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191451Z Nov 04

UNCLAS SECTION 01 OF 03 ANKARA 006480 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/SE, EB/IFD, AND EB/CIP 
TREASURY FOR RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958: N/A 
TAGS: ECON ECPS EFIN EINV TU
SUBJECT: TURKEY TELECOM SECTOR: LIBERALIZATION IS HARD TO 
DO, AND PROCEEDS SLOWLY 
 
 
 SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE ACCORDINGLY. 
 
¶1.  (SBU)  SUMMARY: A combination of poor service and high 
costs for telecom and information technology users impedes 
foreign investment and hampers Turkey's global 
competitiveness.  While many Turkish officials express 
commitment and optimism, telecom sector liberalization is 
proceeding slowly, with the core problems being lack of 
progress in the privatization of the entrenched monopoly of 
Turk Telecom and an ineffective independent regulator.  A 
process of accession to the European Union could help 
accelerate progress.  End Summary. 
 
All Lines Connect to Turk Telecom 
--------------------------------- 
 
¶2.  (SBU)  The path to potential liberalization of the 
telecom sector harks back to 1990 legislation and the 
creation of the Turkish Telecom Regulatory Authority.  Unlike 
the energy sector wherein contemporaneous legislation 
provided for unbundling of the electricity monopoly as a 
first step, Turk Telekom maintained its dominant monopoly 
position.  Attempts to privatize Turk Telekom in small blocks 
failed twice and the more recent attempt to privatize a 
majority chunk has been oft delayed, and will face obstacles 
from various interests, including Turk Telekom itself, the 
GOT (significant cash cow and potential bad press of selling 
crown jewels at perceived low price to foreigners), labor 
unions (concerns about employment), and the legal system 
(SEPTEL).  The telecom sector liberalization itself has 
contributed to delays in the Turk Telekom privatization, as 
it creates ambiguity and a moving target. 
 
How Effective is the Independent Regulator? 
------------------------------------------- 
 
¶3.  (SBU)  The Telecom Regulatory Authority was created in 
1990 to regulate and licence telecom operators.  Through its 
history, because of inadequate experience and size, it has 
not been able to function effectively as an overseer to Turk 
Telekom.  The small, preexisting Wireless General Directorate 
in the Ministry of Transportation, which had responsibility 
for allocating frequencies, provided much of the personnel 
for the start-up regulatory body and the coalition government 
at the time gave the majority of initial board slots to 
members of the National Action Party (MHP), rather than 
necessarily to technically competent individuals.  Although 
in principle independent, it has been difficult for the 
Telecom Regulatory Authority to operate independently of 
pressure from the government and Turk Telekom. 
 
Under Whelming Little Bang in Long Distance 
------------------------------------------- 
 
¶4.  (SBU)  In principle, as of January 1, 2004 the long 
distance service market was to open up with intended goals of 
improving service and reducing consumer prices.  In fact, 
progress has been halting and slow.  While in May 2004, the 
Turkey Telecom Regulatory Authority granted about forty 
licenses for long distance operation, only about five (among 
which, major business groups Koc, Sabanci, and Dogan) have 
actually signed agreements with Turk Telekom to interconnect 
and go into operation, despite pressure to utilize 
substantial investment put in place.  Turk Telekom sought to 
charge 5-7 cents per minute for interconnection, compared to 
the 1-1.5 cent average rate in EU countries.  Underlying 
legislation provided for licensees to conclude agreements 
with Turk Telekom by August 2004.   The general lack of 
timely success in signing agreements put the Telecom 
Authority in the position of arbitrating a compromise.  The 
Authority announced new "reference prices" in October, 
calling for current application of 3 cents interconnection 
fees, and phased reductions to EU levels of 1.5 cents in 
October 2005.  Turk Telekom publicly protested the announced 
fee structure, claiming it faced substantial fixed and 
operating costs, and threatened to take its complaint to the 
courts. 
 
