Telecommunications sector slowly opens market

Telecommunications sector slowly opens market

Fitri Wulandari, The Jakarta Post, Jakarta

The country's telecommunications sector struggled this year to
curtail the domination of state-owned phone operator PT
Telekomunikasi Indonesia (Telkom) and create a more competitive
market.

This year, the actual competition between Telkom and state-
owned international phone operator PT Indosat began following a
US$1.5 billion landmark deal struck in May 2001 to end their
cross-ownerships in several subsidiaries.

As part of the cross-ownership deal, Indosat will be allowed
to enter the fixed phone business, which was for decades an
exclusive preserve of Telkom.

Telkom agreed to transfer its fixed line networks in Central
Java and Yogyakarta to Indosat to give the latter a significant
number of subscribers to start its new service.

However, the planned acquisition of the Central Java and
Yogyakarta operation by Indosat fell through earlier this year
following strong opposition from Telkom's employees in both
areas.

The failure meant Indosat had to start from scratch to start
its fixed phone business. It could only start the service in
November this year using wireless technology, with the target of
building 20,000 phone lines this year and 1.4 million by 2010.

The number is not far below Telkom's phone lines, which
reached 7.2 million this year.

Curbing the domination of Telkom has proven difficult.

Realizing that many parties were interested in curtailing its
domination, Telkom was busy strengthening its business this year.

It started by divesting its shares in less profitable
subsidiaries, while increasing its ownerships in other more
profitable subsidiaries to give maximum profit.

The subsidiaries that it is planning to sell include cellular
operators Komselindo, Metrosel, Telesera and Mobisel, in which
Telkom holds 14.10 percent, 20.17 percent, 69.77 percent and 25
percent, respectively. The state-owned company also has made
great efforts to keep its 77 percent stake in PT Telkomsel, the
country's largest cellular operator.

It is now trying to raise its stake in internet exchange
operator PT Napsindo Primatel, VSAT (very small aperture
terminal) operator PT Citra Sari Makmur, multimedia company PT
Multimedia Nusantara and satellite operator PT Pasific Satelit
Nusantara. Telkom owns 32 percent, 25 percent, 31 percent and
22.57 percent respectively.

Telkom was also actively boosting its fixed line portfolio by
buying out the shares of its partners in their fixed-line joint
operations (KSO). It has bought the shares of all its KSO
partners, except for PT Bukaka Singtel which operates in eastern
Indonesia.

It has acquired the shares of PT Daya Mitra in the Kalimantan
KSO operation for $120 million and Pramindo Ikat in Sumatra for
$425 million.

Telkom was not satisfied with only dominating the fixed phone
business. It also entered internet-based business with its
internet service provider (ISP) Telkomnet and voice over internet
protocol (VOIP).

As it controls the country's telecommunications
infrastructure, it could compete with other players to provide
better services at cheaper prices.

As a consequence, many ISPs stopped operations this years,
accusing Telkom of killing their businesses.

According to the Association of Indonesian Internet Service
Providers (APJII), of the 60 licensed ISPs, only half are still
operating with a profit.

Others have closed down or continue running at financial loss,
including PT Wasantaranet, the country's largest ISP, which is
owned by the government postal service, PT Pos Wasantaranet. It
operated in 168 cities before deciding to stop service to some 40
cities this year.

The ISPs did not have a choice but to lease Telkom's network
infrastructure at a considerably high price.

Meanwhile, Telkomnet, the ISP owned by Telkom, saw the number
of its users rise by a whopping 80 percent to 366,450 in the
first semester (Jan. to June) of 2002, from 190,000 in the same
period last year. By the end of this year, Telkom hopes to have
doubled in just six months to 700,000 users nationwide.

In the VOIP business, the government banned this year 12 VOIP
operators while giving licenses to five newcomers, including
Telkom and Indosat. The other three were cellular operators PT
Satelindo, and two private firms PT Gaharu Sejahtera and PT
Atlasat.

The decision sparked strong protests as the banned operators
had earlier secured licenses in internet telephony, talk protocol
or internet protocol, which are essentially identical to VOIP. As
a solution, the government called on the banned operators to set
up joint ventures with the five operators.

Analysts said VOIP could become a lucrative business in the
future as it significantly cuts down on phone rates for long
distance and international calls. No wonder Telkom is very keen
to establish a strong foothold in the business.

While Telkom was aggressively strengthening its leading
position this year, Indosat sought to boost its presence in the
country's telecommunications industry by buying a 25 percent
stake of Deutsche Telekom in PT Satelindo, a move which allowed
it to wholly control the country's second largest cellular
operator.

It also launched several cellular services this year, but it
by no means could erode Telkom's leading position in the
industry.

Things could change very soon, due to the sale of a large
stake of Indosat to Singapore's telecommunications giant
Singapore Technologies Telemedia (STT).

STT was named as the winning bidder in the sale of a 41.9
percent stake in the company on Dec. 18 worth Rp 5.6 trillion
(US$610 million).

Apart from helping to plug this year's budget deficit, the
privatization was expected to boost Indosat's performance and to
give more impetus to the firm to compete with Telkom.

The sale drew protests from some top politicians and Indosat
employees, who said a state company as vital as Indosat should
not fall into the hands of foreigners. They also cited the lack
of transparency in the bidding process.

However, many analysts warmly welcomed the privatization,
voicing optimism that through its technology and experience, STT
could provide much better service to the local market, and as
such, force Telkom to improve its efficiency.

In the sale and purchase agreement, STT, through Indosat, will
build 759,000 wireless fixed lines by 2010.