UNIVERSITY OF PORTO                         FACULTY OF ECONOMICS      ‘Telecommunication Sector in Turkey, Economic Regula...
ABSTRACTThe telecommunication sector in Turkey had significant changes in the last few years. At theend of 2003, the monop...
CONTENTS1. INTRODUCTION......................................................................................................
In 1998, after the revenue sharing agreements transformed to 25-years licenses agreements of thesetwo operators, a duopoly...
company is to create a higher value of shareholder than the sum of the two companies.Actually, two companies together are ...
Types of Mergers           Horizontal Merger          Conglomerate Merger              Vertical Merger       Horizontal Me...
acting in different production stage and when there is a backward integration, the firmacquires a supplier and in terms of...
Joint Ventures:It is a legal entity that two or more parties undertake economic activity together. Theparticipants agree t...
There are several reasons and motives that firms can engage in mergers and acquisitions. Oneof the most important motives ...
two or more product lines in one firm is cheaper than producing them in separated firms. Wecan summarize the motivations o...
AC0 : the level of average costs of two firms before combiningAC1 : the level of average costs of two firms after combinin...
Eliminating successive monopolies, or dissolving bilateral bargaining stalemates: merging canbe shown to be socially prefe...
 The boat builder’s input demand D′D′ is the motor maker’s product demand curve:            the motor maker sets its MR′ ...
social goals. Regulation is designed and operated for the benefits in which industry regulationis acquired. Monopolies, es...
market participants of access to an important resource. The antitrust regulation seldom contestconglomerate mergers involv...
‘Economic system is subject to some form of government direction rather than left to invisiblehand of market forces. Marke...
Source: http://www.tutor2u.net/economics/content/topics/monopoly/natural_monopoly.htmTelecommunication industry, natural g...
provide an open industry for entry and these agencies can eliminate price controls tochallenge with this situation.When an...
P                                       D(P)                           D(P)                                               ...
price is       P               1                   where P= min AC. Associated with this price, demand is             2Q  ...
There are some policies that can be useful for regulators in order to face with such changes indemand or costs. First of a...
of telecommunications markets, by getting the telecommunications services from the directinvolvement of government with fo...
The market would be faced with an increasing competition, especially in long-distancetelephony. Deregulation in voice comm...
say that Turkish GSM market was in competition with a duopoly (Turkcell-Telsim) with fouroperators (Turkcell, Telsim, Aria...
(source: www.tk.gov.tr)Turkish GSM sector is getting out nowadays from the effects of the economics crisis 2000and 2001. T...
The Competition Authority (CA) administers a specific law of Protection of Competition inTurkey. The CA makes decisions in...
In Figure 5, we observe that from 1994 so from the creation of GSM in Turkey until 1998, thenumber of subscribers is doubl...
from 2000 to 2003, 17%. But finally, new entries didnt make a big change to the dominanceof Turkcell who had a market shar...
Figure 6 : Turkcell tariffs, post-paid packagesBy contrast, ARIA also began another promotion by price equality of on-net ...
5.1. OVERVIEWWhile Turkcell and Telsim was treating to new entries to the market and this threat was likean injure of comp...
ARIA: Aria was established by joint effort of Telecom Italia Mobile and Türkiye İş Bankas ıfor the GSM 1800 project, and i...
According to this data , it is certain that TURKCELL had much more market proportion thanTELSIM. Before merger of Aycell a...
of 2001 there were 20 million mobile subscribers, in 2004 43 million and in 2005approximately 46 million mobile subscriber...
Graphic 10: Growth of Subscribers (2001- 2005)                            Source: Turkish Communication AutorityAs shown g...
As a new brand AVEA, in order to take attentions of existing GSM subscribers and newsubscribers there are lots of new serv...
In every direction mobilogrenci is the most advantageous tariff for the students. In addition itshows that new tariff show...
Graphic 11: Net Sales in GSM Sector(2001-2004)                        Source: Turkish Communication AutorityAccording to n...
getting licenses. For government policy whose one of the key component is privatization ofTurk telecom is useful for estab...
•   Competition and Regulation in the Turkish Telecommunications Industry, Izak      Atiyas, Sabanci University, November ...
•   www.tk.gov.tr      Last Access: 11.06.2007  •   World Investment Report, Cross- Border Mergers and acquisitions and De...
