With a large population and low penetration rates compared with developed markets, Indonesia's telecommunications sector has seen tremendous growth and foreign interest in recent years. While the consensus is that the market is far from saturation point, many believe that 2009 could shape up to be a year of consolidation, as impressive growth has coincided with intense price competition and eroding margins.
In a country in which the majority of mobile users are in the pre-paid segment, market penetration is more often measured by connections rather than subscribers. As of September 2008, the number of connections in the country stood at 131.64m. With 240m people in the country, and given that many Indonesians hold more than one active sim card, industry estimates of actual mobile phone ownership and usage in Indonesia range between 35 and 50% of the population.
In 2001, only 1.7% of Indonesians owned a mobile phone, and in 2005 the country had only three operators. This massive growth potential lured many new entrants as well as foreign participation. Today, there are 10 mobile phone operators in the market, many of whom have regional and global telecoms giants as strategic shareholders.
While the industry has seen tremendous annual connections growth (47.9% in 2007 and 57.1% in 2008), many believe that this has come as a result of increased affordability driven by competition, with prices having been slashed significantly in the past two years.
Bengt Thornberg, president of Ericsson Indonesia, told OBG "Deregulation and increased competition in Indonesia's telecoms sector has had its desired affect of driving down prices significantly over the past few years. Many of the newer operators have brought with them fresh ideas and innovative practices to the market. This has all been beneficial for the customers."
Operator profits have been further eroded by intense spending on promotions, with many attractive introductory offers to lure consumers into switching providers. It is estimated that up to 25m people switch providers every month, making Indonesia one of the highest churning markets in the world? While monthly ARPU (Average Revenue per User) of $5.64 as of Q3 2008 is considered to be amongst the lowest in the world.
While analysts agree that increased competition has had the desired result of making mobile services more affordable to the masses, some worry that reckless price undercutting may lead to a reduction in infrastructure improvements and maintenance.
Hasnul Suhaimi, president director of Excelcomindo (XL) Pratama, the nation's third largest cellular phone service provider, told OBG, "At the beginning, the battle ground was all about building capacity to gain coverage. Today, with the emergence of 10 players in the market, price competition cannot be avoided unless the government interferes. Once prices bottom out and consolidation is achieved, the hope is that the next battleground for market share will be based on service quality. Ultimately, we hope to see competition revolve around value-added services and next generation technologies, but this will still take a while".
Altogether, as of the third quarter of 2008, the top three mobile players accounted for 92% of the market. Telkomsel is the largest mobile operator in the country with roughly 46% market share (60.5m connections). Satelindo, the mobile arm of Indosat, comes second with 27% market share, followed by XL, with 19.1% of the market. All three players have significant foreign shareholders, a testament to the fact that Indonesia is considered a market that many regional and global players want to be a part of.
State-owned PT Telkom controls a 65% stake in PT Telekomunikasi Selular (Telkomsel), while the remaining 35% is owned by Singapore's SingTel. Also, Qatar's Q-Tel owns 41% of Indosat, and is currently tending shares to raise its stake to the maximum 65% foreign ownership cap allowed by the Indonesian government. Meanwhile, XL has strategic foreign shareholders through Malaysia's TMI and the United Arab Emirates' Etisalaat.
Other foreign players in the market include Hong Kong's Hutchison, and Malaysia's Maxis and Saudi Telecom Company (STC), who together recently jointly acquired Natrindo and relaunched it as Axis. Axis is currently making an aggressive push following its relaunch, having added 1.15 new customers in the third quarter of 2008 alone.
While analysts expect Telkomsel, Satelindo and XL's growth in profit for 2009 to still exceed the anticipated national GDP growth of 4.5%, all three are forecast to experience lower growth rates than those achieved in 2008. With growth rates expected to continue to flatten out in years ahead, many foresee consolidation on the horizon.
According to a recent report issued by OSK Research, Hutchison is believed to be considering exiting the market, citing that it does not want to be part of a possible industry consolidation. Operating under the brand name "3", Huchison had 3.6m subscribers and a market share of 2.8% at the end of September 2008.
But Richard Tan, managing director, commercial group, PT Smart Telecom, a CDMA provider that launched its services in late 2007, told OBG, "Consolidation is not necessary. Yes, the sector is dominated by the three large incumbents, but if you have a strong niche proposition, and are determined and prudent, there are enough opportunities in the market for everyone to compete."
While slow growth on the operator side may point to little room for more foreign participation, one area that still remains lucrative for further foreign involvement is the infrastructure side of the equation. The leading operators, realising that service quality and scale will be a critical factor of success in years ahead, have each announced massive spending on infrastructure. Overall, it is estimated that Indonesian mobile operators will spend up to $4bn in engineering related services by 2010.
Global telecoms network giants such as Erricsson and Nokia Siemens consider Indonesia to be a top growth market for their operations, and increasingly, Chinese providers such as Huawei, are winning large contracts.