Is demand for Indonesia's digital economy growing?


The vibrancy of Indonesia’s digital economy is evident in the ubiquity of the green-uniformed Gojek and Grab delivery drivers navigating via mobile device through the streets of its major cities. Indonesia has the largest and fastest-growing ICT market in South-east Asia and presents an enticing opportunity for investors, thanks to demographic and macroeconomic factors, particularly as the government presses on with its omnibus laws to reform a host of financial, investment, labour and tax regulations.

Structure & Oversight

The Ministry of Communication and Information Technology (MCIT) regulates the telecoms sector. Johnny Plate was appointed minister in October 2020 when President Joko Widodo – better known as President Jokowi – named his first Cabinet after re-election. Within the MCIT, the Directorate General of Post and Telecommunication is tasked with setting and enforcing policy standards relating to telecoms, radio frequency spectrum and satellite orbits.

The Telecommunication and Information Accessibility Agency (BAKTI) is responsible for advancing IT provision in peripheral Indonesia. The BAKTI manages a universal service fund, with a budget exceeding $170m, and supports investment in the Palapa Ring fibre-optic infrastructure network, which circles the archipelago. The fund also subsidises base transceiver stations (BTS) in a number of remote locations, a multifunctional communications satellite expected to come on-line by 2022, and public access internet facilities across Indonesia, according to the “State of Broadband 2019” report conducted by the UN’s International Telecommunication Union (ITU).

Internet & Mobile

In 2018 the number of internet users in Indonesia grew by 10% to 171m, or 64.8% of the population. The majority of users are between 15 and 19 years old, and the highest internet penetration rate is found in Java, followed by Sumatra. According to the “Global Digital Report 2020”, published by Canada’s social media management platform Hootsuite and the UK’s digital marketing agency We Are Social, in January 2020 the number of internet users in Indonesia reached 175.4m, up 17% year-on-year (y-o-y). The report found a total of 160m social media users – representing an increase of 8.1% from April 2019 and accounting for around 59% of the country’s total population.

According to the World Bank, Indonesia’s fixed broadband penetration per 100 people rose to 3.3 in 2018, up from 2.4 the previous year. By the same measure, mobile subscriptions fell from 164.4 to 119.3, suggesting a concentration of SIM card ownership as users switch to a single-service provider rather than hold different SIM cards for data and telephone purposes, for example.

The Economist Intelligence Unit (EIU) ranked Indonesia 57th out of 100 countries in its Inclusive Internet Index 2020, which assesses four metrics: availability (wherein Indonesia ranked 55th), affordability (61st), relevance (62nd) and readiness (40th). Indonesia’s score of 66.4 out of 100 places it fourth globally among lower- and middle-income countries – behind India, Vietnam and Mongolia. According to the EIU, Indonesia struggles to ensure affordability of mobile and fixed broadband data, and local content availability leaves much room for improvement. This makes clear the trajectory for public policy efforts to further develop the segment as part of wider efforts to steer the country through the Fourth Industrial Revolution (4IR), which is based on the application of new digital and automated technologies.

The “Global Digital Report 2020” counted 338.2m mobile connections in January 2020, up 4.6% y-o-y and equivalent to 124% penetration. Indonesia is a mobile-first country, a fact strongly illustrated by the fact that WhatsApp is among the primary means of communication – not just for social conversation, but for business communication as well. Indonesians are connected to mobile internet for approximately four hours a day, among the top-10 countries in the world by mobile internet usage – compared to a global average of three hours and 13 minutes – according to the “e-Conomy SEA 2019” report by Google, Temasek, and Bain & Company.

Digital Economy

According to the report, between 2015 and 2019 Indonesia’s digital economy quadrupled in size – at an average growth rate of 49% per year – to reach an estimated $40bn. Meanwhile, the internet economy is forecast to grow to $130bn by 2025, driven by widespread adoption of digital payments, infrastructure improvements and healthy competition between leading tech companies such as domestic ride-hailing and payment platform Gojek and its counterpart, Singapore’s Grab.

As of October 2019 there were 38 licensed e-money operators in Indonesia under Bank Indonesia supervision. Of these, 12 are banks, and the remainder are a mix of state-owned and private companies. Between the first half of 2018 and the first half of 2019 e-money transactions almost tripled, from Rp20.7trn ($1.6bn) to Rp56.1trn ($4bn). This was largely due to the proliferation of digital payment infrastructure, supported by a national payment gateway that offers a range of options to the growing number of Indonesians included in the banking system (see Fintech chapter).

