
Economies of Scope
Financial Synergy Lower cost of capital
Diversification Position the firm in higher growth products or
markets
New Products/ Current Markets
New products/ New Markets
Current Products/ New Markets

Source: “M&A, and other restructuring activities” by Donald DePamphilis

2.4. BENEFITS AND COSTS OF M&A

Benefits & Costs of HORIZONTAL MERGERS

Mergers reduce the number of the competitors and can cause the possibility of market power
due to merger means the integration of production facilities.

Under the assumptions that are mergers creates market power and economies. At the graph
below explains that the social costs related to mergers are shown up due to increasing prices
and shrinking output. On the graph the area called A1 is consumer surplus and A2 is a gain to
society because if cost savings. The new quantity of production q 1 is lower than the quantity
before combining of the firm.

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AC0 : the level of average costs of two firms before combining

AC1 : the level of average costs of two firms after combining

The average cost is low before combining because the power of competition of individual
firm and it forces prices down. However, costs fall and prices increase , the market power is
created.

Benefits & Costs of VERTİCAL MERGERS

Vertical mergers link the firm by relationship of buying and selling. The benefits of vertical
integration can be subtitled as reducing transaction costs, technological economies and
eliminating of successive monopolies.

Transaction costs are costs of using the market. 1 The firms that are operating at different
stages of the production of the same good have relationship of buying or selling intermediate
products or services. Firms use the market instead of being completely integrated because of
changing demand for a product or economic conditions.

1
Economics of Regulation and Antitrust Policy, pg 226
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Eliminating successive monopolies, or dissolving bilateral bargaining stalemates: merging can
be shown to be socially preferable to the “double” monopolies”, even if the merged firm is a
monopoly.2

The assumptions are that an upstream motor monopolist sells to a downstream boat
monopolist , each boat requires exactly one motor , C dollars worth of other inputs and the
boat monopoly has no monopsony power. The successive monopolies can be illustrated as:

Q represents the number of boats and motors, Pm is the price of a motor, D is demand curve boats and
D’ is derived demand for motors. In order to find the derived demand for motors, the approach is using
the equilibrium condition for downstream boat monopolist. Generally the profit maximazing condition
is equality of marginal revenue and and marginal cost.

Results:

 the boat monopolist maximises profit by setting MR = MC = Pm + C so the derived
demand for motors D′:
Pm = MR − C
 The derived demand for motors D′ is the MR minus the conversion cost
C (= $100).

2
http://www.agsm.edu.au/~bobm/teaching/ECL/lect07.pdf
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 The boat builder’s input demand D′D′ is the motor maker’s product demand curve:
the motor maker sets its MR′ = its MC = $100, to find its Q* = 140 and Pm = $400.

 The boat builder’s MR = $400 + $100 = $500, at Q* = 140 and Pb = $650, pre-
merger. If the two firms merged, the integrated firm would maximise profit by setting
MR = MC′ = MC m + C = $200, at Q* = 300 at P* = $500, post-merger.

Consumers clearly gain (lower price, more sales), but total profit is also higher, by the
triangle: all gain3

3. ECONOMIC REGULATION

3.1. ECONOMIC REGULATION AND ANTITRUST LAWS

Households are decision making units that they determine what amount of their income to
save and consume or households as a labor determine how much to work. On the other hand,
firms are another decision making units which are interested in what and how much to
produce and which production factor to be used in the production process. Furthermore, firms
determine the prices.

Government decides tax rates, national defence expenditure and also adjusts the money
supply such as the growth rate of it. Actually, firms are not totally free in their decisions in
that, government as a regulator, constraints them. Government has a power of regulations in
order to restrict decisions of economic agents. Regulatory economics is a power of
government for centrally- planning economy in which government has a control over factors
of production and in addition regulation can be used for blocking the market failure or for
enriching well- combined firms. For example, merger between firms would be result in
substantial cost savings by lowering operating expenses for combined firms.

Economic regulation used by government in the purpose of providing distribution of income,
in the purpose of improving efficiency in resource allocation and also in order to achieve

3
http://www.agsm.edu.au/~bobm/teaching/ECL/lect07.pdf
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social goals. Regulation is designed and operated for the benefits in which industry regulation
is acquired. Monopolies, especially the natural monopoly, are mostly regulated in order to
improve economic efficiency for example by restricting output and increasing the prices that
can restrict production of social optimal amount of goods. When considering a regulation
policy, side effects must be carefully determined because these side effects can reduce
welfare. Regulators must carefully set socially optimal price although they can have limited
information about demand and cost conditions.

