Indonesia: Telecoms changes

With an increased emphasis on delivering connection quality and boosting the use of value-added services (VAS), Indonesia’s intensely competitive telecoms sector is in transition. This entails substantial investments in infrastructure and greater efforts by operators to improve service quality. Over the coming years, the structure of the sector may also change, as players collaborate more closely or even consolidate.

The government is still working on its plans to roll out 4G services, the local press reported in early July. Muhammad Budi Setiawan, the director-general for post and informatics resources and equipment at the Ministry of Communication and Informatics, said the authorities were considering which 4G frequency to deploy, examining examples of implementation from other countries. It now seems likely that Indonesia will have 4G in 2014 at the earliest.

The introduction of 4G technology will help support the growth of data usage in Indonesia by increasing capacity and offering download speeds of up to 100 megabytes per second (mbps), six times that of 3G. It can also assist in the expansion of WiMAX, a wireless internet technology that is particularly useful in places where building fixed-line internet infrastructure is tricky, such as Indonesia, which is home to many islands, dense forests and mountainous terrain.

Building up data usage is a priority for most of the country’s nine mobile operators, which are looking to boost profitability as the market matures. Mobile penetration now tops 100%, though many people have two or more SIMs, meaning there are millions of Indonesians without mobiles.

Meanwhile, the players are engaged in what Harry Sasongko, the president-director of Indosat, calls “an aggressive price war”, which has driven down the cost of voice calls and thus average revenue per user (ARPU). For example, Telkomsel, the mobile division of PT Telekomunikasi Indonesia (Telkom Indonesia), the country’s largest telecoms operator, saw its ARPU drop by 7% in 2011, due to “intense competition”, the firm reported. VAS – such as internet and video use – generate higher margins, which can offset tighter conditions in the voice segment.

With fewer new subscribers to compete for, operators are also focusing on delivering better service quality. Dropped calls and interference have been issues in the past, partly as operators have squeezed investment in order to deliver lower call costs. A shift in strategy has now taken place as players look to retain subscribers and win over customers from other networks without deeper price cuts.

According to Hasnul Suhaimi, the president-director of XL, an Indonesian mobile firm, “Operators are setting aside massive amounts for capital expenditure this year to improve quality and provide value-added services. Service quality seems to be the industry’s main focus and the key to succeed in this competitive market. The key is to address growing demand of value-added services through provision of necessary infrastructure to improve capacity and coverage.”

Fred Chapelard, the president-director for French telecoms equipment firm Alcatel Lucent in Indonesia, has said that around 60% of the operators’ capital expenditure is being allocated to building infrastructure and developing data services. Chapelard told OBG that high bandwidth consumption is a challenge due to the limited spectrum allocation or full network capacity in heavy internet access areas.

Sasongko agrees, stating that the government needs to set out plans for implementing long-term evolution technology (LTE). LTE is not strictly speaking 4G, despite often being marketed as such, but is a standard for high-speed data mobile communication.

“LTE services are needed, as consumers’ demand for mobile data service keeps increasing,” Sasongko told OBG. “As of the first quarter of 2012, the number of mobile data service customers in Indonesia was 100m out of the 240m cellular customers. But a roadmap is not yet available, as the government has not allotted frequency for the technology.”

With capital expenditure on the rise but ARPU still tight, the logic for greater sharing of expensive network equipment, and even consolidation, in the market may be growing. Industry figures have maintained for some time that there are too many operators even for such a large market with good long-term potential. Fierce rivalry has militated against collaboration to an extent, but the commercial logic is strong.

“There are too many licences, and consolidation needs to be encouraged by the government in order to create a sustainable market,” Sasongko told OBG. “Otherwise I think operators are going will struggle. Greater cooperation between operators to share network costs is potentially viable; I would like to see a spirit of cooperation between operators.”

Indonesia’s telecoms sector is at an interesting stage of transition. As in many emerging markets, operators are trying to offset lower voice revenues by increasing VAS usage, and take-up of data has so far been fairly impressive. There is still plenty of scope for expansion, however, particularly if greater cooperation between the players eases pressure on their bottom lines.