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Competition Congress Growth and Competitiveness Trends Cahit Paksoy Avea CEO and Board Member

Competition Congress Growth and Competitiveness Trends Cahit Paksoy Avea CEO and Board Member November 8, 2005. Many criteria which are related with being an information society are included in the country competitiveness evaluations.

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Competition Congress Growth and Competitiveness Trends Cahit Paksoy Avea CEO and Board Member

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  1. Competition Congress Growth and Competitiveness Trends Cahit Paksoy Avea CEO and Board Member November 8, 2005

  2. Many criteria which are related with being an information society are included in the country competitiveness evaluations. Countries’ competitiveness is directly linked with the level of development in the knowledge economy Based on theLisbon Review, Finland was the most competitive country in the EU in 2004, followed by Denmark and Sweden. The dimensions of the Lisbon diamond are information society, innovation and R&D, liberalization, networked industries, financial services, enterprise environment,social inclusion and sustainable development. According to World Economic Forum, Finland was the most competitive economy in the world in 2004. Finland was ranked first in growth competitiveness and second in business competitiveness after USA. In 2005 International management Development Institute ranks USA, Hong Kong and Singaporeas themost competitive three countries in overall competitiveness. Based on the comparison of the European Commission, Finland wasamong the leading countries in investing into knowledge-basedeconomy and performance of the economy. Sources: WEF, The Global Competitiveness Report 2004-2005 and The Lisbon Review 2004; IMD, The WorldCompetitiveness Yearbook 2005; EU, Key Figures 2005 on Science, Technology and Innovation andThe European Innovation Scoreboard 2004; United Nations University

  3. US score EU average An information society for all Innovation, research and development LiberalizationCompleting the single marketState aid and competition policy Network industriesTelecommunicationsUtilities and transportation Efficient and integrated financial services Enterprise environmentBusiness start-up environmentRegulatory environment Social inclusionReturning people to the workforceUpgrading skillsModernizing social protection Sustainable development Overall Lisbon score 5.9 6.1 5.15.74.5 5.85.66.1 5.8 5.75.85.6 5.05.65.34.2 5.0 5.6 4.6 4.4 4.75.14.2 5.86.05.6 5.5 4.74.55.0 4.85.15.04.4 5.2 5.0 Comparing USA and EU The Lisbon scores Source: WEF, The Lisbon Review 2004

  4. Turkey’s growth competition position • 2001 2003 2005 • Turkey 48 56 48 • Czech Republic 36 • Hungary 37 • Spain 38 • Slovakia 40 • Portugal 45 • Romania 55 • Poland 57 • Turkey’s Improvement Areas • - Education and HR Qualification • - Investments in technology and internet infrastructure • - R&D investments • Sources: International Management Development, The World Competitiveness Yearbook

  5. Some factors affecting Turkey’s Competitiveness TurkeyPoland Czech Rep.Hungary % of advanced technology exports2,063,07 13,23 25,63 %of illiterate population (age 15+)13,501 1 1 Student/Teacher ration in primary education27,512,5 18,9 10,8 Telecommunication investments (%GDP)0,100,16 1,66 0,59 Number of internet users (among 1000 people)105,5270,3 344,7 293,6 Cost of electricity in production ($/kwh)0,0820,037 0,043 0,05 Number of PC per person (among 1000)53122 179 176 Life expectancy at birth 7075 75 73 R&D investments (US$/ person) 17,629,1 112,4 77,4 Sources: International Management Development Institute, The World Competitiveness Yearbook

  6. Ranking of EU countries The Lisbon review Sustainabledevelopment Informationsociety Innovationand R&D Networkindustries Socialinclusion Financial services Liberalization Enterprise Total rank Finland 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1 3 2 6 4 7 5 9 8 11 10 14 12 13 15 1 4 2 6 7 3 13 5 9 8 10 11 12 14 15 1 2 6 3 5 8 4 7 10 9 12 11 13 14 15 4 1 2 8 7 3 5 6 9 10 15 12 13 11 14 1 3 4 2 7 8 5 6 10 11 9 12 13 14 15 3 2 5 1 7 10 6 9 12 8 4 11 15 13 14 2 1 2 8 4 12 5 9 7 6 10 11 13 14 15 1 4 3 7 6 2 8 9 5 10 13 12 11 14 15 Denmark Sweden UK Netherlands Germany Luxembourg France Austria Belgium Ireland Spain Italy Portugal Greece Source: WEF, The Lisbon Review 2004