Regulatory considerations, which also affect merger and acquisition activity, can be divided
as general, which affects all firms or industry- specific, which affects specific industries.
Antitrust, federal security, environmental and employee benefits are general considerations
while public utilities, telecommunication, banking, insurance and transportation are some of
regulated industries.

Antitrust laws are found to stop corporations who consider a strong market power in that these
can limit output and raise prices in the sense of without any important competitor reaction.
Since there is no perfect competition in all markets regulatory efforts such as antitrust law is a
necessity.

In many industries there can be firms which are large enough to dominate and in this case
antitrust laws can be used by government in order to get the control behavior by providing
against mergers that would be a comminatory in competitive structure of a market.

Concentration on a specific industry causes a market power that the aim is a limit on this role
of market power. The purpose is to limit simple monopolies also mergers and other financial
transactions that the combination of corporations in which influence the market behavior. If
for example a monopoly has a power to control price, there will be an economic efficiency
losses to society. In addition, product quality can be affected.

‘ In general, horizontal mergers, those between current or potential competitors, are most
likely to be challenged by regulators. Vertical mergers or customer- supplier mergers are
considered much less likely to result in anticompetitive effects, unless they deprive other

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market participants of access to an important resource. The antitrust regulation seldom contest
conglomerate mergers involving the combination of dissimilar products into a single firm.‘4

3.2. REGULATION INSTRUMENTS

The most important variables that regulators control are the control of price and control of
entry and exit. To begin with, when the price regulation occurs, firms are responsible to
charge a given price or may set a price between a given range. Also a maximum price can be
specified by government for the purpose of blocking monopolies in high prices or by contrast
with a minimum price in order to control too law prices. In addition, there would be a
different price setting process in a market such as telecommunication. In this market different
prices can be set according to parts of they or according to different days. Furthermore,
control of price is important for a normal rate of return in regulated industries. By using price
control high levels of profits or a too low profit can be offset.

Secondly the control of entry and exit is an important instrument both for productive and
allocative efficiency, it is an important fact. Entry of new businesses are significantly different
across countries in the way they regulate. Setting up a new business needs to meet
government requirements such as official cost of meeting these requirements or how long it
takes. New entrants can be useful in the way that they can provide consumers with high
quality products.

Control of other variables such as quality and quantity controls are also important. Quality
regulation is made to ensure that companies meet with minimum standards to provide a good
or service. This regulation can reduce market failure such as low quality products are reduced
but it can be costly to provide quality. There is a need for regularity agency in order to specify
minimum quality standards.

3.3. THE THEORY OF REGULATION

4
’M&A, and Other Restructuring Activities” by Donald DePamphilis
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‘Economic system is subject to some form of government direction rather than left to invisible
hand of market forces. Market mechanism alone can not perform all economic functions. So
that public policy is needed to guide, correct and supplement it in certain respects.’ 5 Natural
monopoly, externalities and some other sources can be a reason for market failure.

The theory of regulation is concerned about which industries are to be regulated, for whom
this regulation will be beneficial and also it concerns the form of regulation. In some aspects,
such as an industry which is a natural monopoly or when externalities exist, there will be a
requirement for government intervention to provide against market failure.

Natural monopoly can be seen as one of the important reasons for market failure. It arises
when one firm produces a particular good or service that minimizes cost at the social optimum
quantity. According to Graphic 3, long – run average cost curve is declining associated with
an increase in quantities. Producing quantity is minimized and only one firm still achieve
lower average cost per unit which means that production by one firm minimizes cost and that
guaranties market as a natural monopoly.

The ratio of fixed to variable cost is high since for example fixed cost of setting up a
distribution network for a product could be high. On the other hand, variable cost of
producing an extra output will be small. That means, as the scale of production increases,
average total cost will decline as a result of a decrease in fixed cost which is compensated by
higher levels of production. In a natural monopoly, average cost is always declining so that
scale economies never exhausted.

Graphic 3: Natural Monopoly

5

Public Finance in Theory and Practice by Richard A. Musgrave pg. 5
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Source: http://www.tutor2u.net/economics/content/topics/monopoly/natural_monopoly.htm

Telecommunication industry, natural gas supply, electrical power distribution, railways and
water provision are can be seen as kinds of natural monopoly because they require high level
of initial investments. When natural monopoly exists, there could be conflicts between
allocative efficiency and productive efficiency of a sector. In terms of production efficiency,
as we told, only one firm could minimize the value of resource used. As firms are seeking
profit maximizing and as there is only one firm produces, there could be a price set by the
firm which is higher than the cost.