¶5.  (SBU) In repeated conversations with EconOff, 
representatives of the start-up long-distance operator 
association, Telkoder, have bitterly complained about their 
challenge in facing the entrenched monopoly of Turk Telekom. 
In their view, not only have they been unsuccessful in 
securing reasonable interconnection fees with the Turk 
Telekom structure; in addition, they claim that Turk Telekom 
had announced reductions in its retail fee structure to 
maintain its market share.  Telkoder reps have threatened to 
take their complaints to the courts.  Meanwhile, consumers 
continue to rely on service from the monopoly provider.  A 
Turk Telekom advisor told EconOff he expected that more 
licensees would be granted and eventually many would start 
operation, but there would be a subsequent and inevitable 
shakeout and contraction. 
Mobile Telephone Sector Only Competitive Bright Spot 
--------------------------------------------- ------- 
¶6.  (SBU)  Turkey's GSM mobile telephone market enjoys 
considerable competition and the State Planning Board 
estimates 30 million cell phone users, compared to 18 million 
fixed telephone users.   Four licenses for mobile telephone 
operation have been granted in Turkey and three actually 
operate.  Mobile telephone operators also face high 
interconnection fees to Turk Telekom,s infrastructure (15 
cents per minute to decrease to 10 cents per the Telecom 
Authority reference prices).  Private company Turkcell 
(listed on NYSE; Cukurova Group major stake) controls about 
two-thirds of the domestic cell phone market and also 
provides international roaming service.  The balance of 
subscribers use Avea (merger of Turk Telekom and Italian 
owned entities) and Telsim (taken over by Turkey deposit 
guarantee fund from bankrupt Uzan group), so the competitive 
system is not as lively as it could be.  Consumers generally 
face high prices and poor service from cellular providers. 
Unclear timing and details for a proposed public tender for 
Telsim have contributed to delays in tendering Turk Telekom. 
 
Other Sectors and New Economy Dependent on Turk Telekom 
--------------------------------------------- ---------- 
 
¶7.  (SBU)  The New Economy/Knowledge Economy faces challenges 
in Turkey because all suppliers must connect to Turk Telekom; 
consumers face limited or poor service and high prices.  Turk 
Telekom also controls the cable television network.  Although 
cable television remains a monopoly, there is competition 
from digital satellite television, so consumers receive 
reasonable service and pricing.  With respect to cable 
internet provision,  consumers face high prices and poor 
service because of the lack of competion.  The cable sector, 
too, is caught up in contention between the Competition 
Authority (seeks to split out cable service provision in the 
Turk Telekom tender) and the Privatization and Telecom 
Authorities (argue that Turk Telekom should keep this 
component to enhance its attractiveness to potential 
investors). 
 
¶8.  (SBU)  Internet Service Providers (ISP) enjoy competition 
with 91 licensed operators, but all must both connect and 
compete with Turk Telekom itself, so residential and business 
consumers do not enjoy the benefits of a truly competitive 
environment.  The Telecom Authority estimates about a 10 
percent penetration in the population for internet usage, but 
growing at over 25 percent each year. 
 
¶9.  (SBU)  Broadband shows even a greater unmet potential for 
consumers as Turk Telekom maintains direct control for 
provision via either cable or DSL.  There are about 250,000 
broadband DSL subscribers who face prices of about 1.5 to two 
times that of the U.S. and a speed of about five times slower 
than in the U.S.  The Telecom Authority aims to eventually 
introduce licensing and competition in broadband, wireless, 
and data transmission, but no specific timing has yet been 
announced. 
 
¶10.  (SBU)  Satellite service provides a niche market in 
Turkey.  There are twenty licenses and three active 
operators.  One provider told EconOff that it offered 
lucrative business to corporate customers, because of the 
non-competitive environment and lack of reasonable 
alternatives.  This company admitted that this business would 
not be profitable if consumers had diverse and competitive 
telecom service choices available. 
 
Comment 
------- 
 
¶11.  (SBU)  Many contacts lament the apparent lack of 
interest on the part of American companies in the Turkish 
telecommunications sector, either in the Turk Telekom 
privatization or in other opportunities in telecom as it 
(slowly) liberalizes.  Only European and Asian companies have 
so far participated in the information phase of the potential 
Turk Telekom tender.  These contacts yearn for "U.S. know-how 
and can-do approach" or "people who answer the phone in 
August".   Over the years, some American firms, like Lucent 
and SBC, have looked at opportunities and/or opened offices 
in Turkey, but have later pulled back.  While interesting 
opportunities will continue to evolve in the telecom sector, 
for many American firms, the Turkish market may look too 
non-transparent or too "European".  American firms accessing 
the Turkish telecom infrastructure for multinational clients 
have complained to the Embassy about high interconnection 
fees and high international settlement rates.  Unfortunately, 
this situation may not change in the short term. 
 
¶12.  (SBU)  COMMENT CONTINUED: Many Embassy contacts insist 
that liberalization will eventually occur and are willing to 
place better odds on that process in comparison with the 
oft-delayed Turk Telekom privatization.  Successful 
liberalization will be dependent on the Telecom Authority 
exercising greater independence, strength, and technical 
know-how.  (Telecom Authority reps have expressed interest in 
contact with the U.S. FCC, for example, as a conference 
organized in Turkey with a visiting FCC individual or team.) 
Need to make both progress on E.U. harmonization and to 
improve the investment environment will be positive factors 
for catalyzing further liberalization.  End Comment. 
 
 
EDELMAN