The digital economy is Indonesia’s greatest investment success story: until as recently as 2016 e-commerce had been on a restricted investment list; however, online marketplaces, user-generated content web portals and reservation services are now open to 100% foreign ownership. From 2013 to 2016 the sector attracted approximately $3bn in foreign direct investment. Substantially more is expected in the coming years, following a number of strategic decisions by international technology companies. For example, Amazon Web Services has announced plans to build an infrastructure and data centre base in Jakarta, slated to be operational by 2022. Alibaba, Google and Microsoft have also pledged investments after receiving assurances on data storage regulations (see analysis).


Moreover, in 2019 Indonesia expanded its list of so-called pioneer industries – which are eligible for tax holidays linked to the size of their investment – to include key segments of the digital economy such as data processing and related activities. This Ministry of Finance regulation also introduced a new online single submission licensing system for processing tax holiday applications, promising to return a decision within five days of the request (see Tax chapter).

Early April 2020 saw the issuance of a new digital tax, which aims to level the playing field between e-commerce retailers and their brick-and-mortar counterparts, as previously only the latter were required to pay value-added tax. This should help Indonesia improve tax collection, especially as more transactions are moving online in response to the Covid-19 crisis. The proposal initially faced opposition from domestic e-commerce players, as well as their foreign investors and some international firms that would also be subject to the tax despite not maintaining a physical presence in the country.

In October 2019 local digital payment firm OVO became Indonesia’s fifth unicorn, a term for a start-up valued at $1bn or more – indicating the digital economy’s appeal to both local and overseas investors. Nonetheless, questions remain regarding the depth and sustainability of the market. Though investors in the capital market have been drawn to digital service companies in recent years, some observers question whether Indonesia can develop its digital economy alone, relying solely on factors such as the size of the market. Some popular e-commerce websites, such as Tokopedia, have access to capital and strategic backing from foreign partners, but this is true of relatively few firms in the country.

Tokopedia entered 2020 preparing to secure an investment round of $1.5bn from Temasek, Alibaba and SoftBank, which would value the company at up to $9bn. Notably, this would push the company towards a decacorn $10bn valuation – a status thus far only Gojek has achieved. Meanwhile, Gojek and Grab are engaged in a race to build ecosystems that offer financial, transport and lifestyle services. In addition,, which is backed by investment from Tencent, is making a strategic push to expand its online-to-offline retail offering.

In April 2019 Japan’s Mitsubishi led investment in Gojek, with around $1bn. At the same time, Gojek took a minority shareholding in dominant domestic retailer Alfamart – a company in which Mitsubishi also holds an investment. Consequently, customers in Alfamart stores can only use GoPay – an indication of where the market may be heading as competition intensifies. In December 2019 Gojek announced it would stop five out of seven services under its GoLife app as a means of streamlining performance.

The ballooning digital economy is supporting growth in ancillary services. According to Sudibyo Susanto, vice-president of sales and marketing for enterprise communication firm Selindo Alpha, banking and insurance is the company’s largest and fastest-growing market, supported by solid orders from telecoms, mining and manufacturing firms. “Speech and text analysis is a growing segment as banks seek insights into customer behaviour,” Susanto told OBG. In addition, banks are working to establish voice biometrics and facial recognition to further improve authentication and automation in workflows.

Enabling the small and medium-sized enterprises (SMEs) that contribute over half of GDP and employ more than 95% of the workforce will be crucial for Indonesia’s digital economy to effectively take flight. A number of those companies are unbanked and unable to open formal bank accounts – fintech presents a potential solution to this. For example, Jakarta-based KoinWorks has partnered with the Ministry of Cooperatives and SMEs to provide lending and mentoring on financing and investment to almost 5000 companies across the country.

Smart City Visions

In July 2019 SoftBank and Grab announced they would invest around $2bn in Indonesia over the next five years, pledging to create a transport network based on an electric vehicle ecosystem that will drive cities towards a cleaner and greener transportation grid.

The plan preceded President Jokowi’s announcement that he aims for Indonesia’s new capital city in East Kalimantan to be the first capital city with mass and private transportation using autonomous and electric vehicles. The capital relocation – originally scheduled for 2024, though funds are temporarily being redirected towards the fight against Covid-19 – is expected to cost Rp466trn ($32.9bn) and will create a number of opportunities in smart city design and implementation. For example, Masayoshi Son, CEO and founder of SoftBank, has expressed willingness to invest tens of billions of dollars into a smart, clean city that leverages technological development, particularly in terms of artificial intelligence (AI), according to local media.

