TURKEY: LOW INTERNET PENETRATION DUE TO

UNCLAS SECTION 01 OF 03 ANKARA 001209

SIPDIS

USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO
FCC FOR A THOMAS AND A WEINSCHENK

SENSITIVE

E.O. 12958: N/A
TAGS: EINT ECPS TU
SUBJECT: TURKEY: LOW INTERNET PENETRATION DUE TO
MARKET BARRIERS

REF: A. Ankara 94

B. 2004 Ankara 6480

Sensitive But Unclassified. Please handle accordingly.


1. (SBU) Summary: Internet penetration in Turkey
remains low, due mainly to high cost of hardware and
relatively high subscription fees. Although the state
telecom firm, Turk Telekom (TT),has launched higher-
speed and more affordable broad-band internet service,
Internet Service Providers (ISPs) in Turkey complain
about unfair competition from the former monopoly,
which is currently slotted for privatization. The
still relatively new Telecommunications Authority (TA)
is still establishing its competence and independence
and has not been able to carry out decisions in favor
of ISP's. End Summary.

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Low Penetration, High Costs
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2. (SBU) Turkey's information technology sector has
been enjoying steady growth, albeit from a relatively
undeveloped base. The GOT has made steps to facilitate
competition and investment in the sector. There are 95
licensed Internet Service Providers (ISPs),but all
must interconnect and compete with Turk Telekom (TT),
which is the sole provider of internet connections to
the telecom infrastructure, as well as broad-band (ADSL
via telephone or cable). Internet cafes have become
more common throughout Turkey, but computer penetration
in homes remains around 5 %, about one-tenth the
average for Europe.


3. (SBU) Estimates of internet users range from 6
million to double that amount (about 8-15 % population
penetration, about one-half the average for Europe).
On the high end, a State Institute of Statistics survey
from June 2004 estimated that there are 13.3 million
internet users in Turkey, out of a population of 70
million. According to Transport Ministry
Communications Department Director General Ali Zor,
home subscribers account for a small part of this
number (3-4 million),since a large segment of the
population cannot afford to buy PCs and uses internet
cafes for internet access (constituting relatively
unsophisticated use, limited to e-mails). In a meeting
with Econoff and Econ Specialist, State Planning
Organization Information Society Department Head Recep
Cakal confirmed the low internet penetration in Turkey
and attributed this not only to the high cost of PCs
but also to the relatively high internet service fees,
relative to Turkey's $4,300 per capita income. Basic
broad-band service (256 kbs/sec) from Turk Telekom, for
example, costs approximately $30 per month. Cakal said
that technical infrastructure in Turkey was not
reliable and that establishment of a truly competitive
market was key to better service quality and lower
internet service fees.


4. (SBU) Cakal said the GOT was trying to increase
internet penetration through a number of "e-
transformation" projects, primarily targeting
education. One of these projects is a joint project
conducted by the Education Ministry and Turk Telekom
(TT),through which TT has provided computer and broad-
band connection to 12,000 schools as of the end of
November 2004. The project target is to increase this
to 42,500 schools by the end of 2005. In separate
projects conducted with World Bank and EBRD assistance,
computer labs were established in 2,800 schools in
2004, aiming to reach 4,000 more schools in 2005.
These projects ultimately target providing a total of
8,300 schools with IT facilities by the end of 2005.

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ISP Blues
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5. (SBU) While Internet Service Providers (ISP) have
proliferated in Turkey, they complain that TT practices
active and unfair resistance to competition and
innovative services. In a February 23 meeting with
Econoff and Econ Specialist, Tayfun Okter, the General
Manager of Turkey's leading private ISP, Superonline,
described difficulties his and similar companies face
in Turkey. Superonline, the first private sector ISP
established in 1994, has been a market leader since
then. Responding to sectoral and economic crises over
the years, Superonline changed its specialization from
personal accounts to corporate wide area network
solutions. Superonline currently has 1,000 corporate
subscribers, in addition to 300,000 personal
subscribers. Okter told us ISPs have not faced
legislative barriers to free market functioning since
their inception in the 1990s. However, Okter said
there was always an "unseen barrier" -- the sole
backbone infrastructure provider. Okter asserted that
TT abused its control of the backbone infrastructure to
compete unfairly against ISP companies, at times even
arbitrarily cutting some ISPs' connections.

6. (SBU) ISP's assert that TT has limited their access
to both basic internet and to broad-band service.
Okter observed that in order to increase its market
value on its way to privatization, TT had recently
become an even more aggressive competitor. According
to Okter, TT had at times offered lower leased line
internet service fees to end users than to ISPs. Okter
said TT currently had 300,000 ADSL subscribers, most of
which suffer from poor customer support from TT. Okter
claimed Superonline had 2,000 ADSL customers in line,
who would be willing to pay an additional 20 percent to
receive a better quality service from Superonline.
According to Okter, TT had been reluctant to provide
new ADSL portals to ISPs -- and for the limited number
of portals it provides -- TT requires the ISPs to
register the customers in TT's database.

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Skirmishes Over VOIP
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7. (SBU) Voice over Internet Protocol (VOIP) service is
another source of conflict between TT and the ISPs. A
licensing regulation issued by the Telecommunications
Authority (TA) in August 2004 appears to enable long
distance telephone service license holders to provide
voice transmission through all kinds of infrastructure,
including the Internet. However, TT asserts that ISP
companies providing VoIP services need to sign a
special interconnection agreement with TT, and pay high
origination and termination fees. The companies have
argued against this on both a technical and competition
basis. Superonline is one of the companies TT recently
sued in the courts for allegedly illegally providing
VOIP service.


8. (SBU) Okter said they have appealed several times to
the TA about problems they have with TT, but felt it is
hard for the TA to remain unbiased and independent,
given fears it could be blamed for reducing the market
value of TT, a critical state-owned entity, currently
in the privatization process. Despite this, TA has
announced some decisions against TT, which TT in turn
has appealed in the courts. Subsequent court rulings
went mostly against private companies, according to
Okter, both due to the Turkish judiciary's "statist"
stance and to the lack of specialized courts. Okter
said the relevant Ministry of Transport was aware of
the ISPs' problems, and was trying to resolve the
dispute they had with TT. Okter complained that the
ISPs were fighting in many fronts, given an ineffective
TA, a biased judiciary, and unfair competition from TT.
Okter feared that the companies might continue to
suffer from these uncertainties even after TT's pending
privatization.


9. (SBU) Dogan Online, another major independent ISP,
echoed to EconOff many of the concerns raised by
Superonline. While recognizing some uncertainty in the
timing of the TT privatization, he expressed patience
and confidence in the GOT and the regulatory
authority's capacity to slowly but steadily foster
greater liberalization and competition in the Turkish
communication realm. He expected further fall-out in
dial-up ISPs as Turk Telekom expands its ADSL service.

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Comment
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10. (SBU) Liberalization of the telecom and information
technology market in the presence of a dominant state
firm is a big challenge for the GOT, with success
ultimately dependent on the effectiveness of a strong,
unbiased regulator. The Telecommunications Authority
aims to rise to the challenge, but still lacks the
independence and competence to effectively play this
role. As a result, Turkish citizens' and companies'
access to low-cost and reliable high quality internet
service is still hampered by the position of TT as sole
provider of access to the underlying infrastructure.
The GOT will have to plan beyond TT's privatization and
assure that this shortcoming does not continue to
impact the investment and business environment
negatively.

Edelman