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  1. 1. 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
  2. 2. ABSTRACTThe telecommunication sector in Turkey had significant changes in the last few years. At theend of 2003, the monopoly of the incumbent company over fixed-lines and voice servicesfinished. In 2000, an independent regularity authority founded: The TelecommunicationAuthority. The incumbent firm had been privatized in 2005. The competition is slower thanexpected, with exception of the mobile industry.Turkish mobile industry had rapidly grown over the past last decade. This paper examines thetelecommunication 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 andacquisitions. In chapter three, the economic regulation is discussed; main definitions,regulations instruments and the theory of regulation. In chapter four, the telecommunicationsector in Turkey; the structure of the sector and the sector regulations; is reviewed. The paperterminates with a case study which emerges the main changes in the sector in case of anoccurrence of a merger; the merger of two mobile operators Aria and Aycell under nameAvea.________________________________________________________________________ 2 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  3. 3. CONTENTS1. INTRODUCTION.................................................................................................................32. 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............................................................................ 103. ECONOMIC REGULATION........................................................................................... 13 3.1. ECONOMIC REGULATION AND ANTITRUST LAWS.......................................... 13 3.2. REGULATION INSTRUMENTS................................................................................. 15 3.3. THE THEORY OF REGULATION..............................................................................154. THE TELECOMMUNICATION SECTOR IN TURKEY ............................................21 4.1. THE STRUCTURE OF THE SECTOR....................................................................... 21 4.2. SECTOR REGULATIONS.......................................................................................... 255. 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.................................. 346. CONCLUSION................................................................................................................... 371. INTRODUCTIONThe competition is a new concept in Turkey’s telecommunication sector. Until the past fewyears, the fixed-line segment was ensued with a state-owned statutory monopoly, Turk Telekom. Inthe mobile sector, in mid 1990s, there were two operators: Turkcell and Telsim; having revenuesharing agreements with Turk Telekom: these operators were not free to set prices; they were undercontrol of Turk Telekom.________________________________________________________________________ 3 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  4. 4. In 1998, after the revenue sharing agreements transformed to 25-years licenses agreements of thesetwo operators, a duopoly competition began to arise in Turkish mobile industry. In 2000, additionallicenses also accepted: Aria and Aycell. The monopoly power of Turk Telekom on voice services andfixed line ended in 2003. In 2000, an independent regularity authority, the TelecommunicationsAuthority, founded.The end of the monopoly power of Turk Telekom and the foundation of the TelecommunicationAuthority were seen as changes which would prepare atmosphere for a competition, an introduction tonew investments and a growth. It was predicted also Turkeys quest for European Union membershipwould facilitate this environment of competition.Since 1994, so the creation of 2G GSM technologies in Turkey, Turkcell is dominating the industrywith a market share 60-70%. In 2000, the government offered two licenses and two more operatorsentered to the market: Aycell and Aria. The entrance of these two new operators didnt cause a bigchange in the market.Horizontal mergers can be motivated by a desire for greater market power. With this idea, in 2004, anew brand Avea was introduced to the market. Avea, a merger of Aycell and Aria, expressing a newsynergy, reached a larger market share and had more important place in the competition in the end ofthe year 2006.This paper examines the telecommunication sector in Turkey which has a young and moderntelecommunication infrastructure, focusing on the mobile industry; structure of the sector, mainchanges and the regulations in the sector.2. MERGERS AND ACQUISITIONS 2.1. DEFINITIONSMergers and acquisitions is the fact of combining different firms across buying and sellingprocess for a corporate strategy finance and management. The main idea behind buying a________________________________________________________________________ 4 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  5. 5. 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 isthe principle reason to engage firms to mergers and acquisitions.A merger occurs when two firms agree to combine as a single firm rather than remainseparately owned and operated, on the other hand an acquisition happens when a firmpurchases 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 thecombine organization continues with the name of surviving firm. In a merger, the target firmexchanges 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 mightinvolve the buying of firm’s assets or stocks, with the acquired firm continuing to exist as alegally owned subsidiary of the acquirer. 2.2.TYPES OF MERGERS AND OTHER BUSINESS COMBINATIONS.Mergers are generally classified as horizontal, vertical and conglomerate mergers dependingon merging firms are acting in the same industry or different industries.________________________________________________________________________ 5 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  6. 6. 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 firmmerges with a rival firm. This can make merging firms to have an important market power inthe industry which in turns negatively affects the competitiveness. There can be a decrease inthe number of competitors and can cause a market power for the merging firms while it canalso causes cost saving which is socially beneficial. Conglomerate Merger:Conglomerate merger consists of firms that operate in different industries. That is these firmsare not rivals or not a part of same supply chain. It could be an acquisition of complements orproducts of neighbor markets. Conglomeration merger can be an acquisition of a companywhich is planning to enter that market and means that eliminating a potential competitor sincein the absence of merger, company will compete with the acquiring company. This willrestrict 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 stagesof production of the same good. Suppose for example that a jewelry retailer purchases acompany 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 ofproduction such that one of them producing an input is used by the other. The attenders are________________________________________________________________________ 6 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  7. 