This means that there is inefficiency in terms of resource allocation. On the other hand
allocative efficiency requires more firms in order to adjust price associated with marginal cost
by using competition. But if these firms exist, this time there will be a productive inefficiency.
So that there is a need for price and entry regulation which can provide both allocative and
productive efficiency in a natural monopoly. Entry regulation can provide one firm in
production and price regulation can adjust the price that is set by the firm, according to social
optimum price.

Regulators try to provide a healthy industry which is in line with maximizing social welfare.
When there is movement from a natural monopoly in the market, regulatory agencies can

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provide an open industry for entry and these agencies can eliminate price controls to
challenge with this situation.

When an industry is a natural monopoly, regulators determine the social optimum price and
provide demand at that determined price. Regulators adjust price in a situation of a change or
shift in the demand because this change also causes social optimum price to change. In
addition, change in demand or cost can result in this industry not to be a natural monopoly
anymore. When demand curve shifts upward, this industry is not being a natural monopoly
anymore because of a raise in socially optimal output due to this shift. Market demand is
important while determining the regulatory policy.

According to Graphic 4, demand information is needed because after a point, average scale
economies are exhausted and it must be measured whether regulation best fits this situation or
not. At the intersection point of D(P) and AC(Q), it can be seen that average cost is falling. At
this point regulatory policy is socially optimum because at P*, regulators constraint firm’ s
profit that in turns maximizes social welfare. Also at that quantity of Q*, only one firm is
producing which means that total cost is minimized. On the other hand, when demand curve is
•
D (P), social optimum price is equal to lower point of average cost curve that corresponds to
• •
minimum average cost at P . Here market demand corresponds to 3 Q is three times the
efficient firm size.

Graphic 4: Natural Monopoly- U shaped average cost curve

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P
D(P)

D(P)

AC(Q)
P*
P

0
Q* Q 3Q Q

Source: Economics of Regulation and Antitrust, 4. edition, pg. 525

‘ The general rule of thumb is that monopoly regulation is appropriate when the minimum
efficient size of the firm ( that is, the lowest quantity at which average cost is minimized ) is
approximately equal or larger than market demand at the social optimal price so that a
regulated monopoly is likely to be appropriate for this industry. In contrast when demand
•
curve is D (P) in the graphic, market demand price is three times the efficient firm size so
that unregulated environment is likely to be the appropriate policy. ‘6

Furthermore it is important to analyze how cost changes due to technological improvements
or changes input prices affect a firm. These can affect marginal and average curves of a firm.
As total cost is found out by summing fixed and variable costs, average cost of this firm can
be found by dividing each component by output (Q). By dividing variable cost by Q we get
average variable cost which is denoted by AVC(Q). So that AVC(Q) is increasing by output
while fixed cost falls. A technological improvement can decrease fixed costs. So there is also
•
a decrease in average cost. As you can see from Graphic 5, average cost curve shifts to AC

(Q). According to the graphic, now minimum efficient scale is Q 1
and social optimum

6

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price is P
1
where P= min AC. Associated with this price, demand is 2Q 1
which means

that it is more profitable for this industry to let production to two firms.

Graphic 5: The Effect of a Change in Fixed Costs on the Efficient Market Structure

P

D(P)

AC(Q)
P*
AC1 (Q)

P1

0
Q1 Q 2Q1 Q


In short, a decrease in fixed costs, cause decrease efficient firm size and increase social
optimal industry quantity so that it is better to produce with two firms. According to Wiliam
Melody, improvement in technology makes the assumption of natural monopoly about one
firm production wrong. He says that economic theory of telecom competition was a major
contributor to economic growth throughout the world in the latter part of 20th century.

‘ The early work by Melody was a major factor that led to the regulatory precedents that
opened the US telecom market to competition. So the total investment in telecom
infrastructure increased because competitors made investments that the incumbent monopolist
would not have made. This in turns forced the incumbent to invest in new technologies. The
resulting increased investment in telecom sector in the US was a major contributor to the
productivity gains and the growth of US economy in the last third of 20th century. The
demonstrable success of telecom competition as an engine of economic growth in the US led
to competitive policy being emulated by other countries that were serious about growing their
economies.’ 7
7

Source: http://www.lirne.net/resources/netknowledge/parker.pdf
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There are some policies that can be useful for regulators in order to face with such changes in
demand or costs. First of all, regulators can carry on price and entry regulation if the industry
is still a natural monopoly according to them. But what if the industry is not a natural
monopoly anymore? At that time there will be a welfare loss because of restrictions to
competition. If the industry is not a natural monopoly now, full deregulation that is letting free
entry and removing price control can be a useful policy.

