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The telecommunications industry remains attractive despite
the high inflation of 2006.
Last year, the total number of subscribers climbed to almost 65
million, representing a healthy growth rate of 38.6 percent. It is
expected that Indonesia's telecommunications market has the potential
to grow to between 110 million and 120 million subscribers over the
next five years, and achieve a penetration rate of 50 percent.
Therefore, there should be a potential 60 million new customers for
each of the next five years. There are three important aspects to
consider here: industry drivers, regulation and competition. Overall,
the market continues to provide growth opportunities, but accompanied
by tight competition in quality services, coverage and pricing.
There is ample room for growth in the telecommunications industry,
especially in view of the current relatively low penetration rate of 29
percent.
A penetration rate of 50 percent seems reasonable for Indonesia given
its per capita GDP of US$1,100. However, the next 60 million potential
subscribers will be more at the lower end of the income pyramid,
meaning that competition to reach this second segment will be stiffer.
Furthermore, the 60 million potential subscribers are probably located
outside Java as Java is already well covered by the incumbents.
Given that potential new customers will have lower purchasing power,
competitive tariff structures will be the key factor in penetrating
this segment. Fixed wireless access services have tariff advantage
compared to cellular operators. However, pricing is not always the main
factor when choosing an operator. It has been shown that service
quality and coverage are also important factors for customers when
choosing operators.
For instance, Telkomsel's average revenue per user per month (ARPU)
stood at Rp 85,000 at the end of September, 2006, which is a premium
compared to the industry average of around Rp 50,000.
The main reason for this premium is the excellent service quality and
coverage provided by Telkomsel. However, the tariff structure is a bit
too complex for consumers to make a clear comparison.
This prevents customers from knowing which operator is really the
cheapest. Such a state of affairs is the result of an oligopolistic
market structure that gives the operators control over prices.
For customers, telephone bills depend on calling habits, between
originating calls through "on net" or cross operators. Since it is
difficult for customers to get a clear-cut idea about tariffs, we
believe that service quality and coverage are crucial.
A high call-success ratio and a low number of failed calls are the main
determinants of high quality service.
Another source of revenue is data communication. The function of a
handset has moved beyond voice calls, and it is now a device used to
transmit data. Based on an analysis of several telecommunications
operators, voice calls reach a maturity level, with minutes of usage of
around 50-60 minutes per user per month.
A second feature that has been growing rapidly is texting, or SMS. But
unlike advanced economies, Indonesia is still at the early stages of
data transmission. Another popular feature is ring-back tones --
especially among young people as a way of expressing their
individualism.
The Indonesian Telecommunications Regulatory Board (BRTI) has
officially announced new costs based on interconnection regulation.
Under this new ruling, an operator whose interconnection revenues
represent more than 20 percent of its total revenues must open its
network up to interconnection and publish its interconnection rates.
Currently, this new ruling applies only to Telkom, Telkomsel and
Indosat. Other operators are not yet under an onus to comply with the
requirements. The new interconnection regime will level the competitive
playing field in the telecommunications industry.
It has long been known that interconnection is a latent problem and
that it favors the incumbents as they have control over larger
networks. The new ruling requires incumbents to open up their
interconnection points based upon clear pricing regimes.
Smaller players will be able to easily interconnect with the incumbents
as the regulation is transparent and clear. Previously, it was a time-
and resource-consuming process to acquire an interconnection with some
of the incumbents.
We think that this new ruling will accelerate the growth of the
industry as the network becomes more integrated. This should translate
into larger traffic volumes.
The intention of the regulatory board is clear in that it seeks to
promote fairer competition, transparency and a non-discriminatory
business climate. But despite the introduction of the new
interconnection regime, we have not seen any drop in retail tariffs.
Operators are still charging the same rates as before. However, some
marketing gimmicks have been introduced, resulting in a decline in
effective tariffs, albeit compensated for by higher traffic volume.
The new players are bit slow to roll out their networks, despite the
fact that the equipment is not hard to come by. Some electronics
manufacturers even provide vendor financing. The largest obstacle can
be the erection of masts as locations become scarcer.
Some regencies are restricting the number of permits they issue for the
erection of new masts, and are encouraging operators to share existing
masts.
With around 10 operators in Indonesia and an addressable market of
around 120 million, this means that each operator has only 12 million
potential customers. Especially given Telkomsel's position, with the
largest slice of the pie, the industry will probably need to
consolidate in the near future through a mergers and acquisitions.
Four new players that are lining up to roll put their networks are
Hutchinson, Lippo Telecom, Sampoerna Telecom and Primasel Indoprima
Mikroselindo.
The principal challenger to the existing player is Hutchinson, which is
operating on a trial basis, with committed capital expenditure of US$1
billion. Sampoerna Telecom could face problems as it operates in the
450 mhz frequency band, which is less popular than other frequencies.
The principal implication of this is more expensive electronic
equipment due to lower economies of scale and limited handset choices.
Lippo Telecom seems to be a bit late in announcing its rollout plan. It
is still unclear what Lippo Telecom's timeframe actually is. The last
operator, Primasel, has problems with its frequency license.
Currently it operates in the 1900mhz band, which has already been
allocated for 3G use. With its CDMA license, Primasel should actually
operate in the 800Mhz band. However, unfortunately for Primasel, there
are no free slots available there.
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