7. acting in different production stage and when there is a backward integration, the firmacquires 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 DePamphilisAs you can see from the figure 2, between 1990 and 1999 around 60% of mergers arehorizontal mergers, around 35% is vertical mergers while vertical mergers are in very lowlevel. 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 1999Source: UNCTAD, World Investment Report, Cross- Border Mergers and acquisitions and Development, p. 102Joint ventures (JVs), strategic alliances, franchises can be seen as other important alternativestructures to business combinations.________________________________________________________________________ 7 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  8. 8. Joint Ventures:It is a legal entity that two or more parties undertake economic activity together. Theparticipants agree to set up a new entity in order to achieve strategic objectives and sharerevenues, expenses and control. It is generally set up for a limited time and therefore does’ trepresent a long term commitment. Joint venture would be a corporation, partnership or otherlegal structure. Also it provides participants new opportunities such as letting them to enternew 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 aseparate legal entity in the expectation of the outcome of alliance is greater than individualefforts. The arrangement may not be as formal as a joint venture agreement. Each participantscan sell each product to customers of one another that is access to other’ s products ortechnology. Strategic alliances provide with new technology, products or process that ofdistribution 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 providessupports such as training, advertising and marketing, on the other hand franchisee pays feesand runs the business by using the support. This makes franchisor to grow with a lower costas franchisee pays fees and provides the capital. 2.3. REASONS FOR M&A________________________________________________________________________ 8 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  9. 9. There are several reasons and motives that firms can engage in mergers and acquisitions. Oneof 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 andacquisitions. Internal growth is generally slower and fallible process. But growth throughmergers 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 toexpand geographically. It may be less risky and rapidly to expand geographically throughmergers and acquisitions then internal development.Companies often merge in an attempt to diversify into another line of business. Companiesexperience greater success with horizontal combinations, which results an increase in marketshare 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. Itreduces 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 wouldseparately. 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 topossibility 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 currentlyemployed in producing a proper product or service in order to produce related product orservice. The mostly frequent reason that economies of scales are formed is that combining________________________________________________________________________ 9 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  10. 10. two or more product lines in one firm is cheaper than producing them in separated firms. Wecan summarize the motivations of synergy as in the figure 3.Figure 3: Motivations of SynergyTHEORY MOTIVATIONOperating Synergy Improve operating efficiency through economies of scale or scope by acquiring a customer, supplier, or competitor Economies of Scale Economies of ScopeFinancial Synergy Lower cost of capitalDiversification Position the firm in higher growth products or markets New Products/ Current Markets New products/ New Markets Current Products/ New MarketsSource: “M&A, and other restructuring activities” by Donald DePamphilis 2.4. BENEFITS AND COSTS OF M&ABenefits & Costs of HORIZONTAL MERGERSMergers reduce the number of the competitors and can cause the possibility of market powerdue to merger means the integration of production facilities.Under the assumptions that are mergers creates market power and economies. At the graphbelow explains that the social costs related to mergers are shown up due to increasing pricesand shrinking output. On the graph the area called A1 is consumer surplus and A2 is a gain tosociety because if cost savings. The new quantity of production q 1 is lower than the quantitybefore combining of the firm.________________________________________________________________________ 10 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  11. 11. AC0 : the level of average costs of two firms before combiningAC1 : the level of average costs of two firms after combiningThe average cost is low before combining because the power of competition of individualfirm and it forces prices down. However, costs fall and prices increase , the market power iscreated. Benefits & Costs of VERTİCAL MERGERSVertical mergers link the firm by relationship of buying and selling. The benefits of verticalintegration can be subtitled as reducing transaction costs, technological economies andeliminating of successive monopolies.Transaction costs are costs of using the market. 1 The firms that are operating at differentstages of the production of the same good have relationship of buying or selling intermediateproducts or services. Firms use the market instead of being completely integrated because ofchanging demand for a product or economic conditions. 1 Economics of Regulation and Antitrust Policy, pg 226________________________________________________________________________ 11 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  12. 12. Eliminating successive monopolies, or dissolving bilateral bargaining stalemates: merging canbe shown to be socially preferable to the “double” monopolies”, even if the merged firm is amonopoly.2The assumptions are that an upstream motor monopolist sells to a downstream boatmonopolist , each boat requires exactly one motor , C dollars worth of other inputs and theboat 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 andD’ is derived demand for motors. In order to find the derived demand for motors, the approach is usingthe equilibrium condition for downstream boat monopolist. Generally the profit maximazing conditionis 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________________________________________________________________________ 12 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  13. 