Over-the-top (OTT) digital services providers like WhatsApp use telecom operators’ physical telecommunications infrastructure to deliver services that reduce the demand for voice calls and instant messaging, leading to flat or falling revenues for incumbents. At the same time, telcos have to make large additional investments to keep up with the growing demand for mobile data, which they are unable to monetize because of competition from OTT providers. This combination of stagnant revenues and high ongoing investment requirements is threatening the viability of telecommunication companies worldwide.

Turkcell, Turkey’s largest mobile communications provider, decided to address this challenge by transforming itself from a network operator selling undifferentiated data and voice services into an experience provider providing messaging, music, TV, search and other services to its customers. It decided to compete head-on with the OTT service providers rather than adopting a passive strategy.

What changes would Turkcell need to make to transform itself into a digital experience provider? Would this transformation be sufficient to address the revenue and profitability challenges that it faced?

The broader issue

Digital disruption is a reality in most industries and geographies. Established players are up against new competitors that use asset-light digital business models to compete very effectively with them. These new competitors exploit one or more of three sources of value: cost value, whereby they offer the customer lower costs; experience value, whereby they offer the customer a better experience; and platform value, whereby they create network effects that benefit customers. The most formidable competitors are those that exploit all three of these. WhatsApp, for example, offers lower costs since its service is essentially free; it provides a superior experience compared to the instant messaging provided by telecom operators; and it becomes more valuable to customers as the number of people adopting it increases.

Established players need to comprehensively transform themselves to remain competitive, but often they hold back because it is difficult to do and they fear cannibalizing their existing businesses. They tinker at the margins instead of making the root and branch changes that are needed. While this may benefit revenues and margins in the short term, it allows the new players to grow stronger, making it even more difficult to defeat them in the longer term.

Becoming an experience provider

Turkcell decided to position itself as a digital experience provider rather than a supplier of network services, allowing it to differentiate itself from the other telecom operators in Turkey, Turk Telecom and Vodafone. This required it to compete head-on with global OTT companies like WhatsApp, Spotify and Netflix in Turkey. In its suite of digital services, the company emphasized local content and built in features that it could offer as a telco, but which the global OTTs could not emulate.

To encourage subscribers to use its digital services, Turkcell structured its service packages so that the mobile data used for this purpose was essentially free. In contrast, subscribers needed to pay for mobile data if they wanted to use services like WhatsApp and Spotify.

The initial take-up rates for Turkcell’s digital services have been encouraging. For example, BiP, the company’s instant messaging platform, had 11.5 million active users by the fourth quarter of 2018.

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