Jakarta, one of the most densely urbanised cities in the world, is planned to become a smart city by 2025. A framework is currently being defined to help achieve this goal, in conjunction with partners including Tokopedia; Trafi, which provides public transport information; big data analytics firm Nodefulx; and Qlue Performa Indonesia, a platform for smart city consumer feedback. In parallel, the government is promoting its Making Indonesia 4.0 policy, which seeks to improve manufacturing productivity and spur high-value job creation by harnessing the new technologies brought by the 4IR. This policy is set to court investment in related technologies such as robotic and sensor technology, the internet of things, AI, 3D printing and human-machine interfaces. Meanwhile, a lack of digital talent and skills training facilities presents a potential obstacle to the growth of the digital economy. “Indonesia has a demographic bonus, but human capital development is urgently needed, as many people remain unskilled,” Handy Surya Wirawan, president director of Packet Systems Indonesia, a Jakarta-based ICT systems integrator, told OBG. “For example, data scientists, software developers and cloud architects are hard to find within the Indonesian ICT sector.”

The government’s roadmap includes an increased focus on boosting the quality of local human resources, with the administration particularly keen to see additional vocational and technical training centres created, linked to the needs of industry. Concerned parties should be reassured, then, by the decision of technology giant Apple to make Jakarta the location for its inaugural developer academy in South-east Asia. The first cohort of 75 students commenced training on iOS app development in March 2019, in collaboration with BINUS University. The government has also added software programming to a list of fields eligible for tax allowances, in a bid to encourage the development of a robust local mobile app development industry.


In 2019 the cancellation of a merger between Malaysia’s Axiata Group and Oslo-based Telenor – the parents of two of Indonesia’s leading telecoms companies – ended plans to unite a 300m-strong customer base across nine countries. The merger would have established a synergy with a value of approximately $5bn, with implications for XL Axiata, Indonesia’s largest private telco, which is majority-owned by Axiata Group.

Indonesia’s government is keen to encourage domestic consolidation among the country’s five main cellular operators: XL Axiata; Hutchison 3 Indonesia (Tri), located in South Jakarta; Indosat Oreedoo, the local branch of the Qatar-based telco; Telkomsel, jointly owned by Singapore’s Singtel and Telkom Indonesia; and Jakarta-headquartered Smartfren Telecom. Key factors influencing consolidation include the financial challenges posed by high capital expenditure requirements across Indonesia’s sprawling territory, and related concerns surrounding quality of service. However, regulatory barriers remain problematic: there is a notable lack of clarity around the allocation of spectrum assets in the event of a merger, and until recently there have been doubts about the commercial viability of potential tie-ups.

“Political considerations play a key role, as any potential merger would impact a number of vital sectors,and affect how society sees government,” Anastasia Ekoputri, chief insight officer at Jakarta-headquartered consumer research firm Alvara, told OBG. “If we conduct negotiations with foreign parties, there is also a security interest to consider.”

In September 2019 local media reported that Axiata Group was keen to sell a stake in XL Axiata, in which it holds a 66.4% share, and that the operator had received an offer from Hong Kong’s Hutchison Holdings; however, this was unconfirmed as of May 2020. In 2019 Hutchison-owned Tri was at the centre of merger rumours involving XL Axiata, Indosat and Smartfren, after receiving a Rp47trn ($3.3bn) capital injection from shareholders. Indosat and Smartfren have been the subject of merger speculation of their own, with both of the companies’ stocks surging by over 100% in early 2019, before returning to normal levels when merger talks did not come to fruition.


Recent results suggest Indonesia’s telcos are improving their financial performance after all players – with the exception of Telkomsel – suffered losses in 2018. In keeping with global trends, customers are switching from conventional telephone services to online messaging, leading to disruption as telcos invest in improved infrastructure to keep pace with demand for data services.

Prior to Covid-19, Singapore’s DBS Bank forecast data revenue would grow by about 25% in 2020, driven largely by rapid growth in services and an overall stabilisation of data yields. This comes amid anticipated two-fold growth in data usage by the end of 2020 or 2021, which would place Indonesia – with monthly usage averages of around 4.2 GB – closer to figures in India (10 GB) and Thailand (11.5 GB). This forecast takes into consideration the relatively low fixed broadband penetration across the archipelago, which leaves subscribers with few choices besides rapidly improving mobile wireless services.

In FY 2019 XL Axiata’s net profit of Rp713bn ($50.3m) met analyst expectations, driven largely by the upselling of data products. Total subscribers grew to approximately 56.7m, driven by strong growth outside Java, where increasing rates of smartphone penetration offers large potential.