4. THE TELECOMMUNICATION SECTOR IN TURKEY

4.1. THE STRUCTURE OF THE SECTOR

Mainly investments have been made in telecommunication infrastructure in Turkey in the
late1980s and 1990s; we can say that Turkey has a young and modern telecommunication
infrastructure.

Turkey’s telecommunication services and networks were created and offered by the national
government under name Posts, Telegraphs and Telephone (PTT) which was created as a state-
run monopoly, was created based on the argument that the sector was a natural monopoly.

In June 1994; Posts, Telegraphs and Telephone (PTT) which was the state-run monopoly, has
divided in two: General Directorate of Posts which would be responsible for postal and
telegraph services and Turk Telekom which has created as a state company and which would
be responsible for telecommunications services with some regularity power. Ministry of
Transport had other regularity functions.

The developments in telecommunications markets in other countries especially in European
Union Countries have been influenced also Turkey. Structural changes and many regularity
changes through liberalization in telecommunication sector in these countries affected Turkey
also. In June 1994, with enactment of the law 4000, Turkey made the big step to liberalization

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of telecommunications markets, by getting the telecommunications services from the direct
involvement of government with foundation of Turk Telekom as a state economic enterprise.
With this law which also became possible to make privatization of the company by 49%.

After in 1994 also, two important GSM 900 mobile operators Turkcell and Telsim started business
under revenue-sharing agreements with Turk Telekom. Also Internet service provides became to
appear under Turk Telekom.

In 1998, revenue sharing agreements of these two operators Turkcell and Telsim were transformed to
25 years licenses issued by Ministry of Transports.

From April to August 2000, two GSM 1800 operators (Aria and Aycell) were offered, and Is Bankasi-
Telekom Italia consortium had been the only successful applicant. Turk Telekom gained a license of a
GSM 1800 separately with the same price of Aria’s license. So in 2001, two new operators began to
services in Turkey’s telecommunications market. (Aria in March and Aycell in December)

In May 2001, a law passed by Parliament about how Turk Telekom would be privatized. It
also transferred the mandate to issue all kinds of authorizations from the Ministry of
Transport to the Telecommunications Authority. This law also provided that the end of
monopoly rights of Turk Telekom before 2003.

The most important structural change in Turkey’s telecommunication sector was the law
number 4502 in January 2000, which was making changes in principle laws of regulating the
sector. With this law, the Telecommunications Authority was founded (an independent
regularity body); policy-making functions and managing functions were separated. Policy-
making functions have given to Ministry of Transport, by the way the regularity functions
have given to Telecommunications Authority. The main aim of Telecommunications
Authority is to reach liberalization complete in the sector. The Telecommunications Authority
was the first sectored regularity authority.

In the end of 2003, was the expired to end of monopoly power of Turk Telekom on fixed-line
voice transmission and infrastructure.

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The market would be faced with an increasing competition, especially in long-distance
telephony. Deregulation in voice communication in January 2004 prepared the way to new
investments and also privatization in this sector. Founded in 2000, Telecommunications
Authority later made a lot of new regulations such as licensing, interconnection, and a dispute
resolution mechanism.

Mobil Services cover the largest part in Turkish Telecommunication Sector. According to the
data in 2004, the whole market's size is 11, 116 dollars. The mobile services has 47, 6% share
of the sector.

Graph 6: The Distribution to Sub-Sectors of the Telecommunication Sector (2004, %)

Mobile Services

Service Providers
(Internet&Data)
40%
Cable TV
48%
Telecom Equipments

Satellite Services

Fixed Voice Services
0%
9% 1% 2%

Source: www.dpt.gov.tr
We observe Turkey’s mobile sector in different periods. Until 2002, before the merge of
Aycell and Aria under name of AVEA, also the purchase of Telsim by Vodafone, we could

________________________________________________________________________ 23

say that Turkish GSM market was in competition with a duopoly (Turkcell-Telsim) with four
operators (Turkcell, Telsim, Aria and Aycell) which were providing services since 2001.

We can see the major telecommunications operators in Turkey (until the end of 2001) as in
the table below:

Figure 4: Telecommunication Operators ( until the end of 2001)

The biggest GSM operator is TURKCELL, which founded by alliance of one of the most
conglomerates in Turkey Cukurova Group and Finland’s Sonera. The second operator was
TELSIM owned by a Turkish group. The third bigger operator was ARIA which was a joint-
venture of a most important Turkish bank Turkiye Is Bankasi (51% share) and Telecom Italia
Mobile. And the forth operator and the last entrant operator in the market was AYCELL
which was a subsidiary of Turk Telekom.