13.  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 thetriangle: all gain33. ECONOMIC REGULATION 3.1. ECONOMIC REGULATION AND ANTITRUST LAWSHouseholds are decision making units that they determine what amount of their income tosave 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 toproduce and which production factor to be used in the production process. Furthermore, firmsdetermine the prices.Government decides tax rates, national defence expenditure and also adjusts the moneysupply such as the growth rate of it. Actually, firms are not totally free in their decisions inthat, government as a regulator, constraints them. Government has a power of regulations inorder to restrict decisions of economic agents. Regulatory economics is a power ofgovernment for centrally- planning economy in which government has a control over factorsof production and in addition regulation can be used for blocking the market failure or forenriching well- combined firms. For example, merger between firms would be result insubstantial 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________________________________________________________________________ 13 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  14. 14. social goals. Regulation is designed and operated for the benefits in which industry regulationis acquired. Monopolies, especially the natural monopoly, are mostly regulated in order toimprove economic efficiency for example by restricting output and increasing the prices thatcan restrict production of social optimal amount of goods. When considering a regulationpolicy, side effects must be carefully determined because these side effects can reducewelfare. Regulators must carefully set socially optimal price although they can have limitedinformation about demand and cost conditions.Regulatory considerations, which also affect merger and acquisition activity, can be dividedas general, which affects all firms or industry- specific, which affects specific industries.Antitrust, federal security, environmental and employee benefits are general considerationswhile public utilities, telecommunication, banking, insurance and transportation are some ofregulated industries.Antitrust laws are found to stop corporations who consider a strong market power in that thesecan 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 anecessity.In many industries there can be firms which are large enough to dominate and in this caseantitrust laws can be used by government in order to get the control behavior by providingagainst 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 roleof market power. The purpose is to limit simple monopolies also mergers and other financialtransactions that the combination of corporations in which influence the market behavior. Iffor example a monopoly has a power to control price, there will be an economic efficiencylosses to society. In addition, product quality can be affected.‘ In general, horizontal mergers, those between current or potential competitors, are mostlikely to be challenged by regulators. Vertical mergers or customer- supplier mergers areconsidered much less likely to result in anticompetitive effects, unless they deprive other________________________________________________________________________ 14 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  15. 15. market participants of access to an important resource. The antitrust regulation seldom contestconglomerate mergers involving the combination of dissimilar products into a single firm.‘4 3.2. REGULATION INSTRUMENTSThe most important variables that regulators control are the control of price and control ofentry and exit. To begin with, when the price regulation occurs, firms are responsible tocharge a given price or may set a price between a given range. Also a maximum price can bespecified by government for the purpose of blocking monopolies in high prices or by contrastwith a minimum price in order to control too law prices. In addition, there would be adifferent price setting process in a market such as telecommunication. In this market differentprices 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 pricecontrol 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 andallocative efficiency, it is an important fact. Entry of new businesses are significantly differentacross countries in the way they regulate. Setting up a new business needs to meetgovernment requirements such as official cost of meeting these requirements or how long ittakes. New entrants can be useful in the way that they can provide consumers with highquality products.Control of other variables such as quality and quantity controls are also important. Qualityregulation is made to ensure that companies meet with minimum standards to provide a goodor service. This regulation can reduce market failure such as low quality products are reducedbut it can be costly to provide quality. There is a need for regularity agency in order to specifyminimum quality standards. 3.3. THE THEORY OF REGULATION 4 ’M&A, and Other Restructuring Activities” by Donald DePamphilis________________________________________________________________________ 15 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  16. 16. ‘Economic system is subject to some form of government direction rather than left to invisiblehand of market forces. Market mechanism alone can not perform all economic functions. Sothat public policy is needed to guide, correct and supplement it in certain respects.’ 5 Naturalmonopoly, 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 whomthis 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 arequirement for government intervention to provide against market failure.Natural monopoly can be seen as one of the important reasons for market failure. It ariseswhen one firm produces a particular good or service that minimizes cost at the social optimumquantity. According to Graphic 3, long – run average cost curve is declining associated withan increase in quantities. Producing quantity is minimized and only one firm still achievelower average cost per unit which means that production by one firm minimizes cost and thatguaranties market as a natural monopoly.The ratio of fixed to variable cost is high since for example fixed cost of setting up adistribution network for a product could be high. On the other hand, variable cost ofproducing 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 byhigher levels of production. In a natural monopoly, average cost is always declining so thatscale economies never exhausted. Graphic 3: Natural Monopoly 5 Public Finance in Theory and Practice by Richard A. Musgrave pg. 5________________________________________________________________________ 16 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  17. 