Indonesia: Building capacity for data

Faced with an increasingly saturated market and crowded playing field, Indonesia’s telecoms operators are investing in data-based services such as 3G and smartphone apps to gain the competitive edge. However, delays to a fibre-optic project that aims to spread faster internet access throughout eastern Indonesia could impact on those plans.

In highly penetrated urban markets mobile users are rapidly increasing their usage of data services. However, the majority of subscribers access 2G services as 3G is often out of reach because of the high cost of smartphones.

Matching regional trends, mobile phone penetration has surged over the past five years, with the number of SIM cards topping 100% by 2015, compared to just 20% in 2005. Telkomsel is the clear market leader followed by Indosat and XL, with five other major players competing for business in a population of some 237m.

“We have reached a pivotal time in the industry where the future success of a telecommunications company will greatly depend on their ability to transfer from the provision of basic services to the provision of more complex and sophisticated data based services,” Sarwoto Atmosutarno, the president director of Telkomsel, told OBG.

Growth in the industry is estimated to be 7% in 2011, lower than last year’s 10%, the Cellular Telecommunications Association of Indonesia announced in August. The telecoms market, including fixed, mobile and pay-TV services, generated $11.9bn in service revenues in 2010, according to sector research firm, Pyramid Research.

“All the operators in Indonesia are looking for new areas for expansion. The growth is flattening, and we have to anticipate the future,” said Rinaldi Firmansyah, the president director of Telkom.

While competition levels are driving a price war that has created an excellent pricing scenario for consumers, Atmosutarno said declining revenues from voice services and SMS mean the industry will need government help to fund the infrastructure needed for data services.

Hasnul Suhaimi, the president director of XL, which boasts more than 40m subscribers, said his firm will direct more than half of its investment this year towards developing its 3G network to address increased demand for data services, with the rest to be spent on its 2G infrastructure, with the intention of extending coverage and increasing capacity. Of this, 20% will be specifically directed towards penetrating very low-saturated markets in areas like Sulawesi, Maluku and Kalimantan.

The pace of rising use of 3G services is throwing up challenges for providers. According to Harry Sasongko Tirtotjondro, the president director of Indosat, “Indonesia has the fastest growth in Blackberry users outside North America, and this has become a huge challenge for operators as they try to meet the demand for capacity and to maintain good service levels. It is one thing if the increase in capacity was gradual, but the speed at which it is occurring makes it extremely challenging for operators to keep pace. Over the course of the last 18-24 months demand has jumped two-fold.”

As internet speeds and connectivity improve, industry leaders agree that content and social-networking apps, alongside other data services, will become a key area of growth. Expanding and improving the fibre-optic backbone will likely become a critical need to improve speed and access for major population areas as well as to extend coverage to remote areas.

There are around 37m Indonesians with a Facebook account, making it the second-largest market for that social networking website in the world, according to Erik Aas, the president director and CEO of Axis, which launched services in April 2008.

“Most of those individuals have never used a PC. They do all their social networking on handheld devices,” said Aas. When you consider that over half the population is below the age of 30 and whose telecommunication usage is internet-based, and therefore very heavily data-driven, the potential impact on the supportive infrastructure to cater to the needs of the market will be vast.”

Market research firm Tavess estimates the value of Indonesian data services market for 2010 at nearly $6bn, and expects this to grow to $17.7bn by 2015. Earnings at individual firms highlight this trend. “The revenue we derived from data services in 2008 was only 1% of our total,” said Suhaimi. “In 2009 that figured jumped to 4%, in 2010 it reached 7-8% and we expect that number to represent 10% of total revenue by the end of 2011.”

Hope of meeting this increased demand feature in government plans to accelerate broadband penetration nationwide, such as in the Master Plan for the Acceleration and Expansion of Economic Development of Indonesia (MP3I).

One key initiative is the Palapa Ring project. The ambitious $700m project aims to link Sumatra, Java, Kalimantan, Nusa Tenggara, Sulawesi, Maluku and Papua with eight existing network connections or backhauls through an estimated total 35,280 km of undersea and 21,870 km of underground fibre-optic cables, according to local media.

According to Tifatul Sembiring, minister of communications and information technology, so far 42% the Palapa Ring Project has been completed, and it is hoped that the project will be finished by 2014. “The ultimate aim is to have at least one internet source in every village of Indonesia. Also, by the end of this year, the target is to have no internet black-spot districts,” he said.

However, the consortium developing the project has had disagreements and financing difficulties. In March, the Information Communication and Technology Ministry announced that development on the ring was halted as the ministry was awaiting funds from the Finance Ministry.

Confounding the project’s fate are doubts over how it will be implemented, given advances in wireless technologies. While the government’s MP3I envisions broadband access home-to-home across the entire country, industry leaders say challenges in such projects illustrate the limitations in bringing cable directly to every individual, contending that wireless technology could be more a more economical investment in more remote areas.

“It is possible to have a fibre network to support wireless access and there is the potential to service schools and businesses directly, but providing cable to the home would be almost impossible and uneconomical,” said Aas. “Internet penetration to the masses will not be achieved by laying fibres everywhere. ... We as an industry will need to latch on to all sorts of backbone networks that will bring internet to our base stations.

Those base stations can then bring the internet to the last mile through wireless technology.” Getting the structure right will be key to ensuring telecoms firms have the infrastructure to provide high-value data services to meet the demands of the increasingly tech-savvy and mobile market.