After on 19 February 2004, with the partnership of AYCELL and ARIA, AVEA was founded.
AVEA, today, with its 8 million subscribers and 15% market share is an important, growing
GSM operator.

Graph 7 - based on the date 2006 (Market Share)

________________________________________________________________________ 24

(source: www.tk.gov.tr)

Turkish GSM sector is getting out nowadays from the effects of the economics crisis 2000
and 2001. Turkcell is dominating the sector with a market share of 67%. In June 2005, the
number of subscribers of Turkcell reached to 25, 6 million. Turkcell is also enlarging its area
of activities (like Azerbaijan, Georgia...) with its regional market operations.

The statistics of the Turkish Telecommunication Authority show that there are 52,7 million
GSM subscribers at the end of the year 2006.

4.2. SECTOR REGULATIONS

The Ministry of Transports and The Turkish Telecommunication Authority have all the
regulatory power about telecommunications activities in Turkey.

Competition is a new concept in Turkey's telecommunication market. Until recent years,
there was a state-run monopoly. In mobile market, since 1990, there was a duopoly of two
firms: Turkcell and Telsim.

The regulations, in telecommunication sector, need to encourage new entries also prevent
anti-competitive behaviors.

________________________________________________________________________ 25

The Competition Authority (CA) administers a specific law of Protection of Competition in
Turkey. The CA makes decisions in case of a abuse of dominancy by incumbents in
telecommunication industry.

After one year of the full liberalization of telecommunication, the competition in telephony
was too little. For domestic long distances and international telephone licenses are obtained in
March 2004.

The duopoly exists in Turkish mobile sector from 1990s. Turkcell and Telsim having sharing
agreements with Turk Telekom and Turkcell is market leader since its foundation with a
market share 60-70%. In 2000, government offered two more licenses, and Aycell and Aria
entered to the market. But the new entries didn't cause a big change in the dominance of
Turkcell. This caused a little challenge to the dominance of Turkcell generally because the
government intention and the regulator which brings roaming regulations to incumbents.
Naturally, the two new entrants merged.

Figure 5: Mobile Telecommunications (1994-2003) in Turkey

________________________________________________________________________ 26

In Figure 5, we observe that from 1994 so from the creation of GSM in Turkey until 1998, the
number of subscribers is doubling each year but from 1998 to 2000, there is a big increase in
subscribers from 3, 5 million to 16 million.

With replacing the 25-years licenses of the revenues agreements of Turkcell and Telsim, the
number of subscribers jumped. And also it created a competition.

Before with revenue agreements, the tariffs were setting by the Turk Telekom but after the
licensing the tariffs began to set up by these operators which introduced a competition.
According to ITU data, we realize a fast decrease of 3 min call from 1 dollar until 60 cent as a
result of this competition within a year 1998. By the result, Turkcell and Telsim began to
grant discounts of handset (Hurriyet, 14 June 1998).

And by the result, naturally, the demand increased and it prepared the atmosphere for new
investments because a revenue agreement acts a tax on revenues by the way a license only
brings revenue to owner. So licensing of both operators attracted investment initiatives. As a
result, according to the data of Competition Authority, Turkcell increased investments from
136 million dollar from 1997 to more than 1 billion dollar in 1999.

But even before licensing of both companies, Turkcell’s subscribers were a big number. And
after this licensing also the dominance of Turkcell continued. In this period, Turkcell's growth
strategy was to have some agreements with some importers or distributors of handsets. Like
for example, Turkcell was participating sales of the handsets of famous brands like Ericsson,
with purchase of Turkcell subscription. After this, in 1999, Telsim brought this problem of the
exclusive agreements to the Competition Authority. By the way, the Authority concluded that
Turkcell's behaviors showed a infringement of the Law of the Protection of Competition.

Also in table 1, we can observe the effects of the new entries. From 2000 to 2003, the
penetration to mobiles continues to increase, from 16 million in 2000 to 28 million in 2003,
25 to 40 per cent increased. There is also a decrease in tariffs, from 0, 3 YTL to 0, 7 YTL

________________________________________________________________________ 27

from 2000 to 2003, 17%. But finally, new entries didn't make a big change to the dominance
of Turkcell who had a market share of 68% in the end of the year 2003.8

The reason can be search by the time of the entrance in the market. Aycell and Aria entered in
the market in the financial crisis of November 2000, and the other more important in February
2001, when the big devaluation occurred. Already the impact of these crises was really bad on
telecommunication sector, like we see in table1, the revenue decreased from 3, 5 billion
dollars in 2003 to 2, 8 billion dollars in 2001 and 2002 in the mobile industry. So it has to be
more difficult to gain an important market share in an economy in a period with declining
incomes of consumers for new entrants.