On the back of strong data business growth, Telkom’s net profit rose by 15.6% y-o-y to Rp16.5trn ($1.2bn) between January and September 2019, up from Rp14.2trn ($1bn) over the same period in 2018. As of mid-May 2020 the company’s 2019 annual report had yet to be issued. Mobile digital revenue rose by 27.9%, while data and internet services’ contribution to turnover increased from 51.9% to 59.1%. Telkomsel, Telkom’s mobile subsidiary, counted 170.9m customers at end-September 2019, with two-thirds of those data subscribers consuming an average of 5 GB per month, marking an increase of approximately 57.1% y-o-y. As of December 31, 2019 Smartfren’s revenue had increased by 27% to Rp6.98trn ($492.1m), while its net loss narrowed by 38% to Rp2.2trn ($155.1m), largely due to falling subscriber acquisition costs and foreign exchange gains.

Indosat Ooredoo turned a loss of Rp2.4trn ($169.2m) in 2018 into a profit of Rp1.6trn ($112.8m) in 2019. This positive trajectory was driven by market-leading revenue growth of 12.9% y-o-y to Rp26.1trn ($1.8bn), underpinned by a 14.7% increase in mobile income to Rp20.7trn ($1.5bn). The number of mobile subscribers rose by 1.2m to reach a total of 53.2m. Data traffic grew substantially, by 71.7%, as 4G penetration increased to 90% – up from 44% in 2017 – as a result of base station rollout.

LTE-A Developments

Telkom Indonesia is the largest independent owner-operator of telecoms tower infrastructure, and offers multi-tenant co-location services to the market. Combined with other large telecoms tower providers Tower Bersama Infrastructure and Solusi Tunas Pratama, the ownership of the three companies account for around half of Indonesia’s total tower tenancies.

One possible outcome worthy of note is that the reduced overlap resulting from telco consolidation could negatively impact tower company business because of reduced tenancy at overlapping sites. However, DBS Bank suggests that, as leasing arrangements between telcos and tower companies allow for the relocation of tenancy and each caters to a diverse client base, the impact of reduced tenancy could be minimised through relocations to more appropriate sites. The remaining operators in the market would then be more financially resilient and capable of funding targeted network expansions.

Meanwhile, Indonesia’s telcos are engaged in a race to seize market share by improving LTE-A network provision, with vigorous 4G rollout and existing network upgrades occurring across the board. This is particularly true beyond Java, where telcos are bound by universal service obligations (USOs) to commit 1.25% of gross revenue to a national USO programme that focuses on delivering broadband services. For example, Telkom announced it has deployed 15,000 BTS – which facilitate wireless communication between user equipment and a network – in the country’s “frontier, outermost and disadvantaged” regions. This includes 7800 broadband BTS – with another 892 installed in compliance with USOs, connecting 841 villages that previously received no communications services. As of end-September 2019 Telkom has installed 77,500 additional 4G BTS, increasing the number of 2G, 3G and 4G BTS by 14.5% y-o-y. The number of 3G and 4G BTS increased by 20% to 159,600 of the total 209,910 units. Telkom estimates that the rollout covers 97% of the country.

Meanwhile, in February 2020 XL Axiata announced sales of approximately 2800 towers to local players for Rp4.05trn ($285.5m), to help alleviate debt. The company maintains a base station footprint of 129,000 sites, 30% of which provide 4G coverage. Management is focused on investing in transmission, back-hauls and upgrades in line with its focus on data-fuelled revenue growth. In 2019 Indosat added almost 50,000 base stations, bringing its total to 124,140 units – of which 48,000 are 4G – with some 30% of BTS connected to fibre.

As of mid-2019 its LTE mobile network served 422 cities, covering some 80% of the population, and is set to cover 90% upon the completion of an ongoing Rp10trn ($705m) expansion. In October 2019 the company agreed to sell 3100 towers to Dayamitra Telekomunikasi and Telkom Indonesia in a Rp6.4trn ($451.2m) transaction, and set aside $2bn for further expansion between 2019 and 2022, adding about 18,000 BTS, primarily outside Java. In 2019 Smartfren activated its 4G LTE mobile network in Pontianak and Singkawang, offering competitive starter packages that grant users up to 30 GB data and free unlimited calls to other Smartfren numbers for Rp60,000 ($4.23) per month. The company’s 4G LTE users expanded by 45% in the first half of the year, with the number rising to 17.8m as of June 2019, up from 12.3m in January.

