Fri, 26 Jan 2007
Chandra Sahala Pasaribu, Equity Analyst

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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