  7. Finland 2 USA Sweden Taiwan Denmark Norway Singapore Switzerland Japan Iceland Great Britain Netherlands Germany Australia 1 4 17 7 20 10 5 8 19 6 9 3 13 2004 2003 2002 1 1 2 2 3 4 5 6 7 8 9 10 11 12 13 14 2 3 5 4 9 6 7 11 8 15 12 13 10 1 5 3 10 9 4 6 13 12 11 15 14 7 Competitiveness 2002-2005 Total ranking WEFGrowthcompetitiveness WEFBusinesscompetitiveness IMD Total compe-titiveness 2004 2005 6 1 14 11 7 15 3 8 21 4 22 13 23 9 Sources: IMD, The World Competitiveness Yearbook 2005 andWEF, The Global Competitiveness Report 2004-2005

  8. Growth competitiveness by country Ranking by WEF Source: WEF, The Global Competitiveness Report 2004-2005.

  9. WEFTechnology IMD Technology Science 2004 2003 2002 2005 2005 1 2 4 5 6 7 8 10 12 13 15 17 18 1 2 4 5 11 6 7 10 12 8 14 9 15 1 5 13 9 11 14 10 12 16 6 31 20 18 1 10 4 2 13 5 14 24 3 17 42 26 12 USA Taiwan Sweden Japan Denmark Switzerland Israel Norway Germany Canada Estonia Australia Great Britain 1 3 4 5 8 7 9 13 14 11 10 19 16 Finland 3 2 3 15 7 Sources: WEF The Global Competitiveness Report 2004-2005 andIMD The World Competitiveness Yearbook 2005 Competitiveness in technology and science2002-2005

  10. EIS 2004 - Summary Innovation Index Source: European Innovation Scoreboard 2004

  11. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 % Total R&D funding in 2003 Percentage of GDP Great Britain 2) 1) 2001 2) 2002 3) Est. Source: Eurostat

  12. Public grants and alleviation of taxes for corporate R&D in OECD countries Share of corporate R&D spending in 2001 Taxation practices according to funding of large-company R&D, public grantscover all companies. Estimation by Tekes based on OECD statistics.

  13. ICT manufacturing ICT services Size and growth of the ICT sector Share of ICT value added in business sector value added in 2000 % * 1999 ** 2001 Source: OECD, Technology and Industry Scoreboard 2003

  14. Overall maturity scores of eGovernment Source: Accenture 2004, eGovernment Leadership:High Performance, Maximum Value

  15. The eEurope 2005 index The eEurope 2005 index is calculated from indicators on Internet usage, public on-line services,eCommerce activities, information security and broadband usage. Source: Insead/SAP 2004, eEurope 2005

  16. Competition in the Turkish Telecommunications Sector Price Low High Competition Bundled Services Integrated market Competitive market Laws and Regulations Service First phases of competition Monopolistic Regulation Service High Service Quality Low

  17. Over the last decade the industry has witnessed many important achievements. 1993 1994 1996 1997 1998 • Split of the old model of the Post, Telephone and Telegraph monopoly • Two 900MHz licenses were awarded to Telsim and Turkcell in 1993 to provide GSM cellular services under a revenue-sharing basis with Türk Telekom • Turkey's first international Internet connection established by METU and TUBITAK (a 64 Kbps line to NSFNet in the United States) • Licensing of Cable TV services based on revenue sharing system • Privatization efforts of Türk Telekom has started • Turkey's National Internet Backbone Network (TURNET) was put into service • Frame Relay service which enables data transfer at high speed was put into service • With other 68 countries, Turkey committed to liberalize its basic telecommunications services market till 2006 • GSM network was transferred to the firms Turkcell and Telsim for 25 years by giving license at $500 million. Nr of GSM subscribers:(-) 68K 620K 1.406K 3.053K 2003 2001 2000 1999 2004 • Alternative operators began to provide services. • Aycell and Aria merged. • On March, Aria has started operations • Ay-Cell started operations soon after Aria • Türk Telekom became a joint-stock company, dependent on special law provisions. • Telecommunications Authority became operational. • GSM license, at 1800MHz, awarded to the Telecom Italia/IS Bank Consortium Turkcell listed on the New York and Istanbul stock markets • The coalition government committed the abolishment of TT exclusivity on fixed lines 2005 • Türk Telekom privatization will be concluded. Nr of GSM subscribers:41.000K(*) 34.708K 27.888K 18.593K 15.183K 7.500K (*) as of September 2005

