As revenue per user continued to fall for traditional GSM operators, two telecommunications companies have made moves to target lower-end customers.
The second-largest mobile telecoms operator, Indosat, announced its deal with Ericsson to expand its WCDMA (Wideband CDMA) and HSPA (High-Speed Packet Access) coverage on August 1. Meanwhile, the third largest operator, Excelcomindo Pratama (XL), made similar plans with Ericsson public on August 6. The expansion goals of both companies are a further step in the evolution to all-Internet Protocol (IP) networks.
WCDMA provides new service capabilities, increased network capacity and reduced costs for voice and data services.
These moves will support the rapid growth of network capacity, while keeping costs low. Systems such as WCDMA, target lower-income customers than GSM technology and will allow these companies to drop their prices for certain services.
The number of mobile phone customers is expected to reach 100m by 2010, up from around 60m at present. Growth in the mobile telecoms market has been sharp, rising substantially from the 1.05m users in 1997. Even so, mobile phone penetration rates lag far behind those in Malaysia and Thailand, which have rates of 80% and 60%, respectively.
From a relatively low base of customers, the predicted growth rates for the next five years are high. However, this will likely come from lower-revenue customers, meaning that the average revenue per user (ARPU) is likely to fall.
This trend has already begun. Indosat announced that ARPU fell by close to 7% in the first half of 2007 as a result of strong competition between mobile operators. The company's blended ARPU for 2006 was Rp60,000 (about $6.50). There is room for prices to fall, as GSM rates are among the highest in the region.
"The two main challenges are access and affordability: the richest Europeans pay less per unit than the poorest Indonesians, except for SMS, which is much cheaper in Indonesia," Kusmayanto Kadiman, minister of research and technology, told OBG. "We need wider access at cheaper prices."
Compensating for this drop has been a rising customer base. Indosat's yearly target for 2007 is to grow its customer base to 23m users, up from 16.7m at the close of 2006. So far this year the company has attracted 3.3m new mobile users, a 44% increase over the same period last year.
Other leading companies have also registered healthy growth, demonstrating significant market potential in Indonesia. Thus Telkom, Indonesia's largest mobile telecoms operator, announced a net profit of Rp3.58trn (around $388.5m) for the second quarter of this year, a progression of 51.9% year-on-year.
Traditionally dominant GSM players like Indosat are indeed bearing witness to the strong performance of players such as Bakrie Telecom (BTEL), which explicitly targets lower-revenue users. The CDMA technology employed in Indonesia uses the least amount of spectrum thus lowering the cost of delivery for operators. This has translated into BTEL increasing its customer base by 112% year-on-year by the end of June, to reach 2.2m subscribers. The company said it intends to reach 3.6m users by the end of 2007.
Bakrie's service, as well as competitor Mobile-8 Telecom, is able to offer in-network calls at a very low rate of under RP2000 ($0.20) per hour. This poses a significant challenge to GSM operators, as they target lower-end users.
BTEL's gross revenue has likewise grown, by 63% year-on-year, to reach Rp580bn (around $63.7m) in the first half of 2007. Expanding its coverage this year from the 17 cities at present, this relatively low-cost telecoms player is forcing other players to follow suit.
"We expect we will have coverage in 34 cities by the end of the year," Anindya Novyan Bakrie, president director of BTEL, said. "Our target is to become a national player offering high-quality services and products at affordable prices."
The mobile telecoms market has rapidly grown since the original liberalisation of the sector in the mid-1990s, when XL joined the existing duopoly. Nonetheless, the mobile telecoms sector has remained relatively concentrated, with the two largest companies, Telcomsel and Indosat, accounting for over four fifths of the subscriber base. However, growing competition for the lower segments of customers means that most players are moving towards all-IP networks, most using CDMA technology.
With such an expanding market, reduced pricing seems to be an acceptable cost of taking advantage of promising opportunities. As mobile operators adapt by keeping costs low and offering low-cost services, the lower-income segment of users is increasingly on the radar screen.