Indonesia: Mobile market

It is certainly intensely competitive, but the size and growth potential of the Indonesian telecoms sector suggests that players that invest and innovate can enjoy considerable success.

In an exclusive interview with OBG, Indonesia’s minister of information and communications technology, Tifatul Sembiring, noted that the existence of many companies in the market, including some powerful incumbents, would drive technological development in the industry, including increasing use of mobile internet, particularly as conventional services become less profitable.

“There are 12 mobile operators in the market, five of which control 92% of income revenue,” Tifatul told OBG. “Due to the resulting price war we are seeing average revenue per user (ARPU) falling as a result of the fierce competition. Companies looking to come in have to be extremely innovative and clever to capture any market share. The creativity of telecommunications service developers will be key to the future of the industry in Indonesia through their capability to combine mobile and internet services.”

A number of recent developments in the Indonesian telecoms industry make it clear that the market still has a great deal of potential for growth, but also that it will not necessarily come cheaply, as an increasing emphasis is put on delivering value-added services.

On May 4, the international press reported that PT Indosat, the country’s second-largest telecoms group after Telekomunikasi Indonesia (Telkom), had posted a 63.3% rise in net profit to Rp453.9bn ($53.2m) in the first quarter of the year. Revenues grew a more modest 3% to Rp4.88trn ($571.8m) quarter-on-quarter, as mobile revenue grew 6.2%. The firm clocked up subscriber growth of 21.2% to 45.7m, the sort of increase unthinkable in many markets, and a sign that there is still considerable potential for building customer bases in Indonesia, a market of nearly 240m people, if the right strategy is adopted.

Indeed, even with the mobile penetration rate standing at around 67% as of end-2010, topping the 100m-subscriber mark, there is still significant scope for attracting new clients. Although this has increased substantially over the past few years, from a penetration rate of 22%, or around 30m subscribers, in 2006, there are still millions of potential subscribers. In one three-month period alone – fourth-quarter 2010 – some 8m new mobile customers were added.

Internet penetration remains lower still – at just 12%, with 2% for broadband – figures which demonstrate that growth in the market will likely still be driven by the provision of basic services as the industry still relatively in its infancy. At the same time, this also suggests that the sector may leapfrog some technologies, bringing further business to the mobile market.

“It is different in many growth markets such as Indonesia where telecommunications developed from not being connected to being connected through cellular phones,” Viraj Juthani, the telecom practice group director of marketing consultancy Nielsen Telecom, told the local press.

PT Indosat attributed its success in boosting profit to rising mobile revenues along with reduced marketing expenses and foreign exchange gains. However, the firm’s earnings before interest, taxes, depreciation and amortisation (EBITDA) flatlined at Rp2.22bn ($260,105) and EBITDA margin fell slightly year-on-year (y-o-y), from 47% in the first quarter of 2010 to 45.6%. A 14.8% y-o-y drop in blended mobile ARPU to Rp33,800 ($3.96) bears out Tifatul’s assertion that competition is driving down pricing considerably. As a result, firms are looking to advanced technology to build and maintain their subscriber bases and, more importantly in the medium to long term, increase yield.

In April, Telkom announced that it was looking to increase the speed of its internet service and preparing to launch a mobile chatting application and in order to draw in more subscribers. The company estimates that “FlexiMessenger”, the application in question, would help Telkom Flexi meet its target of increasing its subscriber base by 20-30%. Telkom is also due to install new technology at base transceiver stations in 10 major cities, including Jakarta, Surabaya, Makassar, Denpasar, Bandung and Yogyakarta.

It is not just the domestically owned giants that are looking to spend big in order to bolster their market position. In May, Saudi Telecom Company (STC), the Kingdom’s biggest phone operator by market value, announced that it would be investing around $450m in its Indonesian subsidiary, NTS, also known as Axis. Axis entered the Indonesian mobile scene in 2008 and was widely credited with triggering a wave of price reductions with its competitive impetus. It racked up a large subscriber body within months with its low-cost packages and a lively marketing campaign.

STC has made it clear that Indonesia is a vital market in its aim to raise the proportion of its revenue earned through its international operations from 33% at present to 50% in three to four years. To this end, the Saudis increased their stake in Axis from 51% to 80.1% on March 12. While Axis’s investment strategy is not yet clear, it would be a surprise if the operator did not introduce new services to attract customers and build value.

It is not just operators who are investing in Indonesia. ZTE Corporation, China’s second-largest telecommunications equipment manufacturer, is also looking to expand by increasing its sales of more sophisticated technology on which the sort of applications being tapped by the operators can be used.

“Coupled with high-speed economic growth in Indonesia, more and more Indonesians like to use mobile applications, which is boosting the demand for smartphones,” Fan Xiaoyong, the managing director of PT ZTE Indonesia, told the Chinese press.

ZTE has been enjoying 25% growth in Indonesia in recent years, with revenues led by mobile network infrastructure. It is now looking to increase the proportion of its sales coming from handsets, including smartphones, the market for which has been growing at 20-30% annually, according to Fan.

Given that most of the population still has only low to medium income by international standards, ZTE will focus on low-cost, high-quality smartphones with value-added applications tailored to the local market, such as prayer time reminders.

Tough competition for market share is one of the most obvious aspects of the Indonesian telecoms sector. While it may have driven down ARPU, it has also been a catalyst to drive for innovation and spread sophisticated mobile technology. With growth rates continuing to rise, the opportunities for those firms willing to invest and able to think on their feet are numerous.