Operators ringing the changes
Operators ringing the changes
David O'Brien, Jakarta
The telecommunications market has been the first major
infrastructure business in Indonesia to experience significant
change. Although market participants continue to argue about
access arrangements and interconnection pricing the results
cannot be argued against.
Prior to deregulation the country had eight million wireline
subscribers and a lengthy waiting list. Today they have been
joined by almost 45 million wireless subscribers, forecast to
grow by the same number again over the next five years.
A second stage of industry rationalization is now occurring.
The smaller Indonesian operators are cashing out to investors at
a time when the wireless business (whilst still highly
profitable) may have peaked in terms of profitability per
customer.
Telekom Malaysia purchased 27.3 percent of Excelcomindo for
US$314 million earlier in the year. As such the implied value of
100 percent is in the region of $1.15 billion. Based on market
share, its comparable profitability and its medium term trend, it
seems a full priced acquisition.
As the smallest player, with the highest foreign currency
debt, Excelcomindo has struggled in relation to its larger
incumbent competitors. In the period from December 2003 to July
2005, Excelcomindo has seen a decline in market share from around
16 percent to 11.2 percent of the GSM market. In the last six
months its competitors have continued customer growth at a little
over 30 percent, whilst Excelcomindo has grown at 13 percent.
Where one may have expected a more nimble footed and
innovative competitor relative to the state owned monoliths, past
ownership has failed to articulate a clear market position and
make in roads.
As at the end of June 2005 Telkomsel has 21 million
subscribers, Indosat 13 million and XL 4.5 million. In the CDMA
market Telkom is a clear leader with 75 percent of the market and
3.7 million customers, followed by Mobile 8 with 0.8 million,
Bakrie 350,000 and Star One 70,000.
Under the Excelcomindo acquisition agreement, Telekom Malaysia
is required to arrange an IPO as a step to gaining majority
control from Peter Sondakh's Rajawali Group. Latest reeports from
the Jakarta stock exchange said that Khazanah Nasional Bhd
(Malaysian state investment company),which owns part of Telekom
Malaysia had acquired 16.82 percent of Excelmindo for $234
million.
Closely following the Telkom Malaysia acquisition, Maxis,
Malaysia's second largest telecommunications company announced
its own Indonesian telecommunications investments. Indonesia's
Lippo Group managed to obtain $100 Million and a commitment of
$150 million of capital expenditure for 51 percent of its shell
entity that holds the rights to 3G bandwidth. This same bandwidth
the government now wishes to retender in November this year.
Maxis' associated Pay TV arm Astro also bought Lippo physical
assets in the form of the Lippo owned Kabelvision cable network.
For 51 percent of these assets Astro paid an initial $65 million
in equity and loans and committed up to $200 million over five
years for pay TV.
This valuation seems to be based on some heady penetration
rate projections. Astro's stated target sees the potential to
grow up to some 10 million homes, representing about 25 percent
of the total market, within the next five years.
There are obvious synergies that Astro brings with its
economies of scale; however expanding the market to the extent
forecast could prove a little more difficult. In the more than
five year period pay TV has been operating in Indonesia the
subscriber base has only managed to reach around 250,000
households between the Indovision and Kabelvision.
The future in Indonesia is likely to be wireless for the so
called last mile which will then be switched to fiber optic
backbone carried on IP (Internet Protocol) for both broadband and
regular communication. Some of the valuations being developed for
these plays are seemingly predicated on this bold new future of
the triple play of internet, television and voice.
The ability to have a content base is seen to potentially
confer a comparative advantage in bundling a service offering.
However, many technical and regulatory unknowns remain to make
such a bet reality. Questions remain also about the role of 3G
relative to the new wireless broadband technology of Wi Max.
The Maxis play is seemingly predicated on leveraging the cable
and also being able to offer content on 3G. Excelcomindo will
have contemplated a similar scenario to leverage the national
fiber optic network which is currently under utilized.
Mobile 8 also appears to have such a broader media play in
mind via their mix of media assets and CDMA 2001 network. To date
Mobile 8 have primarily leveraged the cost savings of the more
modern network to attract lower end subscribers rather than
promote high speed data capabilities.
Although strong customer growth continues, it is now
predominately amongst lower value customers. The measure of such
used in the industry is ARPU (Average Revenue per User). In the
case of XL this has declined from nearly Rp200,000 (US$20) per
month in 2000, to just Rp70,000 per month in 2004. For Telkomsel
the fall has been from Rp179,000 to Rp102,000 over the same
period. The current ARPU for Indosat is at Rp89,500 per month.
All these amounts are the blended or weighted average of pre and
post paid users.
In a small minority of high end customers there may be a
demand for 3G services. In Indonesia the total post paid customer
base at end December 2004 was only 1.85m (Telkomsel 1.3m, Indosat
0.5m and XL 0.05m). This number has increased greatly in the past
year as margins on post paid have been cut. The ARPU on these
customers still sits at just Rp 300,000 rupiah/month for Indosat
and Telkomsel and 500,000 on the XL small subscriber base.
The future is likely to be one where 3G is rolled out and for
a smaller proportion of the population, value added services are
taken up. The number of competitors in this field is likely to
keep pressure on the fat margins currently enjoyed. At the lower
end of the market competitive pressures will grow to pressure
margins through pricing and greater customer acquisition and
retention costs.
The writer is a Technical Advisor at CSA Strategic Advisory.
CSA helps businesses through a combination of "soft" behavioral
and "hard" financial advice. He can be reached at
dobrien@csadvisory.com.