Expansion & Upgrades

In October 2019 Indonesia announced the completion of the 13,000-km Palapa Ring fibre-optic infrastructure network, which links Sabang in the west to Merauke in the east, and connects the northern-most island of Miangas to the southern-most island of Rote. This adds some 6878 km to the archipelago’s fibre infrastructure.

Private sector players are investing heavily in infrastructure improvements, both as a means to prepare their networks for the arrival of 5G (see analysis) and to stay competitive as demand for data intensifies across existing networks. The cost of the Palapa Ring project transmission cable – which passes under the sea – and related microwave transmissions and telco towers, totalled Rp7.6trn ($537.9m). However, more can be done to fully leverage this development.

“The broadband ring is great news for connectivity in Indonesia. The challenge now is how to connect the last mile to the village level,” Bhima Yudhistira, economist at the Institute for Development of Economics and Finance, told OBG. “We need financing, and we expect a state-owned enterprise to come in.” In December 2019 Telkom announced that it had completed 100% fibre-optic cabling coverage in Denpasar, Bali, as part of a government programme to provide broadband in 199 cities. The launch was supported by 3152 km of fibre-optic infrastructure and 854 BTS from Telkomsel.

Meanwhile, as part of its 2019 business strategy, XL Axiata has announced plans to extend its existing 45,000-km fibre network by an additional 2500 km, while also linking 10,000 BTS for back-haul. As part of its plans for expanding outside of Java, the company has started a network in the Anambas Islands Recency. Future plans include network expansion in Eastern Indonesia, serving East Nusa Tenggara, North Maluku, Maluku and Papua.

Upon completion, XL Axiata’s mobile network is expected to span 440 cities and 95% of the population, supported by inter-island fibre. As for Indosat, Nokia confirmed it will implement an upgrade to its mobile network – starting with Java – to ensure it is prepared for 5G and to support the 10-GB ethernet (GE) and 100 GE links required in urban areas. In April 2019 national infrastructure service provider FiberStar signed with Huawei to expand its high-speed fibre network services through the construction of a 1-Tbps backbone network linking Jakarta with Surabaya, as part of a deepening partnership in both fixed networks and data centres.

Elsewhere, the December 2019 launch of the Kacific-1 high-throughput Ka-band satellite promises to provide stable, high-speed, low-cost broadband internet access across remote, rural and suburban areas, once service agreements are signed.


Indonesia ranked 41st globally on the ITU’s Global Cybersecurity Index 2018, and ninth in the Asia-Pacific region, ahead of Vietnam and the Philippines but behind Singapore and Malaysia. There are government strategies in place to help the country maintain this strong position within the region.

In its “ASEAN Cyberthreat Assessment 2020” report, Interpol identified Indonesia’s ballooning digital economy as a leading target for cyberattacks, with phishing attacks against service providers such as Facebook, PayPal and Netflix particularly prevalent, and overall the highest risk in the region. Indonesia has also been a primary target of mobile banking malware, including ransomware, cryptomining and mobile banking Trojans. In January 2020 Interpol helped coordinate an operation to arrest a trio in Indonesia that was operating a multinational malware campaign targeting shopping websites with a JavaScript sniffer, stealing customers’ card details and other personal information. However, according to some industry players, the authorities are overwhelmed by the scale and frequency of attacks, and lack a cybersecurity legal framework under which to prosecute. To combat this, a draft cybersecurity and resilience law is set to be approved in 2020, and although Indonesia lacks data-protection regulations, the government has prioritised General Data Protection Regulation in Parliament.

In the meantime, improved coordination between the police, the National Cyber and Encryption Agency – earmarked to become the primary implementing body under the draft law – and the military, along with stricter education and enforcement of basic online security measures, will be necessary for Indonesia to cultivate a safe and secure digital ecosystem.


Although Indonesia, like the rest of the world, is feeling the economic impact of the Covid-19 pandemic, the country’s digital economy is primed for region-leading growth in the years ahead. Longstanding government plans to improve internet and mobile data service provision across the country are coming to fruition, in tandem with the evolution of a dynamic digital services ecosystem steered by homegrown unicorns and supported by a thriving market for ancillary services. Domestic telcos are taking advantage of surging demand for data services, despite the difficulties inherent in expanding services in a geographically disparate country.

Challenges ahead include an uncertain macroeconomic environment weighed down by the Covid-19 virus, and an undefined regulatory and legal framework under which cybercrime threatens to undermine confidence and trust. However, these issues are not insurmountable, and it is hoped that President Jokowi’s administration has the political will – and international support – to meet the challenges and maintain its position at the region’s digital forefront.

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The Report: Indonesia 2020

ICT chapter from The Report: Indonesia 2020

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