Dr.Doany : Voice Tariff Rebalancing was a Fundamental Assumption of the Business Plan – 10

Previous chapters of that interview would be read at

• 15 Months After Privatization of Turkish Telecom – 1
• Dr.Doany; Salaries Will Be Get An Increase In March – 2
• Dr.Doany : Oger Telecom Staff is Assisting TT Staff – 3
• Dr.Doany : 26,000 Job Applications Received for TT in a year – 4
• Dr.Doany : We Compliant With Our Concession Aggreement Obligations
• Dr.Doany : 2007 Investment Plan is 1,3 Billion YTL – 6
• Dr.Doany : Wholesale Tariff is Waiting for Approval – 7
• Dr.Doany : Our Real Competitor Is Mobile – 8
• Dr.Doany : Bed Dept Campaign Target is 35-40% – 9

In that chapter new tariff balancing is discussing

Question – 27 : Could you please give detailed information on the new tariffs, especially by stressing what it brings to the subscribers? Why do you name the tariff change as “tariff re-balancing”?

Dr.Paul Doany : The main objective of the tariff changes proposed by Türk Telekom is to bring the ‘price elements’ for the various product offerings closer to their respective cost of provisioning. This is in line with the regulatory framework, and also forms the basis for fair competition, particularly in relation to ‘service-based’ competition.

Our price plans include the following elements:

• ‘Fixed fee’, which is paid monthly, and is mean to cover the access cost, given that such cost is incurred by TT regardless of the call traffic on the line (ie, simply keeping the line in a working condition); this fee may sometimes include ‘bundled minutes’ of usage, meaning that free minutes are provided within this price (which should be deducted when computing the strict access charges)
• ‘Call charges’, which is comprised of charges payable by the customers for their calls, and include: local calls; national long-distance calls; international call charges; and mobile calls.

We can use a ‘balance’ to show the problem (Figure 1: Cross Subsidy): here you can see that our fixed fee is way below cost, and our local calls are selling at very low margin (noting the off-peak rates as well). However, on all other call charges, we are making very high margins, which compensates our access deficit losses, and makes up for the overall company profit. This is a form of cross-subsidy, where our national long distance calls in fact subsidise the access deficit.

I would like to also state that voice tariff rebalancing was a fundamental assumption of the Business Plan prepared by Oger Telecom during the 55% block sale tender process, as I am sure it was the case for all other serious bidders. One simple test to apply is to benchmark the fixed fee income as a percentage of voice revenues – this was 28% before this latest rebalancing, and is now hoped to reach 36%. We would highlight that European operators have achieved levels in the band of 40-50%, and it is essential that we reach these levels over time.

All subscribers to Türk Telekom’s fixed telephone services except the SIRKET customers pay a month fee that is significantly below the monthly cost of an access line.

In particular, the previous HESAPLI monthly fee was nearly 74% below the average residential monthly prices in Europe and the STANDARD monthly rate around 58% below this average. The existing prices for local call services in most of the tariff plans are also below cost of Turk Telekom, and are also lower than the prices applied in other European countries (not only in absolute price, but also as a percentage of average customer spend).

This situation of price elements being “below cost” in access and local call rates is not unusual for incumbent fixed operators in a ‘historical’ monopoly situation, where local prices end up being “cross-subsided” by other services. However, this situation is not sustainable in a ‘competitive environment’ where new entrant operators use the incumbent’s infrastructure (also at prices below our cost) and are thus able to undercut the incumbent prices. When the tariffs are unbalanced, this undercutting is very easy, the retail prices would be artificially high (as they need to recover access deficit costs). Competitors focus on the most profitable consumers only, benefiting from low TT termination costs, are thus able to provide significant discounts on domestic and international long distance and fixed-to-mobile call rates.

In such a competitive environment, the incumbent cannot afford to continue to subsidize access deficit and low-margin local calls with higher prices in national long distance and mobile calls. Therefore, in the same way as its counterparts in all European countries having liberalized their markets for fixed telecommunications services, Türk Telekom has the right (and the obligation) to rebalance its tariffs increase, by increasing its monthly rental (to lower access deficit) and local call rates (to realize a ‘fair margin’). I say here that we also have the ‘obligation’ to rebalance, as our price elements should be in line with our costs, and we should not cross subsidize – we owe that also to our customers.

The new lower tariffs proposed for national long distance, international and fixed-to-mobile calls, markets on which Türk Telekom competes with the new entrant fixed operators, take into account: the existing interconnection rates (fixed and mobile); the rates charged by international operators for terminating traffic abroad; cost of leased lines rented by alternative operators from Türk Telekom for providing these services; and, marketing, sales and overhead costs, plus a reasonable margin. Hence, all the expenses incurred by an alternative operator for providing these services are covered and the rates proposed by Türk Telekom do not lead to a ‘margin squeeze’ that would harm competition on the markets concerned or lead to unfair competition. This can be very easily demonstrated, and has in fact been discussed with the Telecommunications Authority, who challenged our application and of course, now approved it, as they should.

We have filed our costs to the TA, in line with our obligations, and I would like to highlight something in that regard: on pure rebalancing, we should have increased the fixed fees more than we did, however, we opted to limit this by inflation over the intervening period since the last increases in 2004. In addition, for the STANDARD package, we also provided 100 free pulses, providing some compensation to the customers for the increased fixed fee. The value of these free pulses is around 8YTL, whereas the increase was under 3YTL. Although these are for calls after 10pm, it should be noted that average minutes on a mobile phone are in the range of 100-140 minutes per months, so we are practically offering same number of minutes. We don’t believe that the 10pm time restriction is a problem for customers.

The reduction of Türk Telekom’s interconnection rates between the beginning of 2004, date of the liberalization of the fixed markets in Turkey, and 2005 is very significant even when compared to the decreases imposed on Western European markets (1998) and up to 2005. Furthermore, Türk Telekom provides leased lines to alternative operators at competitive tariffs when compared to its European counterparts.

Therefore, the conditions for the development of competition on fixed markets are both fair and viable. The number of alternative operators on the Turkish market is comparable to the number of operators in Italy although the number of fixed lines in Turkey is well below the Italy number.

In summary, I would like to present the new price elements again:

• fixed fees have been increased by inflation, to lower the access deficit, and begin to approach European levels (in terms of % revenue, where we had around 28%, comparing with 40 – 50% as the ideal range); as a compensation to our Standard customers, we have provided 100 free pulses, which are worth over 8YTL.
• local call charges have been increased by inflation, to achieve a ‘fair margin’
• national long distance, international and mobile call charges have been reduced by 50-60%, enabling us to compete.

We have demonstrated our pro-competition behaviour by not delaying signature of agreements with the alternative operators, and by maintaining our high prices in the early part of their market entry, as we needed to rebalance our full tariffs, as opposed to simply react to their prices. This enabled them to grab market share very easily, by undercutting TT substantially.

Now the competition will get tougher.

It should be understood that ‘fair’ competition does not mean ‘easy’ competition. This message should be understood by the alternative operators.

At the following chapter, Dr.Doany : We are looking for international expansion opportunities – 11

Turkish translation of that part at Doany : Ses Tarifelerinin Dengelenmesi Özelleştirme Öncesi İş Planının Temel Varsayımıydı – 10

Whole interview as Turkish and English, will be reached at Paul Doany Interview file.