Turkey Information Technology Report Q2 2008

Market Overview The size of the Turkish IT market is expected by BMI to increase from US$5.2bn in 2007 to around US$10bn by 2012, making it one of the fastest growing markets in the region. There are downside risks associated with exposure to current global credit conditions, but Turkey expected to continue its rise over the next few years as one of the key IT markets in the region for IT vendors. With a large and predominantly young population providing a strong resource for future PC sales in a market where penetration is still below the global average, Turkey should grow faster than even the markets of Central and Eastern Europe.

IT is now playing an increasingly significant role in a wider range of industries, as well as in daily life. The government has set itself a target of creating a US$9bn IT industry, and while the government's target may be ambitious, the computer penetration rate is expected to reach around 30% by 2014. The household sector, as well as corporate spending, will drive sector growth, with the re-election of the AKP government last year making possible greater consumer confidence.

While Turkey has the demographics of a developing country, it has some advantages including electricity in nearly every home and the third biggest group of credit and debit card users in Europe. There is also a broad maturity in the banking and telecoms sectors which are important sources of demand for IT products and services. Retail and tourism are also dynamic sectors which are providing opportunities, and there is considerable growth potential in areas like healthcare.

Industry Developments The Turkish government is implementing an ambitious plan to build an Information Society by 2010.

Currently internet penetration in Turkey is only around 20%, compared with an average of around 50% in EU countries. A recent government report states that the government will play an important role in encouraging IT development, observing that public sector spending on IT increased from TRY380.3mn to TRY758.3mn between 2002 and 2006.

In 2008, the government has signalled its intention to take further measures to increase IT awareness, including introducing broadband in schools. The State Minister for Economic Affairs recently estimated that 34,000 schools nationwide would have broadband by the end of the year. Pointing out that only 24,000 out of 44,000 schools currently have internet technology, Prime Minister Erdogan recently said that opportunities must be available to all students.

In 2007, the Turkish Ministry of Transport announced the launch of a Universal Service Fund to promote IT across the whole of Turkey. By the end of the year, the Fund reached a value of around TRY500mn (US$385mn). A number of projects are receiving support through the fund. However, government efforts have often been hindered by a lack of institutional co-ordination Competitive Landscape The growth potential and strategic importance of the Turkish PC market is continuing to new investment from vendors including a number of Far Eastern vendors. In December 2007, South Korean giant LG announced that it was in discussions with local distributor Indeks Bilgisayar to distribute LG brand notebooks in 81 towns and cities in Turkey. Meanwhile, the new Turkish subsidiary of Japanese giant NEC will market notebooks, desktops, servers, and storage applications, working with local distributor Ozzel Bilgi Islem.

Meanwhile, the startling growth of the Turkish market, which is still very hardware centric, has meant a bonanza for local retailers. One of the fastest growing, Vatn Computer, the electronics retail chain, recently reported an annual turnover of around US$500mn, which it expects to increase to US$3bn within three years.

Other domestic retail chains such as Gold Computer, Teknosa, and Bimeks are also expanding aggressively, Around 20 large companies compete in the software market in Turkey, with the major suppliers including companies like Microsoft, IBM, Oracle, Sun Microsystems, Business Solutions, Likom and Havelsan. A particular area of opportunity is financial services, and in 2008 Turkey is the location for the first implementation under Oracle's international distribution agreement with Alaric International, a specialist provider of solutions for the card payments industry.

Computer Sales Sales of computers including PCs, notebooks and accessories are expected to rise to a dollar value of US$3.4bn in 2008, up from US$2.8bn in 2007. A recent Deloitte report found that the cost of a computer in Turkey is three times the world average. Computer costs remain high relative to GDP/capita of around US$5,000, and consequently computer penetration in Turkey remains below the global average of 10%.

However, the market is catching up fast, with the introduction of a number of campaigns to drive computer penetration in education, small- to medium-sized enterprises (SMEs), health, and other sectors.

Computer sales compound annual growth rate (CAGR) for the 2007-2012 is forecast at 15%. Lower inflation and interest rates should encourage greater demand for PCs, while generally improving economic conditions should boost household and small business confidence levels. Until a few years ago, demand for computers was mainly confined to big cities like Istanbul, Izmir and Ankara. Now, however, the fastest growth in sales is coming from Anatolia. The surge in sales has been attracting both foreign and domestic computer firms to up their operations there. Demand for laptops will remain the strongest growth area.

Software The software market in Turkey was estimated at US$687mn in 2007, and is expected to rise to around US$809mn in 2008. CAGR over the forecast period (2007-2012) is expected to be 12%. However, much will depend on success in bringing down the rate of illegal software usage which, at 66%, is twice the global average. Around 20 large companies compete in the software market in Turkey. Software represents around 13-14% of total IT spending in the country. Strong growth in the corporate sector accounted for Turkey to rank as one of Microsoft's top five growth markets in 2006.

According to Turkish government statistics, Turkey imported legal software products worth US$89.75mn in 2005, with the UK topping the list of origin countries followed by the US and Germany. In 2006 there were further moves to encourage the trial of open source software in public organisations, starting with the Ministry of National Defence, where Turkey's domestically-developed 'Pardus' operating system will be used.

Services The IT services market is expected to enjoy double-digit growth over the 2006-2011 forecast period, as enterprises look for more sophisticated support to get value from their IT investments, as well as outsourcing of non-core functions. Spending on all categories of IT services is expected to be US$1.1bn in 2008. Sector CAGR is forecast at around 12% over the 2007-2012 period. While support remains the largest sub-category, other groups are growing particularly fast including outsourcing and training services. In the context of an increasingly competitive business environment there have been some larger deals, such as the one last year between IBM and Zorlan (see Competitive Landscape). The support services segment was estimated to account for around 50% of total spending, and managed services for around 12-15%.

E-Readiness Internet penetration was estimated by BMI at 19.3% by year end 2007, representing around 14.5mn users, and this number is expected to double to more than 28mn by 2012. Broadband penetration was around 7.8%, but this is expected to pass 30% within the forecast period. This progress is helping to drive Turkey's e-commerce development, with recent data showing that transactions doubled in 2007 to 54.1mn transactions, up from 21.7mn the previous year.

The OECD called in 2007 for more initiatives to increase public use of ICT, with research from the EU Statistics Office showing that Turkey is among the countries in which internet access is very low. The research found that only 39% of Turks had computers at home, and that Turkey was below the EU average in terms of both computers per household and internet access.

Turkey is lagging behind its EU neighbours on many indicators, excepting e-government, where much progress has been made. In 2005, a new co-ordination unit was established within the State Planning Organisation (SPO), the Information Society Department, responsible for the overall co-ordination of ICT projects. To increase the participation and the level of success, an advisory board with 41 members has also been established. This consulting body gathers representatives from public institutions, NGOs and universities.