17. Source: http://www.tutor2u.net/economics/content/topics/monopoly/natural_monopoly.htmTelecommunication industry, natural gas supply, electrical power distribution, railways andwater provision are can be seen as kinds of natural monopoly because they require high levelof initial investments. When natural monopoly exists, there could be conflicts betweenallocative 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 seekingprofit maximizing and as there is only one firm produces, there could be a price set by thefirm which is higher than the cost.This means that there is inefficiency in terms of resource allocation. On the other handallocative efficiency requires more firms in order to adjust price associated with marginal costby 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 andproductive efficiency in a natural monopoly. Entry regulation can provide one firm inproduction and price regulation can adjust the price that is set by the firm, according to socialoptimum 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________________________________________________________________________ 17 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  18. 18. provide an open industry for entry and these agencies can eliminate price controls tochallenge with this situation.When an industry is a natural monopoly, regulators determine the social optimum price andprovide demand at that determined price. Regulators adjust price in a situation of a change orshift in the demand because this change also causes social optimum price to change. Inaddition, change in demand or cost can result in this industry not to be a natural monopolyanymore. When demand curve shifts upward, this industry is not being a natural monopolyanymore because of a raise in socially optimal output due to this shift. Market demand isimportant while determining the regulatory policy.According to Graphic 4, demand information is needed because after a point, average scaleeconomies are exhausted and it must be measured whether regulation best fits this situation ornot. At the intersection point of D(P) and AC(Q), it can be seen that average cost is falling. Atthis point regulatory policy is socially optimum because at P*, regulators constraint firm’ sprofit that in turns maximizes social welfare. Also at that quantity of Q*, only one firm isproducing 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 theefficient firm size. Graphic 4: Natural Monopoly- U shaped average cost curve________________________________________________________________________ 18 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  19. 19. 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 minimumefficient size of the firm ( that is, the lowest quantity at which average cost is minimized ) isapproximately equal or larger than market demand at the social optimal price so that aregulated 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 sothat unregulated environment is likely to be the appropriate policy. ‘6Furthermore it is important to analyze how cost changes due to technological improvementsor 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 canbe found by dividing each component by output (Q). By dividing variable cost by Q we getaverage variable cost which is denoted by AVC(Q). So that AVC(Q) is increasing by outputwhile 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 Source: Economics of Regulation and Antitrust, 4. edition, pg. 525________________________________________________________________________ 19 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  20. 20. price is P 1 where P= min AC. Associated with this price, demand is 2Q 1 which meansthat 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 Source: Economics of Regulation and Antitrust, 4. edition, pg. 525In short, a decrease in fixed costs, cause decrease efficient firm size and increase socialoptimal industry quantity so that it is better to produce with two firms. According to WiliamMelody, improvement in technology makes the assumption of natural monopoly about onefirm production wrong. He says that economic theory of telecom competition was a majorcontributor 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 thatopened the US telecom market to competition. So the total investment in telecominfrastructure increased because competitors made investments that the incumbent monopolistwould not have made. This in turns forced the incumbent to invest in new technologies. Theresulting increased investment in telecom sector in the US was a major contributor to theproductivity gains and the growth of US economy in the last third of 20th century. Thedemonstrable success of telecom competition as an engine of economic growth in the US ledto competitive policy being emulated by other countries that were serious about growing theireconomies.’ 7 7 Source: http://www.lirne.net/resources/netknowledge/parker.pdf________________________________________________________________________ 20 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  21. 21. There are some policies that can be useful for regulators in order to face with such changes indemand or costs. First of all, regulators can carry on price and entry regulation if the industryis still a natural monopoly according to them. But what if the industry is not a naturalmonopoly anymore? At that time there will be a welfare loss because of restrictions tocompetition. If the industry is not a natural monopoly now, full deregulation that is letting freeentry and removing price control can be a useful policy.4. THE TELECOMMUNICATION SECTOR IN TURKEY 4.1. THE STRUCTURE OF THE SECTORMainly investments have been made in telecommunication infrastructure in Turkey in thelate1980s and 1990s; we can say that Turkey has a young and modern telecommunicationinfrastructure.Turkey’s telecommunication services and networks were created and offered by the nationalgovernment 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, hasdivided in two: General Directorate of Posts which would be responsible for postal andtelegraph services and Turk Telekom which has created as a state company and which wouldbe responsible for telecommunications services with some regularity power. Ministry ofTransport had other regularity functions.The developments in telecommunications markets in other countries especially in EuropeanUnion Countries have been influenced also Turkey. Structural changes and many regularitychanges through liberalization in telecommunication sector in these countries affected Turkeyalso. In June 1994, with enactment of the law 4000, Turkey made the big step to liberalization________________________________________________________________________ 21 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  22. 