David O'Brien, Jakarta
The telecommunications market has been the first major
infrastructure business in Indonesia to experience significant
change. Although market participants continue to argue about
access arrangements and interconnection pricing the results
cannot be argued against.
Prior to deregulation the country had eight million wireline
subscribers and a lengthy waiting list. Today they have been
joined by almost 45 million wireless subscribers, forecast to
grow by the same number again over the next five years.
A second stage of industry rationalization is now occurring.
The smaller Indonesian operators are cashing out to investors at
a time when the wireless business (whilst still highly
profitable) may have peaked in terms of profitability per
customer.
Telekom Malaysia purchased 27.3 percent of Excelcomindo for
US$314 million earlier in the year. As such the implied value of
100 percent is in the region of $1.15 billion. Based on market
share, its comparable profitability and its medium term trend, it
seems a full priced acquisition.
As the smallest player, with the highest foreign currency
debt, Excelcomindo has struggled in relation to its larger
incumbent competitors. In the period from December 2003 to July
2005, Excelcomindo has seen a decline in market share from around
16 percent to 11.2 percent of the GSM market. In the last six
months its competitors have continued customer growth at a little
over 30 percent, whilst Excelcomindo has grown at 13 percent.
Where one may have expected a more nimble footed and
innovative competitor relative to the state owned monoliths, past
ownership has failed to articulate a clear market position and
make in roads.
As at the end of June 2005 Telkomsel has 21 million
subscribers, Indosat 13 million and XL 4.5 million. In the CDMA
market Telkom is a clear leader with 75 percent of the market and
3.7 million customers, followed by Mobile 8 with 0.8 million,
Bakrie 350,000 and Star One 70,000.
Under the Excelcomindo acquisition agreement, Telekom Malaysia
is required to arrange an IPO as a step to gaining majority
control from Peter Sondakh's Rajawali Group. Latest reeports from
the Jakarta stock exchange said that Khazanah Nasional Bhd
(Malaysian state investment company),which owns part of Telekom
Malaysia had acquired 16.82 percent of Excelmindo for $234
million.
Closely following the Telkom Malaysia acquisition, Maxis,
Malaysia's second largest telecommunications company announced
its own Indonesian telecommunications investments. Indonesia's
Lippo Group managed to obtain $100 Million and a commitment of
$150 million of capital expenditure for 51 percent of its shell
entity that holds the rights to 3G bandwidth. This same bandwidth
the government now wishes to retender in November this year.
Maxis' associated Pay TV arm Astro also bought Lippo physical
assets in the form of the Lippo owned Kabelvision cable network.
For 51 percent of these assets Astro paid an initial $65 million
in equity and loans and committed up to $200 million over five
years for pay TV.
This valuation seems to be based on some heady penetration
rate projections. Astro's stated target sees the potential to
grow up to some 10 million homes, representing about 25 percent
of the total market, within the next five years.
There are obvious synergies that Astro brings with its
economies of scale; however expanding the market to the extent
forecast could prove a little more difficult. In the more than
five year period pay TV has been operating in Indonesia the
subscriber base has only managed to reach around 250,000
households between the Indovision and Kabelvision.
The future in Indonesia is likely to be wireless for the so
called last mile which will then be switched to fiber optic
backbone carried on IP (Internet Protocol) for both broadband and
regular communication. Some of the valuations being developed for
these plays are seemingly predicated on this bold new future of
the triple play of internet, television and voice.
The ability to have a content base is seen to potentially
confer a comparative advantage in bundling a service offering.
However, many technical and regulatory unknowns remain to make
such a bet reality. Questions remain also about the role of 3G
relative to the new wireless broadband technology of Wi Max.
The Maxis play is seemingly predicated on leveraging the cable
and also being able to offer content on 3G. Excelcomindo will
have contemplated a similar scenario to leverage the national
fiber optic network which is currently under utilized.
Mobile 8 also appears to have such a broader media play in
mind via their mix of media assets and CDMA 2001 network. To date
Mobile 8 have primarily leveraged the cost savings of the more
modern network to attract lower end subscribers rather than
promote high speed data capabilities.
Although strong customer growth continues, it is now
predominately amongst lower value customers. The measure of such
used in the industry is ARPU (Average Revenue per User). In the
case of XL this has declined from nearly Rp200,000 (US$20) per
month in 2000, to just Rp70,000 per month in 2004. For Telkomsel
the fall has been from Rp179,000 to Rp102,000 over the same
period. The current ARPU for Indosat is at Rp89,500 per month.
All these amounts are the blended or weighted average of pre and
post paid users.
In a small minority of high end customers there may be a
demand for 3G services. In Indonesia the total post paid customer
base at end December 2004 was only 1.85m (Telkomsel 1.3m, Indosat
0.5m and XL 0.05m). This number has increased greatly in the past
year as margins on post paid have been cut. The ARPU on these
customers still sits at just Rp 300,000 rupiah/month for Indosat
and Telkomsel and 500,000 on the XL small subscriber base.
The future is likely to be one where 3G is rolled out and for
a smaller proportion of the population, value added services are
taken up. The number of competitors in this field is likely to
keep pressure on the fat margins currently enjoyed. At the lower
end of the market competitive pressures will grow to pressure
margins through pricing and greater customer acquisition and
retention costs.
The writer is a Technical Advisor at CSA Strategic Advisory.
CSA helps businesses through a combination of "soft" behavioral
and "hard" financial advice. He can be reached at
dobrien@csadvisory.com.