Already when a new firm enters in a market, it confronts with a lot of challenges. A reason to
bring difficulties to a new entrant firm, like in our case is mobile industry so to a new
operator, with a small number of subscribers to attract more subscribers from existing
subscribers is when there is network externalities. Generally in mobile industry, the network
externalities are the cheaper talks between the subscribers of an operator (on-net calls), and
more expensive talks wits other networks (off-net calls). So this concept means a welfare
gained from a good or a service increases when the number of other consumers of that good
or service. A consumer would prefer to subscribe to a network with more subscribers.

In March 2001, before a short time that Aria entered in the market, Turkcell began a new
package which made on-net calls cheaper. This package which name is “Biz Bize Cell” had a
significant price difference of on-net calls and off-net calls with reducing significantly on-net
calls prices and by the way increasing off-net calls prices. This package is still a big reason to
choose Turkcell in 2007.

8
http://www.tk.gov.tr/Yayin/istatistikler/istatistik/WEB-2003-4-GSM.htm
________________________________________________________________________ 28

Figure 6 : Turkcell tariffs, post-paid packages

By contrast, ARIA also began another promotion by price equality of on-net calls and off-net
calls. The promotion also included with quantity discount; after 55 minutes of call, the call
decrease by 7 cent per minute. At the end of 2001, Aria had a market share of 4%. After 2003,
Aria finished this promotion.

The Competition Authority observed this situation of Turkcell's and Telsim's threat before
new entry like an injure of the competition law. But it concluded that this was not an injure of
the competition law.

5. CASE STUDY: AVEA (MERGER OF AYCELL AND ARIA)

________________________________________________________________________ 29

5.1. OVERVIEW

While Turkcell and Telsim was treating to new entries to the market and this threat was like
an injure of competition law, two small GSM companies that are ARIA and AYCELL
decided to be integrated in order to have more market power.

‘Avea is Turkey's fast growing mobile communications company, which has a customer base
of approximately 8 million and represents 15% of the total market, offering innovative
services tailored for the usage of both individual and corporate customers.

TT&TIM Iletisim Hizmetleri A.S was officially founded on February 19th, 2004 with the
merger of Turk Telekom's GSM operator Aycell with Is-TIM, joint venture of Is Bank (51%)
and TIM (49%).

There was a short period just after the merger in which Aria and Aycell brands were sustained
under the umbrella of TT&TIM. As of June 23rd, 2004, the new "Avea" brand, expressing
the synergy born after the merger, was introduced to the market.

The commercial name of "TT&TIM Iletisim Hizmetleri A.S." was changed as "Avea
Iletisim Hizmetleri A.S." On 15.10.2004.’9

The know-how experience of these two companies was integrated and that helped to have
operationally and financially stronger position and to increase efficient competition in Turkish
GSM sector.

‘The privatization process of 55% of Turk Telecom shares was completed in November 2005.
Accordingly, Oger Telecom currently owns 55% stake at Turk Telekom. In September 2006,
Turk Telecom increased its stake in Avea to a controlling 81% through buying Telecom
Italia’s 40.6% stake in the company with the remaining 19% held by İş Bank. Accordingly,
Oger Telecom maintains control over Avea through its 55% stake in Turk Telecom.’10

9
www.avea.com.tr
10
www.avea.com.tr
________________________________________________________________________ 30

ARIA: Aria was established by joint effort of Telecom Italia Mobile and Türkiye İş Bankas ı
for the GSM 1800 project, and it started to operate in March ,2001. It focused on innovations
and customer oriented services.
AYCELL: With the Ministry of Transportation's tender dated March 16th, 2000, the GSM
1800 Mobile Phone Operating License was given to Turk Telekomunikasyon A.S. and Aycell
Haberlesme ve Pazarlama Hizmetleri A.S. was founded as a separate capital company on
January 8th, 2001.11

5.2. MARKET STRUCTURE BEFORE MERGER

%1 market share and Aria had nearly %3 market share.
According to general definition of GSM sector, it includes network operators, regulators,
manufacturers, subscribers, costumers and telecommunication service, and in Turkey before
integration of ARIA and AYCELL, there were two other GSM operators as TURKCELL and
TELSIM. Although with the merger of ARIA and AYCELL , AVEA became the third GSM
operator in TURKEY.
Before merger of AVEA , TURKCELL and TELSIM launched to market that’s why they
reached definite market share that is not easy to reach for new GSM operators.
GRAPHIC 8: GROWTH OF SUBSCRIBER NUMBER (1997-2000)

source: TURKISH COMMUNICATION AUTORITY

11
www.avea.com.tr
________________________________________________________________________ 31

According to this data , it is certain that TURKCELL had much more market proportion than
TELSIM. Before merger of Aycell and Aria that had less than %25 market share but Turkcell
had more than %50 market share and Telsim was following to Turkcell with more than
Aycell’s and Aria’s market shares. As a new company AVEA is a condition for increasing
competition in GSM sector.

