Interview: Erik Aas, Hary Sasongko, Sarwoto Atmosutarno, Hasnul Suhaimi
In which product and service areas do you expect to see growth over the next several years? To what extent are basic services still a factor?
ERIK AAS: Unique to this market is the speed at which the average customer has leapt from utilising basic services to communicating through social networks. To date approximately 37m people have a Facebook account, making Indonesia the second-largest market in the world. Most of those individuals have never used a PC, they do all their social networking on handheld devices. We reached a peak in SMS and voice usage two years ago, but now statistics indicate both services are in decline. This is a clear signal that we are experiencing a paradigm shift in the way people are using telecommunications. Operators have to fundamentally adapt to this change by altering their network and the services they are prepared to deliver.
There are opportunities for revenue growth in areas like units with bigger screens and tablets, which add new functionality and make it easier to justify increased spending. This growing demand for data services is driving our investment strategy over the next three years. We are aiming for a four-fold capacity increase for voice and SMS, and a 50-fold increase in data capacity at the same time. This is a perfect example of the shift taking place behind the scenes of the industry.
HARY SASONGKO: Growth within the sector is taking place, and certainly some of that is from users in more remote areas with basic needs. However, there is also tremendous expansion occurring in saturated markets, as demand for value-added services increases rapidly. The real challenge for the industry is to address this growth through provision of necessary infrastructure. Within telecommunications this essentially refers to capacity and coverage. Indonesia’s infrastructure needs to be developed both in terms of basic services and more sophisticated ones. Even in a metropolis like Jakarta, low tariffs and high traffic have resulted in an undersupply of capacity. With the huge surge in data usage, strain on networks is growing. Jakarta is a very complex city, and we have to keep pushing our network to continue delivering services as efficiently as is possible.
For example, Indonesia has one of the highest growth percentages for Blackberry devices in the world, which has become a concern for operators trying to meet capacity demand. Moreover, the rapid increase in data usage makes it challenging for operators to keep pace.
Over the last 18-24 months, demand has jumped twofold. This difficulty is compounded by the vast capital costs required to develop infrastructure, especially given decreasing industry margins. Price elasticity is very tight due to the sector’s highly competitive nature.
SARWOTO ATMOSUTARNO: We have reached a pivotal time in the industry. The future success of a telecommunications company will depend on its ability to move from providing basic services to providing more complex and sophisticated data-based ones. Revenue per minute for both voice and SMS has been declining the past few years, and while revenue per minute for data services is also falling, usage is growing exponentially. Earnings before the deduction of income tax and amortisation (EBITA) margins are around 55%, much lower than before but still above India’s 31%.
In the future, 40-45% margins are inevitable, which makes it very difficult for mobile operators to finance the investments required in infrastructure and technology to meet the surge in data services demand. In developed countries, the industry average is about $30 per customer per month for unlimited data, while in Indonesia it is $10. This is excellent for consumers, but unless the business environment changes, the brunt of responsibility for infrastructure provision will fall on the government, as the private sector will be unable to afford the large-scale capital requirements necessary.
At a minimum, responsibility will have to be shared by a sort of public-private partnership (PPP). The declines in margins and comparatively lower revenues are mostly due to the hyper-competitiveness of the telecommunications industry in Indonesia. Without at least some consolidation, these trends will continue.
HASNUL SUHAIMI: Actual penetration rates have only reached roughly 55%. However, to fully understand that figure you need to divide the market into saturated areas and non-saturated areas. In major cities penetration rates can be close to 100%, while in more remote areas it could be nothing. It is expected overall penetration will continue to climb at about 10% per year. The majority of this growth will be driven by new entrants to the market in non-saturated areas. These new subscribers will demand basic services like voice and SMS. However, within the saturated areas we are experiencing a rapid decline in voice services, which used to represent more than 50% of our revenues, consistent SMS usage and a surge in data services. The rate at which the average Indonesian opts to utilise SMS or social media to communicate is unprecedented. As a result, within this market segment, the focus will be on providing new data-based services, content delivery and applications. This represents a major shift. In the past the growth of our business primarily relied on attracting new subscribers by constructing base transceiver stations to support our growth. Our strategy is to direct around half of new investment toward developing our 3G network to address increased demand for data services. The rest of our investment will be directed at 2G, with the intention of extending our coverage and increasing our capacity. Of this, 20% will specifically go towards penetrating less saturated markets like Sulawesi, Maluku and Kalimantan. Being first to market and having the opportunity to build brand recognition and loyalty will still be vital for long-term success.
How important is tower sharing in the Indonesian telecoms sector? What effect does it have on the profitability of market participants?
