Liberalizing telecoms market

By Bondan Winarno

JAKARTA (JP): The race is on! By 2004, the government will have to end the duopoly in the provision of the international telecommunications services now enjoyed by Indosat and Satelindo. By 2007, the domestic long distance telephone must be opened.

And by 2011, the telecom market should be fully liberalized. After that happens, there will be no going back.

The breakup of AT&T -- which used to be the world's largest corporation -- in 1985, was nothing compared to what ensued in the telecommunications industry. In the forced divestiture of 1985, AT&T went in all directions to hold on its technology company. But, in the 1996 voluntary restructuring, AT&T shed the technology companies -- Lucent Technology and NCR -- to focus on the telecom services.

What a difference a decade makes. In its recently published 1996 annual report, AT&T declared itself "The New AT&T" which "brings all your connections together, to experience the revolution in calling services, wireless, Internet, and home entertainment".

In the last decade, a major change has taken place in the telecommunications sector. The changes can be categorized into three major divisions: deregulation, restructuring, and privatization.

In the three years between 1986-1988, Nippon Telegraph & Telephone (NTT) released 34.6 percent of its shares on the domestic stockmarket and gained US$78.6 billion. No foreign investors were allowed to buy the shares, for the government was wary about the short-term profit orientation of the foreign investors.

Privatization has been a high priority in the last three years. PT Indosat went public in 1994, followed by PT Telkom in 1995. PT Satelindo is preparing to go public sometime this year. From a global perspective, between 1995 and 1996, there was a horde of 19 telecommunications operators crowding the world's stockmarkets for a capitalization amounting to US$37 billion. The big names were all there, including: Deutsche Telekom, KPN of the Netherlands, and STET of Italy.

Now, the wave of privatization has somehow subsided. After all, there is not that much money left in investor's pockets. It will be hard for them to afford the telecommunications portfolio.

The new trend is towards acquisitions and strategic alliances. Most recently, British Telecom acquired MCI (U.S.) to create a new powerhouse which is strategically placed to take full advantage of the liberalizing market -- both on the European and the North American fronts. Prior to the acquisition, BT and MCI have enjoyed a strategic alliance for two years.

The convergence of technologies (computer, telecommunications, electron devices) and the convergence of media (print, electronic, film) have permitted the processing and arrangement of information into forms that are more interesting, interactive, and entertaining than ever before.

In today's jargon, the final form that information takes after being processed is referred to as content. With an integration of the variety of telecommunications technologies that allows for access and transfer of information between widely dispersed geographical locations, the new multimedia industry has been born.

Traditionally, the provision of content has fallen within the spheres of interest of different industries to those who distribute or transmit the information. Examples of industries oriented toward the provision of content are the mass media (newspapers, and magazines), film studios, television networks, production houses, news agencies, and other providers of information such as software houses and research institutes. Those industries have been regarded as separate from the providers and operators of telecom networks.

It should come as no surprise that recent developments have inspired alliances between these various industries. Companies have gone mad the world over. The media magnate Rupert Murdoch brought his News Corp into an alliance with Telstra. U.S. West merged with Time Warner.

Not all of these marriages involve eternal vows of allegiance. In 1993 TCI (Tele-Communications Inc.) announced a megamerger with Bell Atlantic which would have created the world's most powerful communications and entertainment companies. The dramatic US$33 billion merger was dead after only four months.

Nevertheless, the failed merger has already driven other companies to action. Telecommunications companies bought cable television companies. Software companies allied with entertainment powerhouses. Broadcasting companies merged with video rental companies. All are trying to create new ways to link people to information and entertainment.

A cable television company in the United Kingdom now offers telephone lines to it's subscribers. So, what is happening is the bundling of companies offering bundles of services.

In the case of AT&T described earlier, the bundle of services includes calling services, wireless services, online services, and home entertainment. The customers want the convenience of getting all their connections from the single supplier.

At the end of the day, customers need only to cut a single check to settle all the services rendered. A one-stop shopping idea.

In the newly published 1996 annual report, PT Indosat Tbk announced that nearly 95 percent of its revenue was derived from the international telecommunications services. In one way, this is good news, for it is evidence of the company's ability to maintain its market share.

When PT Satelindo was allowed to enter the market in 1994 to provide international telecommunications services, Indosat predicted a market share loss of up to 15 percent. It has not happened. But, 95 percent of "eggs in one basket" should also be viewed as a volatile situation.

Market share will continue to erode as the result of competition in the post-duopoly era. Not only will the competition cause further pain, but also alternative calling and value-added services -- such as: call back, frame relay, etc. -- may soon pose a bigger threat.

