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.