HASNUL: We definitely support tower sharing, and we currently lease over 5000 of our own towers. We generate 5-6% of our total revenue from leasing and intend to be even more aggressive in the future, inviting any competitor to utilise our network. However, this philosophy is not entirely shared in the industry. More third-party operators are entering the market, which is positive. But voice and SMS have an EBITA of 50%, while data represents only 20-30%. That is why, with the increasing data service use, mobile operators must find ways to reduce capital expenditures on supportive infrastructure. Tower sharing is an excellent way to achieve stronger bottom lines. Regulations are in place to keep encouraging tower sharing, but they are not being adequately enforced.
AAS: Operators’ increased desire to share towers is a basic shift in the value chain. It is increasingly a functional business and there are towers available for lease. It is also practical from a mobile operator’s perspective because you avoid dealing with issues like permits and land acquisition. The tower business will continue to mature and develop as the industry grows. Today, with the focus of mobile operator differentiation shifting away from network coverage and towards branding and service design, tower sharing is more firmly on the agenda than ever. As well as opening the way to potential reductions in both operating and capital costs, tower sharing can help an operator focus more effectively on marketing and customer satisfaction.
SASONGKO: Cost sharing among operators is already under way and will intensify. An example of this is tower sharing. In 2009 we had no revenue from tower leasing. In 2010 we made almost $27m. This demonstrates how quickly operators have adopted leasing as a business practice, rather than constructing new towers, in order to reduce costs. Allowing foreigners to operate in the tower industry may reduce leasing tariffs. That said, while I welcome both foreign and domestic companies, towers are not terribly high-tech. The actual savings achieved would be insignificant. Obviously, when there is a real need for foreign investment it should be welcomed, but in this instance I am content with the regulations, since they stimulate local industry. In reality, due to the reduced margins, the sector has reached a point where the major goal now is cost reduction.
To what extent is the development of a fibre-optic backbone a necessary programme?
SASONGKO: The objective is actually quite good. Efforts to improve connectivity across the country should be supported so long as they are efficient and thoughtful. Roads, ports and airports were in the past the focus for government infrastructure to improve connectivity, but now telecommunications is the most efficient way to bring people together. Many studies clearly demonstrate the link between economic prosperity and increased broadband and mobile phone penetration. Telecommunications has become a basic need. As long as the cost of electronic devices decreases and the government can fulfil its objectives, everyone in this country will be connected.
HASNUL: Expanding and improving fibre-optics is an excellent way to address capacity issues and extend coverage to remote areas. However, it would be uneconomical for each operator to develop their own network. For years telecoms operators have been contributing part of our revenue under the Universal Service Obligation (USO). This money was to be used by the government to build infrastructure to service remote areas.
However, perhaps this money could be better used by not only bringing fibre-optics to the rural areas, but also by increasing capacity in major urban centres. Each operator could then pay for the right to offload from their own network. We may need to replace USO with an Internet Service Obligation (ISO). Currently, the average customer only uses 200-250 MB per month. In the future, demand could go as high as 5 GB per month. It will be nearly impossible to successfully meet this demand without some sort of shared network.
To what extent will smartphones and 3G technology become a major operator focus?
ATMOSUTARNO: 3G and 4G make much more efficient use of the spectrum compared to 2G – and with increased efficiency there is less cost. As an industry, it is in our best interest to ensure these new technologies gain acceptance by the mass market. However, acceptance of 3G and 4G will depend on the development of a nationwide infrastructure backbone.
Additionally, the need for content represents a huge opportunity for developers to collaborate with operators. If done correctly, content provision will be a major factor in driving up the average revenue per user. Therefore, as an industry we need to foster an environment that supports and encourages innovation and creative approaches to these issues.
We also need to increase the accessibility of 3G hardware in phones, tablets and other devices. The challenge of making these devices affordable demands collaboration between operators, vendors, device manufacturers and content providers. If together we can find ways to bundle and package our services and products cheaply, we will be able to penetrate the mass market. This type of convergence among IT companies, content providers and telecommunications firms also represents a natural progression for the industry. Each entity by itself has little chance of profitability, but together we can become incredibly successful.
AAS: Smartphones are still considered to be a high-end device, but this depends on your definition of a “smart” phone. Phones providing basic services, access to social networks and internet browsing are relatively inexpensive. I think you will see these devices continue to come down in price. Blackberry and Android technology, on the other hand, remain very expensive.
At the end of the day, for the user it is a balance between functionality and cost.
Smartphone users typically provide about 10% of revenue but consume 50% of network resources. That situation presents a significant dilemma. We, as an industry, need to ensure the appropriate technology is implemented to limit the capacity used by smartphone or 3G users, who represent only a minority of the industry’s customer base. Otherwise, the impact will ultimately be felt by the mass market, which remains the source from which we derive the majority of revenue.
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