Figure 7: Main Operators in GSM Market

OPERATORS NUMBER OF SUBSCRIBERS

Turkcell 11.8 million ( 30 september, 2001)

Telsim Over 6 million (30 June , 2001)

Aria 0.5 million (October,2001)

Aycell 50.000 (December,2001)

TOTAL Approximately 18.7 million (2001)

Source:Turkcell,Telsim,Aycell,Aria
.
In 2001 before merger of Aycell and Aria, these two companies had smallest market shares.
Approximately Aycell had less than

5.3. CHANGE ON MARKET AFTER MERGER

In 2001, the new GSM operator AVEA launched to the market and now there are three
dominant GSM operators in turkey as TURKCELL , VODAFONE and AVEA.

Generally in Turkey , number of GSM subscribers has an increasing trend due to the
competition between GSM operators causes lower prices and diversified services. At the end

________________________________________________________________________ 32

of 2001 there were 20 million mobile subscribers, in 2004 43 million and in 2005
approximately 46 million mobile subscribers. According to research department of Turkcell,
in 2004 Turkey’s number of subscribers was 34,8 million. Turkcell had %67 market share
based on number of subscribers, Telsim had 19% and AVEA had % 14 market share. In 2004
, the merger of Aria and Aycell was so far away to shrink Turkcell’s marhet share, and still
Turkcell captures more than % 50 additional subscribers.

Graphic 9: Growth in Turkish GSM Market

Source: TURKCELL RESEARCH DEPARTMENT

Due to telsim was taken over by SDIF and its new owner Vodefone there is a recovery for it,
and it threatens the market share of Turkcell that is leading company in GSM sector.

Other graphical explanation of market shares and increasing number of subscribers :

________________________________________________________________________ 33

Graphic 10: Growth of Subscribers (2001- 2005)

Source: Turkish Communication Autority

As shown graph above, turkcell and avea had an increasing trend in number of subscribers but
the precentage growth of AVEA less than Turkcell. From 2002 to 2003 while Turkcell’s
amount of subscribers was staying almost constant , there was a decrease in Telsim’s
subscribers due to an increase in AVEA’s amout of subscribers.

Concerning services of mobil phones, Turkcell had more than %50 market share and between
2001 and 2005 there was not a striking changes in market shares, and Telsim and Avea had
less than %25 market share. Another graphical explanation of market shares based on net
sales.

5.4. TECHNOLOGY, PRICES AND ECONOMIC REGULATION

TURKCELL and VODAFONE TURKIYE are the competitors of AVEA in GSM market.
Both of the competitors use the GSM 900 technology and AVEA uses GSM 1800 technology.
‘GSM-1800 uses 1710 – 1785 MHz to send information from Mobile Station to the Base
Transceiver Station (uplink) and 1805-1880 MHz for the other direction (downlink),
providing 374 channels ( channel numbers 512 to 885). Duplex spacing is 95 MHz. GSM-
900 uses 890-915 MHz to send information from the Mobile Station to the Base Transceiver
(uplink) and 935 -960 MHz for the other direction (downlink), providing 124 RF channels
spaced at 200 kHz Duplex spacing of 45 MHz is used.’12
12
www.wikipedia.com
________________________________________________________________________ 34

As a new brand AVEA, in order to take attentions of existing GSM subscribers and new
subscribers there are lots of new services and new tariffs that are opportunities for costumers
to utilize lower prices. And 2001 , when AVEA launched to market , Turkcell lowered down
its intra-network call rates by third.

Some of tariffs of AVEA, which are adventous for costumers in order to utilize lower prices
comparing to other GSM companies, are mobilogrenci (for students) and hepsibir as a
postpaid tariff. Also, AVEA has special tariffs for groups for professions such as for teachers
and differenr companies.

