The end of oligopoly in telecommunications?

The end of oligopoly in telecommunications?

By Winahyo Soekanto

DENPASAR (JP): A step forward was achieved in early February
when Telkom and Indosat settled their cross-ownership worth
US$1.5 billion in major subsidiaries Telkomsel, Satelindo and
Lintasartha.

Telkom seems to have let go of its dream to acquire Indosat;
instead, it took over 35 percent of Indosat's shares in
Telkomsel, thus strengthening its position with 77 percent of the
shares. Indosat, on the other hand, purchased 22.5 percent of
Telkom's shares in Satelindo and 37.66 percent in Lintasartha.

Further, Telkom has also sold its assets in joint operation
scheme for region IV (KSO IV) of Central Java and Yogyakarta.

The deal, part of a campaign to restructure Telkom and
Indosat, will influence the speed with which Indonesia can
restructure and liberalize its telecommunications industry.

In addition, the move was in line with Ministry of
Communications Decree No. 72/1999 on the Blueprint of the
Government Policies on Telecommunications, which stipulates the
termination of cross-ownership of Telkom and Indosat in an
affiliate company.

The government and monopoly holders in the telecommunications
industry are, indeed, responsible for the success of reform in
the industry.

This success depends on how they restructure their portfolio
so that it is more procompetitive, and bars conduct that is
anticompetitive.

By selling Telkom's assets in KSO IV, the regulator, in this
case the government, has at least solved one of the problems
concerning the prior termination of monopoly in five regions.

It is certainly regrettable that not all of the above
pretermination schemes was completed at once, but this would need
a firm stance on Telkom's part.

We need to remember how Telkom has yet to respond to proposals
by its local partners to set up joint ventures. This is despite
that the recent deal made by Telkom and Indosat has resulted in
the companies' shares being very actively traded in the stock
market; it helped raise the composite index at the Jakarta Stocks
Exchange by 4.02 percent or 17,009 points.

Even so, the government should pursue the progress notched by
Telkom and Indosat. The government must push for further steps,
so that within a certain, measured period, the two companies must
be in full compliance to Law No. 5/1999 on abolition of monopoly
and unfair competition.

This is nonnegotiable, and the regulator needs to be able to
maintain procompetitive policies for all industry players.

Some questions should be answered. For instance, as a full
service network provider, should Telkom and Indosat be allowed to
sell the same service in more than one business portfolio?

What if Telkom, as a consequence of its agreement with
Indosat, continues to control the majority of shares in Telkomsel
as well expand domination in cellular service through its
TelkoMobile project?

The same goes for Indosat. What if, in addition to a greater
share in Satelindo, the company continues to dominate the
international direct call service market as well as the cellular
service market through its IM3 project to be launched in August?

By conducting such market expansion, the two companies are in
danger of practicing oligopoly and cross-subsidy, thus defeating
the original purpose of settling the cross-ownership in their
subsidiaries.

There are certainly alternatives. Let us say Telkom wishes and
is able to reach an agreement with Indosat to control the
majority of Telkomsel's shares as Indonesia's major mobile
cellular supplier.

In this case, it should not be given a new license as cellular
operator even though it is meant as compensation for the
pretermination of its monopoly. The government should find other
forms of compensation.

Indosat, too, should now start selling its shares in Satelindo
to new players or the other shareholders so it would not qualify
as a dominant player or be accused of practicing oligopoly.

It is indeed appropriate that Telkomsel, which is Telkom's
pilot project in the cellular industry, should be returned to
Telkom's control.

In reality, its management today is indeed dominated by
Telkom's officials -- leading to rumors Telkom has been giving
Telkomsel special treatment.

It has been said, for instance, that Telkomsel was allowed to
place its equipment for free in Telkom's supporting facilities --
thus helping Telkomsel to grow rapidly because of reduced
operational and investment costs.

Such rumors might, of course, have come from competitors who
were feeling threatened by Telkomsel's spectacular performance.

According to an analyst at the BNP Prime Peregrine, the
cellular company was, for instance, able to maintain a high rate
of network expansion even during the economic crisis. Not only
was it able to record significant profit but it was also declared
debt free.

Now that Telkom holds the majority of Telkomsel's shares, and
in order to prevent a cross-subsidy, its management should indeed
educate the public about whether there is any grain of truth in
the rumors.

There is yet another obligation facing Telkom and Indosat. In
addition to terminating their monopoly and transforming
themselves into full-service network providers, Telkom and
Indosat should also be responsible for the largely oligopolistic
structure of the industry.

Telkom, for instance, still has direct or indirect interests
in several cellular operators such as Excelcomindo, Komselindo,
Metrosel, Telesera, Patrakom and others, while Indosat still has
interests or shares in KSO I in Sumatra and in Patrakom.

The government or regulator can now choose to uphold Law No.
36/1999 on telecommunications and Law No. 5/1999 on monopoly, and
take a firm stance -- free from the influences of the operators
or vendors/manufacturers -- on Telkom's obligation to develop
Telkomsel and return its TelkoMobile license.

The government can also now choose to be firm and have Indosat
sell its shares in Satelindo.

The government, certainly, can also choose to continue to
allow the structure of the industry that may no longer be
monopolistic but still oligopolistic in nature, which also means
greater potential for conflicts to their stated policy of
procompetitive. It is up to them now.

The writer is a lawyer based in Denpasar and an observer of
the telecommunications industry.