A growing and relatively young population with rising disposable income make Indonesia a highly attractive country for telecommunication services. While the industry has far outpaced overall GDP growth in recent years, the market remains under-penetrated. Providing fast and reliable connections across the vast archipelago is a significant logistical challenge, but also a tremendous business opportunity for network and service providers as well as companies offering consulting, training and other auxiliary support.
Not least because of the geographic challenges, all eyes are on wireless technologies rather than fixed lines and particularly on growing demand for mobile data services. Growing connectivity is the central theme of Indonesia's development roadmap, which is why the government has over the past years improved regulations to facilitate infrastructure projects across the country (See Indonesian Infrastructure: Tremendous PPP Opportunities). As business activity increases outside of the country's economic centre of West Java, so too does the need for effective communications.
Fast mobile networks are now the most efficient way for Indonesia to catch up with more developed countries and provide coverage even in less populated regions. This reflects in subscription numbers, where some 310 million cellular subscriptions at the end of 2013 (up 12.4% from 276 million customers a year earlier) dwarf fixed-line and fixed-wireless subscriptions. Continued economic growth is driving both demand for and affordability of cellular services, which points to further upward potential in the world's fourth-most populous country. Unlocking this potential, however, requires substantial network investment. With the number of mobile subscriptions already far surpassing the country's entire population, operators are focusing their marketing efforts on increasing volumes per customer rather than growing their customer base.
The dominant mobile service providers are Telkomsel, Indosat and XL Axiata, each of which operates their own 2G (GSM) and 3G networks. Telkomsel, a subsidiary of former monopolist Telekomunikasi Indonesia (Telkom), has the widest coverage and largest subscriber base with a market share of 42.4%, according to its 2013 Annual Report. Indosat, once the monopolist of international telecommunications, commands a market share of 19.2%, putting it slightly ahead of XL Axiata (18.7%), a subsidiary of Kuala Lumpur-based Axiata Group. The Indonesian state still holds a majority stake in Telkom and a minority in Indosat, but both companies also have significant foreign shareholdings. Other mobile providers include Hutchison, Smartfren Telecom and Bakrie Telecom, which use CDMA transmission.
While Telkom is barely contested on the fixed market, privatisation has created strong competition in the mobile sphere, where players compete along the dimensions of price, extent and quality of network coverage as well as additional services. The fact that prepaid is the dominant payment model adds to price competition. The practice of subsidizing mobile devices by bundling their purchase with service operation contracts remains largely unexplored in Indonesia, which makes it easy for customers to switch providers as soon as a better offer comes their way. Moreover, many Indonesians have multiple SIM cards in active use, allowing them to take advantage of lower call rates to specific numbers, free texts or bonus data volumes at certain times of the day.
Generating revenue in this environment is a formidable task and partly explains why average revenue per user (ARPU) is low in Indonesia when compared to other countries in the region. This makes the costly but necessary network extension to accommodate 4G LTE very challenging and has begun to do serious damage to bottom lines in an industry that enjoyed high profitability in recent years. Consolidation is ongoing, as witnessed in XL Axiata's $865-million USD acquisition of Axis Telekom Indonesia in early 2014, but this will do little to relieve competition between the big three.
As more customers switch from simple mobile phones to smartphones and tablet computers, and with the increased use of internet telephony (VoIP), data services play an increasingly large role vis-à-vis traditional voice calls and SMS in generating revenue. Currently, only about one in five users has a smartphone. Also, thanks to rising disposable income, customers will be able to afford more expensive data plans that either offer greater volumes or higher connection speeds. The figures clearly show that data services – while still at a relatively low stage – are now the main growth engine in Indonesia's cellular market. XL Axiata in 2013 recorded total revenue growth of just 0.3%, driven by the data segment, which grew by 16% (2013 Annual Report). Seeing data traffic increase by 142% in 2013, the company vowed to focus “all its business transformation strategies to capitalise on the demand for data.” At Indosat, cellular revenue decreased by 1.3% in the first nine months of 2014 year on year, which the company explained with a “decrease in voice, SMS, and interconnection revenue, compensated by increased data and [value added service] VAS revenue.” Similarly, Telkomsel reported “a 23.7% increase in revenues from internet, data communication and information technology services” in 2013, “largely driven by increased mobile phone data usage and mobile broadband subscribers.”
Handheld devices are already the preferred way for Indonesians to access the internet. The ongoing roll-out of 3G networks – to be followed by much faster 4G connections – means wireless technology will continue to carry most data traffic. Not only will this make fixed broadband largely obsolete in the future, but it will also prompt increased use of cellular networks to hook up laptop and even desktop computers to the internet (See Improving Internet Access in Indonesia).
Building brand loyalty and retaining customers is a key challenge for operators, which are exploring ways to combine their connection services with content providers, such as social media. The high proportion of users accessing online services through cellular devices means internet services in Indonesia need the telcos as much as the telcos rely on content services to generate data traffic. This will motivate increasing cooperation between the two. The emergence of e-commerce and mobile payment systems could be a major driver of growth in mobile data services and at the same time create a stronger bond between network operators and customers. While these technologies are still in their infancy in Indonesia, the youthful market provides fertile ground for their adoption in the future (See Indonesia’s Retail Boom is Far From Over). Telecommunication providers are in prime position to benefit from the growth of online retail, though strong security is paramount to earn the trust of consumers in a country that has one of the worst records for cybercrime. Creating secure mobile systems is a significant business opportunity in itself.
The easiest way for foreign investors to engage in the Indonesian telecommunications market is through cooperation with local wireless operators, either in the provision of services or the installation of network infrastructure. In terms of services, products that integrate cellular connections with online services are a way to increase customer loyalty. Social media can generate traffic for personal use and cloud computing for business. In the future, e-health solutions can help the telecommunication industry grow on the back of strong potential in Indonesia's healthcare industry (See Indonesia’s Healthcare Sector). Health advice and even diagnostic services through mobile devices can alleviate the shortage of qualified doctors and deliver quality care to patients across the archipelago.
In terms of infrastructure, extending and improving mobile networks will connect more people to the internet in a country that remains under-served with broadband. Indonesia is still predominantly a 2G market, and leapfrogging from there to 4G is a huge task that will require substantial investment in towers and equipment. In addition, submarine cables linking the islands of Indonesia are critical to boosting national connectivity. Satellite technology, optical fibres and WiFi hotspots all increase providers' options, but they also stress the need for close integration of cellular and fixed networks to bring various types of communication together in user handsets. Facilitating convergence through technology and know-how is becoming an increasingly important business field. Finally, building and running data centres are another investment opportunity.
Global Business Guide Indonesia - 2015
Contribution to GDP: 3.47% (Information and Communications, Q3 2015)
Fixed Telephone Line Penetration: 11.72% (ITU, 2014)
Mobile Phone Penetration: 124.3% (2015)
Unique Mobile Phone Subscribers: 41.5% (2015)
Smartphone Penetration: 43% (Google, 2015)
Internet Penetration: 34.9% (APNIC, 2015)
Fixed Line Broadband Penetration: ±2% (2015)
Main Operators: Telkom, Indosat Ooredoo, XL Axiata, Axis Telekom, Hutchison 3 Indonesia, Bakrie Telecom, First Media, Smartfren Telecom.