The Case of Turkish GSM Market

A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Tözer, Ayhan Conference Paper Assessment of First Comer Advantages and Network Effects; the Case of Turkish GSM Market 21st European Regional Conference of the International Telecommunications Society (ITS): "Telecommunications at New Crossroads: Changing Value Configurations, User Roles, and Regulation", Copenhagen, Denmark, 13th-15th September 2010, No. 35 Provided in Cooperation with: International Telecommunications Society (ITS) Suggested Citation: Tözer, Ayhan (2010) : Assessment of First Comer Advantages and Network Effects; the Case of Turkish GSM Market, 21st European Regional Conference of the International Telecommunications Society (ITS): "Telecommunications at New Crossroads: Changing Value Configurations, User Roles, and Regulation", Copenhagen, Denmark, 13th-15th September 2010, No. 35, International Telecommunications Society (ITS), Calgary This Version is available at: http://hdl.handle.net/10419/44317 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu ‘Assessment of First Comer Advantages and Network Effects; the Case of Turkish GSM Market’1 Ayhan TÖZER ICT Expert Information and Communications Technologies Authority of Turkey & Phd Student at METU, STPS Department. [email protected] Abstract First comer advantages and network effects are frequently stated as among the most important determinants of market structures and this is particularly relevant for network economies including telecommunications markets. Connected to this, regulatory tools such as number portability have frequently been used to reduce market imperfections resulting from these effects. Within this context, this paper aims to analyze the role of these factors in creating the current market structure of Turkish GSM sector. By examining relevant data such as development of market shares in a historical perspective and by making use of consumer surveys, it is concluded that the dominant operator has benefited from being first comer in the market and established a stable market share (power) due to network effects that are used by this firm deliberately to entrench its position especially in the form of switching costs, scale economies, brand image and tariff (on-net vs. off-net pricing) differentiation; however, it is also observed that introduction of number portability lead to reduction in switching costs, increasing market competition. Keywords: First comer advantages, Network effects, Mobile telephony (GSM),number portability, Competition, Regulation and Consumer preferences. 1 The views and statements expressed in this article are those of the author and do not reflect those of Information and Communications Technologies Authority. 1 1. Introduction This paper begins with the brief review of ‘first comer advantages’ and ‘network effects’ along with the discussion of new product (service) diffusion in a related market. In addition to this, one of the competition tool namely number portability has been analyzed in terms of its costs and benefits to see the effectiveness of this instrument in reducing first comer advantages and network effects. Afterwards, the structure and concentration level of Turkish GSM market have been discussed in different perspectives to explore the role of these advantages. In this context historical developments and market shares of the operator’s have been assessed to give a general picture of the sector. Then, some of the structural reasons for the poor competitive performance have been stated in general terms. In the fourth part recent implementation of number portability and differentiation strategies used by the three operators have been evaluated in terms of services offered, pricing plans and promotional activities such as mobile handset provision. Finally, consumer preferences have been studied to give some explanations to the current structure of the market by using consumer surveys. 2. Review of Theoretical Concepts It can be argued that diffusion of new technology2 (in the form of new product and/or new service) creates a new market/s in which competitors struggle to gain market share at the expense of each others. Before analyzing this process in a case study, it may be suitable to begin with brief evaluation of these topics. 2.1. Diffusion (of new product and/or service) As known by everyone, for any innovation to be successful in market place people should demand it. In other words without diffusion, innovation would have no major economic and social impact in any society (Hall, 2005). Here diffusion is defined as the process by which market actors adopt a new product (service)3 or substitute 2 In the article, innovation is used in the meaning of new product and service to create a new market, e.g. mobile telephony technology leading to mobile telephony services (voice, data transmission etc.) and related products such as mobile handsets. 3 In this context, new products and services are used interchangeably, since it is especially difficult to differentiate between mobile technology, mobile telephony service and handsets (products) in general terms for 2 previous (older) product by the new one. However, the speed of diffusion process differs between each product and service depending on various factors. Indeed, Geroski (2000) mentions the fact that in some cases it takes very long period of time for new products (technologies) to be adopted by people (even by those who seem most likely benefit from their use). In this respect, Rosenberg (1972) similarly have made the observation that while this process takes time in general terms, there exists wide variations in the adoption rate of different products. On the other hand, learning of how to use these new products and continuous feedback relations between users and producers (firms) lead to -again continuous- improvements in the original products. Related to our main topic, evolution of mobile telephony (GSM) can be given as an example of the role of both supply and demand side influences (and their interactions) on the continuous improvement of these products such as development of short message services (sms) and later multimedia messaging services (mms) and other various value added services (internet banking, gaming applications etc.) used from a mobile handset along with the improvement of data transmission capacity of mobile telephony (3G technology). As stated above, diffusion speed of a new product depends on various factors. According to Rogers (1995), there exist five analytical categories to account for the adoption rate in personnel level; relative advantage of innovation, its compatibility, complexity of innovation, triability and observability. The rapid diffusion of mobile telephony all over the world, in fact is due to the relative advantage (mobility in the first place, of course) of this new product over the comparable product (and to some extent substitutable), fixed telephony4. Furthermore, related to the second characteristics, mobile telephony is compatible with potential users’ way of doing things and with social norms. In addition to these factors, both triability (that can be tested by users) and observability (evaluation after trial and learning from other people’s experiences) features of this new product all have played roles in the rapid diffusion process virtually in every country of the world. On the other hand, it is our purposes. In other words, from the demand side perspective, the important thing for a consumer is to use this technology to make calls, transmit data etc. without taking into consideration many technical details. 4 After nearly twenty years from the commercial implementation of GSM; more than 700 GSM Networks in various countries of the world are expected to carry more than 16 billion minutes of calls and six billion text messages, GSM’s global subscriber base is forecast to have grown by 1.2 million and more than six million GSM handsets are estimated to have been manufactured in just ‘one day’ time period according to Telecommunications predictions of Deloitte Touche (2008). 3 evident that external factors also influence this process. Promotion activities of companies like advertising campaigns, provision of free handset in return for a predefined contract period can all be stated for examples of this external category used by producers to increase adoption rate of this new product. In this context, another interesting phenomena is that old

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