22. of telecommunications markets, by getting the telecommunications services from the directinvolvement 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 businessunder revenue-sharing agreements with Turk Telekom. Also Internet service provides became toappear under Turk Telekom.In 1998, revenue sharing agreements of these two operators Turkcell and Telsim were transformed to25 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 aGSM 1800 separately with the same price of Aria’s license. So in 2001, two new operators began toservices 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. Italso transferred the mandate to issue all kinds of authorizations from the Ministry ofTransport to the Telecommunications Authority. This law also provided that the end ofmonopoly rights of Turk Telekom before 2003.The most important structural change in Turkey’s telecommunication sector was the lawnumber 4502 in January 2000, which was making changes in principle laws of regulating thesector. With this law, the Telecommunications Authority was founded (an independentregularity body); policy-making functions and managing functions were separated. Policy-making functions have given to Ministry of Transport, by the way the regularity functionshave given to Telecommunications Authority. The main aim of TelecommunicationsAuthority is to reach liberalization complete in the sector. The Telecommunications Authoritywas the first sectored regularity authority.In the end of 2003, was the expired to end of monopoly power of Turk Telekom on fixed-linevoice transmission and infrastructure.________________________________________________________________________ 22 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  23. 23. The market would be faced with an increasing competition, especially in long-distancetelephony. Deregulation in voice communication in January 2004 prepared the way to newinvestments and also privatization in this sector. Founded in 2000, TelecommunicationsAuthority later made a lot of new regulations such as licensing, interconnection, and a disputeresolution mechanism.Mobil Services cover the largest part in Turkish Telecommunication Sector. According to thedata in 2004, the whole markets size is 11, 116 dollars. The mobile services has 47, 6% shareof 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.trWe observe Turkey’s mobile sector in different periods. Until 2002, before the merge ofAycell and Aria under name of AVEA, also the purchase of Telsim by Vodafone, we could________________________________________________________________________ 23 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  24. 24. say that Turkish GSM market was in competition with a duopoly (Turkcell-Telsim) with fouroperators (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 inthe 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 mostconglomerates in Turkey Cukurova Group and Finland’s Sonera. The second operator wasTELSIM 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 ItaliaMobile. And the forth operator and the last entrant operator in the market was AYCELLwhich 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, growingGSM operator.Graph 7 - based on the date 2006 (Market Share)________________________________________________________________________ 24 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  25. 25. (source: www.tk.gov.tr)Turkish GSM sector is getting out nowadays from the effects of the economics crisis 2000and 2001. Turkcell is dominating the sector with a market share of 67%. In June 2005, thenumber of subscribers of Turkcell reached to 25, 6 million. Turkcell is also enlarging its areaof activities (like Azerbaijan, Georgia...) with its regional market operations.The statistics of the Turkish Telecommunication Authority show that there are 52,7 millionGSM subscribers at the end of the year 2006. 4.2. SECTOR REGULATIONSThe Ministry of Transports and The Turkish Telecommunication Authority have all theregulatory power about telecommunications activities in Turkey.Competition is a new concept in Turkeys telecommunication market. Until recent years,there was a state-run monopoly. In mobile market, since 1990, there was a duopoly of twofirms: Turkcell and Telsim.The regulations, in telecommunication sector, need to encourage new entries also preventanti-competitive behaviors.________________________________________________________________________ 25 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  26. 26. The Competition Authority (CA) administers a specific law of Protection of Competition inTurkey. The CA makes decisions in case of a abuse of dominancy by incumbents intelecommunication industry.After one year of the full liberalization of telecommunication, the competition in telephonywas too little. For domestic long distances and international telephone licenses are obtained inMarch 2004.The duopoly exists in Turkish mobile sector from 1990s. Turkcell and Telsim having sharingagreements with Turk Telekom and Turkcell is market leader since its foundation with amarket share 60-70%. In 2000, government offered two more licenses, and Aycell and Ariaentered to the market. But the new entries didnt cause a big change in the dominance ofTurkcell. This caused a little challenge to the dominance of Turkcell generally because thegovernment 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 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  27. 27. In Figure 5, we observe that from 1994 so from the creation of GSM in Turkey until 1998, thenumber of subscribers is doubling each year but from 1998 to 2000, there is a big increase insubscribers from 3, 5 million to 16 million.With replacing the 25-years licenses of the revenues agreements of Turkcell and Telsim, thenumber of subscribers jumped. And also it created a competition.Before with revenue agreements, the tariffs were setting by the Turk Telekom but after thelicensing 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 aresult of this competition within a year 1998. By the result, Turkcell and Telsim began togrant discounts of handset (Hurriyet, 14 June 1998).And by the result, naturally, the demand increased and it prepared the atmosphere for newinvestments because a revenue agreement acts a tax on revenues by the way a license onlybrings revenue to owner. So licensing of both operators attracted investment initiatives. As aresult, according to the data of Competition Authority, Turkcell increased investments from136 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. Andafter this licensing also the dominance of Turkcell continued. In this period, Turkcells growthstrategy was to have some agreements with some importers or distributors of handsets. Likefor 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 theexclusive agreements to the Competition Authority. By the way, the Authority concluded thatTurkcells 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, thepenetration 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 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  28. 