  18. Turkish telecommunications market is not mature yet, there are important opportunities. - Mobile - - Fixed - - Broadband - • xDSL services are only provided by Türk Telekom until the market’s full liberalization. • Satellite Digital TV has developed and spread rapidly in the last years, with two companies (DigiTurk, StarDigital) jointly sharing the market. • Low mobile penetration compared to Europe. • The market has a total of 39.7 million subscribers. • Competition became more tough and price wars have started. This trend will continue until the sale of Telsim • Mobile internet has not achieved a success yet, because of technological constraints, current user preferences and more importantly cost issues. • Turkish Wired Communication Market is 29th in terms of total revenue but it is 229th worldwide in terms of ARPU. • Room for improvement of Türk Telekom’s services and efficiency. Today • Broadband market size continuously increases. • xDSL services become more spread by Türk Telekom and other carriers (after full liberalization). • Cable DTV operators start to emerge with additional value added interactive services. • Mobile penetration increases. • Prices tend to decrease, customer satisfaction and service differentiation become more and more important. • Mobile internet penetration starts to increase and mobile Internet services evolve fast. • Market’s full liberalization. • Competition in the market, alternate operators start to emerge. • Türk Telekom starts to take necessary actions in order to increase its efficiency in services and processes. • Market size increases with additional data and voice services. Near Future

  19. The market has not saturated yet, however purchasing power and the high tax rates are important barriers for full realization of the market potential. • Turkey’s mobile telecommunications market is directly correlated with domestic growth as most revenue comes from domestic operations. • MoU and ARPU directly depend on growth in GDP per capita income. • Turkey has the largest population and GDP of any market in the Middle East and Africa (MEA) but it has very modest GDP per capita. • The country is the largest market for telecommunications services as well, accounting for an estimated 34.6% of all MEA telecom retail services revenue in 2005 (24% of fixed retail and 44% of mobile services revenue) • The analysts expect the telecom market to display a sustainable trend, in line with decreasing country risk and growing economic recovery linked to the EU accession process. • On the road to EU membership Turkey will be aligning its telecommunications law to EU regulations. Source: TA and Ata Invest Estimations GSM ownership per 100 inhabitants Source: ITU Statistics, 2004

  20. The market is unique in the way that both fixed and mobile markets are of monopolistic nature. • Turkish mobile market indicate a monopolistic market structure. The extraordinary on-net advantage is difficult to compete. • The Authority is working on important subjects which critically affect the market dynamics. • Number Portability • A Committee is formed with the participation of GSM operators. The draft regulation regarding Number portability is expected to be finalized by the end of this year. • Draft Law Amending Wireless Law • The ground behind this draft is to prevent the theft and illicit usage of the handsets. The operators will be responsible to establish their own CEIR system in addition to the central database to be established by TA. All the handsets not registered to TA’s database will be blocked by the operators. • Draft Electronic Communications Law • Abolishes the license and usage fees • Describes a new framework for authorization • Draws a framework for the designation of SMP • Brings a new financial obligation for the participation to the Universal Service Fund. • Draft Law Amending Environmental Law • Brings a new fee to be collected from the subscribers (1YTL per month) and will be transferred to TA as environmental contribution fee. Describes the procedure to be followed for the activities that may have a negative impact on the environment. • Regulation Regarding the Protection of Public From the Electromagnetic Fields • Caused by Non-Ionized Radiation Based on the Law regarding Organization and Duties of Ministry of Environment and Forestry: Brings new authorizations regarding electromagnetic areas and abolished TA’s authority in related fields. • Study Regarding Market Analysis • Since TA is the authorized body to conduct studies regarding the SMP and give the final decision for the designation of SMP operators; TA is trying to describe the market structures in which SMPs will be designated.

  21. There has been a steady growth in the number of mobile subscribers • Government took a big step in the privatization of Türk Telekom. Next step will be the sale of Telsim • Telsim’s sale will significantly increase the competition However changes in the rules of competition are not expected before 2006. • Delay in the regulation of number portability is one of the growth barriers. • High tax rates: another factor hindering growth. Although mobile phone growth is impressive, MoU and ARPU are still very low compared to the EU because of heavy taxation. (exceeding 60% of the invoice amount). On top of the existing rates government will introduce a new fee (1YTL/month) as environmental contribution fee. • Due to high tax rates average call duration dropped from 103min/ month in 2000 to 67min/ month in 2005. • The market is highly dependent on prepaid cards, which represent around 75% of the total. Postpaid growth is flat. Prepaid subscription is also expected to compromise 95% of net additional subscription in the coming periods. • Growth is expected to continue at a slower pace in 2005, carrying a total number of mobile subscribers to around 40millions. • As of Q3 2004 average net monthly churn rate is 0,7%. - Wireless Market Development in Turkey - Source: Merrill Lynch Source: Avea estimation based on Merrill Lynch growth forecasts.

  22. Conclusion: Turkey needs to invest in advanced technologies to improve its competitiveness. Policy, strategy and action plan to increase competitiveness Increase internet usage and improve electronic integration in the economy Increase the share of R&D in GDP Integrate public and private industries’ processes, improve coordination among public and private institutions

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