This means that these days Indosat cannot rely on growth in one main area of business. For a publicly listed company, the situation described might ring warning bells to investors. In order to increase the value of Indosat's stock, growth must be achieved in areas outside the company's core area of business.

In 1995, the company devised a diversification strategy coined as "1+3" business strategy -- "1" being the company's core business, and "3" represents the three diversification directions: domestic, regional/global, and related industries.

"A Grand Strategy for Indosat 2000" was further formulated to provide the specific guidelines for the diversification strategy, which covers six main areas: basic telecommunications, multimedia service/content, telecommunications service at the regional and international level, cellular and satellite telecom, added value service, and related business.

In all six directions, Indosat has already made some progress. The eggs will no longer be in just one basket. The company is geared toward full service provision in the telecom market.

In the basic telecom service provision, Indosat is no longer merely an international telecom provider. Through its subsidiary PT Mitra Global Telekomunikasi Indonesia (MGTI) -- a consortium which also involves NT&T of Japan and Telstra of Australia -- the company is now installing 400,000 telephone line units in Central Java under the KSO/joint operation scheme with PT Telkom. In other words, even before the liberalization of the market, there has already been a mechanism in which the domestic telecommunications service provision is not fully monopolized by the government.

Indosat has also broken boundaries. Since 1995, Indosat has a 49-51 percent joint venture with the Royal Government of Cambodia to develop telecommunications infrastructure and operate the systems. Camintel SA was in fact, able to finish the job of putting 10,000 telephone line units in 22 Cambodian provinces in one year, while it was initially earmarked for three years.

Such schemes are also taking shape in Kazakhstan whereby Indosat plans to start the work in May 1997. Both Cambodia and Kazakhstan are strategic stepping stones for expansion into the neighboring countries.

In multimedia, Indosat has also stepped onto a terra firma. Last year the company acquired 40 percent stock of the largest Indonesian production house, YTC (Yasawirya Tama Cipta), with the option to acquire majority shares. Breaking further boundaries, Indosat has incorporated a subsidiary in Japan to take a position in a cable television company.

The step was further strengthened with the institution of PT Indosat Mega Media. Indosat has also received its shareholder's consent to participate in two other multimedia companies: M2A (Multimedia Asia), and Multimedia Nusantara.

Recently, Indosat also placed a strategic stake in Datakom Asia, a company distributing pay-television via digital satellite system. Datakom Asia is the holding company of Indovision (PT Matahari Lintas Cakrawala) owned by Peter F. Gontha, which will launch a digital satellite Indostar-1 in July 1997. The combination of Indosat and Datakom Asia will create a powerhouse which can offer seamless multimedia services to their combined customer bases.

In the cellular market, Indosat maintains its strong position in PT Telkomsel, a joint venture GSM operator with PT Telkom. By this year Indosat also hopes to start a mobile PHS (Personal Handyphone System) operation in Surabaya through its subsidiary PT Primasel. If the shareholders give their permission, Indosat will also go beyond the Indonesian border to operate cellular/fixed telecommunications in the Philippines. Indosat is looking into the possibilities to place 20 percent participation in a Philippine telecommunications company.

In the satellite market, Indosat's position is even stronger now with the operation of an Inmarsat LES (Land Earth Station) at Jatiluhur. While cellular technology has not been able to cover the entire globe, Inmarsat technology has already invented a cheaper system to allow customers to communicate from almost any point on earth and the open sea.

Indosat is a member of the Intelsat and Inmarsat consortium, and is contemplating participation in PT PSN (Pasifik Satelit Nusantara).

The value added services has been pioneered with the acquisition of USA Global Link in 1995. The company is now planning to expand its services to Europe by establishing Global Link Deutschland to take advantage of the liberalization of European telecommunications market in 1998. The value added services, in a way, is a certain methods to combat the callback services which damage international telecoms operators.

The Indosat strategy is to stick firmly to its underlying vision -- i.e. to become a global player, a market leader, and a world-class operator. The diversification into related industries has been done in strict compliance with the vision. Indosat's diversification to related industries encompasses: the operation of EDI (electronic data interchange), software/applications, and infrastructure maintenance.

The Dow-Jones website recently quoted Indosat's president, Tjahjono Soerjodibroto, as saying that he would seek stockholders' consent to relinquish a majority of Indosat's shares in Satelindo.

Indosat holds 7.5 percent of Satelindo's shares, and intends to keep no more than 1 percent. The funds from the share sales will be ploughed back into it's investment coffers. With the financial strength Indosat now enjoys, it does not seem likely that the company will need much to borrow from the money market to finance its vision-driven diversification strategy.

Bondan Winarno is the author of Managing Transformation of a State Enterprise: A Case Study of PT Indosat.