28. from 2000 to 2003, 17%. But finally, new entries didnt make a big change to the dominanceof Turkcell who had a market share of 68% in the end of the year 2003.8The reason can be search by the time of the entrance in the market. Aycell and Aria entered inthe market in the financial crisis of November 2000, and the other more important in February2001, when the big devaluation occurred. Already the impact of these crises was really bad ontelecommunication sector, like we see in table1, the revenue decreased from 3, 5 billiondollars in 2003 to 2, 8 billion dollars in 2001 and 2002 in the mobile industry. So it has to bemore difficult to gain an important market share in an economy in a period with decliningincomes of consumers for new entrants.Already when a new firm enters in a market, it confronts with a lot of challenges. A reason tobring difficulties to a new entrant firm, like in our case is mobile industry so to a newoperator, with a small number of subscribers to attract more subscribers from existingsubscribers is when there is network externalities. Generally in mobile industry, the networkexternalities are the cheaper talks between the subscribers of an operator (on-net calls), andmore expensive talks wits other networks (off-net calls). So this concept means a welfaregained from a good or a service increases when the number of other consumers of that goodor 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 newpackage which made on-net calls cheaper. This package which name is “Biz Bize Cell” had asignificant price difference of on-net calls and off-net calls with reducing significantly on-netcalls prices and by the way increasing off-net calls prices. This package is still a big reason tochoose Turkcell in 2007. 8 http://www.tk.gov.tr/Yayin/istatistikler/istatistik/WEB-2003-4-GSM.htm________________________________________________________________________ 28 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  29. 29. Figure 6 : Turkcell tariffs, post-paid packagesBy contrast, ARIA also began another promotion by price equality of on-net calls and off-netcalls. The promotion also included with quantity discount; after 55 minutes of call, the calldecrease 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 Turkcells and Telsims threat beforenew entry like an injure of the competition law. But it concluded that this was not an injure ofthe competition law.5. CASE STUDY: AVEA (MERGER OF AYCELL AND ARIA)________________________________________________________________________ 29 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  30. 30. 5.1. OVERVIEWWhile Turkcell and Telsim was treating to new entries to the market and this threat was likean injure of competition law, two small GSM companies that are ARIA and AYCELLdecided to be integrated in order to have more market power.‘Avea is Turkeys fast growing mobile communications company, which has a customer baseof approximately 8 million and represents 15% of the total market, offering innovativeservices tailored for the usage of both individual and corporate customers.TT&TIM Iletisim Hizmetleri A.S was officially founded on February 19th, 2004 with themerger of Turk Telekoms 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 sustainedunder the umbrella of TT&TIM. As of June 23rd, 2004, the new "Avea" brand, expressingthe synergy born after the merger, was introduced to the market.The commercial name of "TT&TIM Iletisim Hizmetleri A.S." was changed as "AveaIletisim Hizmetleri A.S." On 15.10.2004.’9The know-how experience of these two companies was integrated and that helped to haveoperationally and financially stronger position and to increase efficient competition in TurkishGSM 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 TelecomItalia’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 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  31. 31. ARIA: Aria was established by joint effort of Telecom Italia Mobile and Türkiye İş Bankas ıfor the GSM 1800 project, and it started to operate in March ,2001. It focused on innovationsand customer oriented services.AYCELL: With the Ministry of Transportations tender dated March 16th, 2000, the GSM1800 Mobile Phone Operating License was given to Turk Telekomunikasyon A.S. and AycellHaberlesme ve Pazarlama Hizmetleri A.S. was founded as a separate capital company onJanuary 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 beforeintegration of ARIA and AYCELL, there were two other GSM operators as TURKCELL andTELSIM. Although with the merger of ARIA and AYCELL , AVEA became the third GSMoperator in TURKEY.Before merger of AVEA , TURKCELL and TELSIM launched to market that’s why theyreached 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 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  32. 32. According to this data , it is certain that TURKCELL had much more market proportion thanTELSIM. Before merger of Aycell and Aria that had less than %25 market share but Turkcellhad more than %50 market share and Telsim was following to Turkcell with more thanAycell’s and Aria’s market shares. As a new company AVEA is a condition for increasingcompetition in GSM sector. Figure 7: Main Operators in GSM Market OPERATORS NUMBER OF SUBSCRIBERSTurkcell 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 MERGERIn 2001, the new GSM operator AVEA launched to the market and now there are threedominant GSM operators in turkey as TURKCELL , VODAFONE and AVEA.Generally in Turkey , number of GSM subscribers has an increasing trend due to thecompetition between GSM operators causes lower prices and diversified services. At the end________________________________________________________________________ 32 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  33. 33. of 2001 there were 20 million mobile subscribers, in 2004 43 million and in 2005approximately 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 sharebased 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 stillTurkcell captures more than % 50 additional subscribers. Graphic 9: Growth in Turkish GSM Market Source: TURKCELL RESEARCH DEPARTMENTDue 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 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  34. 