Price war between Telkom and Indosat gets fiercer

Price war between Telkom and Indosat gets fiercer

Rudijanto, Contributor, Jakarta

The launching of new international call service by state-
controlled PT Telkom Tbk (Telkom) in August of this year signals
the some real competition between two telecommunication giants,
Telkom and PT Indosat Tbk (Indosat).

While the fight can be as tough as the one fought in the ring
between Mike Tyson and Evander Holyfield, the competition itself
should be more than mere entertainment for customers.

Telkom's newly launched 007 international calling service
constitutes the a heavyweight challenger to the domination of
Indosat and its subsidiary Satelindo in the international call
business. If previously Indosat only faced poorly prepared
weapons such as Voice Over Internet Protocol (VoIP), Telkom's 007
is a direct attack meant to capture Indosat's loyal customers.

Telkom's 007 is a clear line with comparable voice quality to
Indosat's 001 and Satelindo's 008 international call services.
Aside from its ability to connect customers to 256 countries,
Telkom's 007 is much cheaper. The most frightening reality is
that most of the international call users have been Telkom's
fixed line telephone customers.

"We see there is a market for international calling. That is
why after receiving the license to operate in this market, we've
taken this opportunity to exploit this growing market," says
Anwar Yake, Telkom's Retail Services Manager.

Prior to launching 007, Telkom had actually tested the waters
with its 017 VoIP. Though officially packaged as VoIP, Telkom's
017 has voice quality only slightly below acceptable standards
due to low compression applied by Telkom on its transmitted data.

While other VoIP services normally have had a minimum of
success in transmitting faxed messages, Telkom guarantees that
its 017 can deliver faxes. Offered at 40 percent below normal
fixed line international calls on a flat-rate basis, Telkom's 017
has cut into the market share of the established players in this
sector.

Many suspect that Telkom has deliberately used the low
compression to enable its 017's voice quality to reach nearly the
same level as that of the 001 or 008. For many, this constitutes
a serious violation against VoIP criteria. Indosat and Satelindo
still hold the exclusive rights to provide international call
services.

"No, we have not violated any rules. We still use VoIP
technology on 017. The fact that the voice quality is better than
other VoIP services shows that we have improved our VoIP
technology. Regarding how low or how high the compression that
VoIP providers use is up to each provider's policy," says Anwar.

Though many are suspicious, but they cannot prove their
suspicions. Even the Directorate General of Post and
Telecommunications that has authority to uphold the VoIP
regulation cannot prove Telkom's wrongdoing in its 017 VoIP
operation.

"Of course, we have reminded Telkom on this matter but we have
had difficulty proving their violations because we don't have
tools that can prove it," says Head of Public Relation at the
Directorate General of Post and Telecommunication.

The Directorate General's inaction against Telkom has led many
to suspect government's tacit support of Telkom in winning the
competition for the international call market. After all, Telkom
is still a state-controlled telecommunications company that
contributes significantly to the state budget.

After the privatization process, Indosat has changed its
status to foreign-scheme investment company. Under this new
status, Singapore Technologies Telemedia Pte. Ltd. controls 41.94
percent of Indosat's shares. The investing public controls 43.94
percent and the Indonesian government owns 15 percent of the
shares.

With such new ownership composition, one should no longer
wonder about the apparent governmental favoritism for Telkom. If
this allegation is true, Telkom with its strong control of the
domestic fixed line telephone market, indeed, constitutes a real
heavyweight challenger in the international call market.

Aware of Telkom's strength, Indosat has prepared for a tough
fight to maintain its position in the international call market.
To face attacks from VoIP providers, including Telkom's 017,
Indosat operates its own VoIP Globalsave after receiving
government licenses on April 26, 2003.

With the goal, among others, to win back its customers from
other competitors, Indosat launched a promotion program. Under
this promotion, the company offered discounted rates of up to 85
percent for 13 overseas destinations, including China, Japan and
Singapore, South Korea, Germany and the Netherlands, from April
24 to June 30, 2003. The discount excluded calls to overseas
mobile phones.

Indosat offers its VoIP Globalsave in two packages, namely
pre-paid calling cards, and post-paid. The post-paid is
subscription-based service that aims at providing more convenient
service to customers. Under this scheme, customers only need to
register their telephone numbers for activation.

Meanwhile, seemingly aimed at Telkom's 007 launching in
August, Indosat's subsidiary Satelindo announced a new discount
campaign at the end of July. Under the discount program,
Satelindo's 008 offers up to 40 percent discounts to customers.

Prior to the new program discount, Satelindo has also launched
post-paid Pass Call that offers discount up to 58 percent. Pass
Call is not a VoIP product but it stems from Satelindo's calling
card product with exactly the same voice quality as the company's
008.

Unlike VoIP that has had a small percentage of success in
delivering fax messages, Satelindo's Pass Call can deliver fax
messages. Being a clear channel service, Pass Call is positioned
above VoIP in quality. The product is distributed through some
agents.

The competition in the international call market certainly is
getting tougher. Both VoIP providers and particularly Telkom's
007 cannot but grab certain percentages of Indosat's market share
in this international call market.

But this tough competition in this market has long been
anticipated after the implementation of Indonesia's new
telecommunications law. The company has transformed itself from
an international call provider into a fully integrated
telecommunications provider.

The result of this transformation is that the company's
revenue from international calls has sharply declined from 73
percent in 2000 to only less than 27.1 percent as of this year's
first quarter. The biggest contribution to the company's total
revenue came from its fast growing cellular sector with 55.4
percent of total revenue.

The fact that Indosat's main revenue source has gradually
shifted to its fast growing cellular sector shows that the
company views this international call sector as a sunset
business. Under this transformation, Indosat sees its future more
on other business lines, especially the cellular sector, rather
than international call business.