One of the special prepaid tariff of AVEA is mobilogrenci for students and the prices are 2
credits/10 min. for calls to all mobil ogrenci users, 3 credits/min for calls to other AVEA
users, 4 credits/min for calls to fixed lines and other GSM operators, and a short message
costs 1 credit.(www.avea.com.tr) . in order to see the price differences with other GSM
operators ;
Figure 8: Avea Mobil Ogrenci Tariff

Other AVEA
operator’s mobilogrenci
BizBizecell tariff
tariff

With the 40 credits/10 2 credits/10
subscribers min min

On network 4 credits/min 3 credits/min

Home-office 4 credits/min 4 credits/min

Other GSM 9credits/min 4credits/min

Source:avea.com.tr

________________________________________________________________________ 35

In every direction mobilogrenci is the most advantageous tariff for the students. In addition it
shows that new tariff shows that other advantageous tariff is postpaid hepsibir and comparing
to other GSM operators prices are;

Figure 9: Avea Hepsibir Tariff
Avea Hepsibir Turkcell Bizbizecell Telsim Seç Konus
On-network 25 new kr/min 30.5 new kr/min 20 new kr/min
Home and office 25 new kr./min 30.5 new kr/min 30 new kr/min
line
First 300 min:20
new kr/min
Other GSM 25 new kr/min 57.5 new kr/min After 300 min:30
mew kr/min
Monthly fee 95 new kr 95 new kr 10 TRY
Charging period 6 sec. 6 sec. 60 sec.
Source:avea.com.tr

Especially, prices differences arise calls between fixed lines and mobil that’s why the tariffs
becomes more important for consumers in order to choose GSM operator that supply the
lower price for calls between fixed lines and mobil.

On the other hand, for TURCELL and TELSIM that is now VODAFONE , with integration of
AYCELL and ARIA AVEA became more competitive in the market and a risk for other
GSM operators to loose their costumers. That pushes the companies to diversify its services ,
lower down the prices and increase the quality because it becomes easy to find substitutions in
the marketplace.

When the developments of products and services, telecoms sector are analyzed , the main
function of regulatory authority that aims efficient distribution of resources is arising as
eliminating market breakdowns. Precautions related to entrance and quitting the market are
taken, it should be taken into consideration that these precautions should make new entries
easy and decrease social welfare of existing companies in telecoms sector.

________________________________________________________________________ 36

Graphic 11: Net Sales in GSM Sector(2001-2004)

Source: Turkish Communication Autority

According to net sales it shows again Turkcell had more than 50 percentage market share and
Telsim and Avea had less than 25 percentage market shares.The mobile market has also seen
numerous developments since 2001.

In Turkey, the half of the market reperesents a mature market and with a young and growing
population , and increasing national level of wealth that’s why for telecoms industry Turkey
becomes an important investment destination.

6. CONCLUSION

Main purpose of this paper is to examine the evolution of telecommunication sector in
Turkey. We tried to find out the relationship between competition policy, liberalization,
regulation and privatization in that they all have affects upon investment and growth.

Turkey accelerated liberalization in telecommunication sector, especially affected by
European Union and also, regulation of this sector has differences especially in procedures in
________________________________________________________________________ 37

getting licenses. For government policy whose one of the key component is privatization of
Turk telecom is useful for establishing competitive market structure in order to increase
service quality and number of innovative services and decrease costs.

In telecommunications, Oger telecom and Vodafone were entered the market in 2005 and this
shows that main drivers of market and players continue to report strong profits attributable to
new technology and value added services. On the other hand, AVEA as a horizontal merger
company launched the market in 2001 and this increased the competition in
telecommunications sector.

With privatization of telecommunication sector, Turkey become more close to international
technology standards, diversification of services in GSM market, increased quality and more
competitive and stronger in order to set the prices at levels in international telecommunication
markets.

References

• www.avea.com.tr
Last Access: 11.06.2007

• Telecommunication Policy in Turkey: Dismantling Barriers to Growth , James B.
Burnham

________________________________________________________________________ 38

• Competition and Regulation in the Turkish Telecommunications Industry, Izak
Atiyas, Sabanci University, November 2005

• www.turkcell.com.tr

• www.oecd.org

• www.itu.int
(International Telecommunication Union )

• http://www.agsm.edu.au/~bobm/teaching/ECL/lect07.pdf

• ’M&A, and Other Restructuring Activities” by Donald DePamphilis

• Public Finance in Theory and Practice by Richard A. Musgrave

• Economics of Regulation and Antitrust, 4. edition

• http://www.tk.gov.tr/Yayin/istatistikler/istatistik/WEB-2003-4-GSM.htm

• http://www.lirne.net/resources/netknowledge/parker.pdf

• www.wikipedia.org

• www.dpt.gov.tr
________________________________________________________________________ 39

• www.tk.gov.tr

• World Investment Report, Cross- Border Mergers and acquisitions and Development

• http://www.tutor2u.net/economics/content/topics/monopoly/natural_monopoly.htm
Last Access:11.06.2007

________________________________________________________________________ 40

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