34. Graphic 10: Growth of Subscribers (2001- 2005) Source: Turkish Communication AutorityAs shown graph above, turkcell and avea had an increasing trend in number of subscribers butthe precentage growth of AVEA less than Turkcell. From 2002 to 2003 while Turkcell’samount of subscribers was staying almost constant , there was a decrease in Telsim’ssubscribers due to an increase in AVEA’s amout of subscribers.Concerning services of mobil phones, Turkcell had more than %50 market share and between2001 and 2005 there was not a striking changes in market shares, and Telsim and Avea hadless than %25 market share. Another graphical explanation of market shares based on netsales. 5.4. TECHNOLOGY, PRICES AND ECONOMIC REGULATIONTURKCELL 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 BaseTransceiver 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 channelsspaced at 200 kHz Duplex spacing of 45 MHz is used.’12 12 www.wikipedia.com________________________________________________________________________ 34 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  35. 35. As a new brand AVEA, in order to take attentions of existing GSM subscribers and newsubscribers there are lots of new services and new tariffs that are opportunities for costumersto utilize lower prices. And 2001 , when AVEA launched to market , Turkcell lowered downits intra-network call rates by third.Some of tariffs of AVEA, which are adventous for costumers in order to utilize lower pricescomparing to other GSM companies, are mobilogrenci (for students) and hepsibir as apostpaid tariff. Also, AVEA has special tariffs for groups for professions such as for teachersand differenr companies.One of the special prepaid tariff of AVEA is mobilogrenci for students and the prices are 2credits/10 min. for calls to all mobil ogrenci users, 3 credits/min for calls to other AVEAusers, 4 credits/min for calls to fixed lines and other GSM operators, and a short messagecosts 1 credit.(www.avea.com.tr) . in order to see the price differences with other GSMoperators ; 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 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  36. 36. In every direction mobilogrenci is the most advantageous tariff for the students. In addition itshows that new tariff shows that other advantageous tariff is postpaid hepsibir and comparingto 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.trEspecially, prices differences arise calls between fixed lines and mobil that’s why the tariffsbecomes more important for consumers in order to choose GSM operator that supply thelower price for calls between fixed lines and mobil.On the other hand, for TURCELL and TELSIM that is now VODAFONE , with integration ofAYCELL and ARIA AVEA became more competitive in the market and a risk for otherGSM 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 inthe marketplace.When the developments of products and services, telecoms sector are analyzed , the mainfunction of regulatory authority that aims efficient distribution of resources is arising aseliminating market breakdowns. Precautions related to entrance and quitting the market aretaken, it should be taken into consideration that these precautions should make new entrieseasy and decrease social welfare of existing companies in telecoms sector.________________________________________________________________________ 36 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  37. 37. Graphic 11: Net Sales in GSM Sector(2001-2004) Source: Turkish Communication AutorityAccording to net sales it shows again Turkcell had more than 50 percentage market share andTelsim and Avea had less than 25 percentage market shares.The mobile market has also seennumerous developments since 2001.In Turkey, the half of the market reperesents a mature market and with a young and growingpopulation , and increasing national level of wealth that’s why for telecoms industry Turkeybecomes an important investment destination.6. CONCLUSIONMain purpose of this paper is to examine the evolution of telecommunication sector inTurkey. 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 byEuropean Union and also, regulation of this sector has differences especially in procedures in________________________________________________________________________ 37 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  38. 38. getting licenses. For government policy whose one of the key component is privatization ofTurk telecom is useful for establishing competitive market structure in order to increaseservice quality and number of innovative services and decrease costs.In telecommunications, Oger telecom and Vodafone were entered the market in 2005 and thisshows that main drivers of market and players continue to report strong profits attributable tonew technology and value added services. On the other hand, AVEA as a horizontal mergercompany launched the market in 2001 and this increased the competition intelecommunications sector.With privatization of telecommunication sector, Turkey become more close to internationaltechnology standards, diversification of services in GSM market, increased quality and morecompetitive and stronger in order to set the prices at levels in international telecommunicationmarkets. References • www.avea.com.tr Last Access: 11.06.2007 • Telecommunication Policy in Turkey: Dismantling Barriers to Growth , James B. Burnham________________________________________________________________________ 38 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  39. 39. • Competition and Regulation in the Turkish Telecommunications Industry, Izak Atiyas, Sabanci University, November 2005 • www.turkcell.com.tr Last Access: 11.06.2007 • www.oecd.org Last Access: 11.06.2007 • www.itu.int (International Telecommunication Union ) Last Access: 11.06.2007 • http://www.agsm.edu.au/~bobm/teaching/ECL/lect07.pdf Last Access: 11.06.2007 • ’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 Last Access: 11.06.2007 • http://www.lirne.net/resources/netknowledge/parker.pdf Last Access: 11.06.2007 • www.wikipedia.org Last Access: 11.06.2007 • www.dpt.gov.tr Last Access: 11.06.2007________________________________________________________________________ 39 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007
  40. 40. • www.tk.gov.tr Last Access: 11.06.2007 • 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 Telecommunication Sector in Turkey, Economic Regulation, M&A Faculty of Economics – University of Porto Applied Economic Studies 2006/2007

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