Driven by rising demand for new, affordable technology products and services among the nation’s large youth population, as well as increased investments by both the state and the private sector, Indonesia’s ICT sector expanded rapidly in 2016 and the first half of 2017. By January 2017 Indonesia’s mobile connectivity penetration rate – a measure of the number of mobile subscriptions as a percentage of total population – stood at 142%, which was among the highest in the region and up considerably from as recently as two years ago.
FUTURE GROWTH: Furthermore, even as total internet penetration remained somewhat low at around 51% in 2016, according to data from We Are Social, a UK-based digital media research firm, some 93% of Indonesian internet users access the web via their smartphones. According to a 2017 report by research firm eMarketer, smartphone penetration is expected to increase by 50% over the next half decade. This would place Indonesia among the largest smartphone markets in the world.
“Things have been going very well in recent years for all of our members,” Timothy Siddik, the chairman of the supervisory board at the Association of IT Industry Indonesia, a professional sector association with around 120 member companies, told OBG. “In terms of organic growth this market is absolutely enormous, and the prospects for the future are quite encouraging.”
HURDLES: Despite this generally optimistic outlook, various challenges remain, both for industry players, the state and technology consumers alike. One key hurdle is the persistence of the rural-urban divide. Indonesia’s geography is such that rolling out genuinely nationwide networks, be it mobile telecoms, fixed broadband or any other kind of expansive network technology, is expensive and difficult. Consequently, while most firms are able to offer cutting-edge ICT products and services in Jakarta and other urban centres, where the cost of installation and operation is offset by high demand and, consequently, strong revenues, the technology in place in many rural areas remains outdated. As a growing number of Indonesians, and particularly those living in rural areas, acquire smartphones in the coming years, however, this situation is expected to improve as a result of growing demand for data services. According to data from GSMA Intelligence, a global telecoms industry association, by 2018, 41% of mobile connections in the Asia-Pacific region will be 4G compared to 23% for 3G and 36% for 2G. Nonetheless, the cost of smartphone handsets remains unaffordable for many Indonesian consumers. Lastly, cybersecurity, e-commerce and the fixed broadband segment are all considered to present a number of challenges – and, hence, opportunities – among Indonesian ICT players.
Much of the optimism across the industry recently has to do with the government’s ability and willingness to address some of the more trenchant challenges facing the ICT sector. Supporting the development of ICT across the country was a major plank of President Joko Widodo’s election campaign in 2013-14, and it has been a key area of focus since his administration took office in October 2014. Under President Widodo the state has made considerable progress on the Indonesia Broadband Plan (IBP), a large-scale effort to install fixed-line network capacity in all parts of the country, thereby ensuring access for rural citizens. “The broadband plan is very ambitious and is focused explicitly on ensuring digital inclusion across the nation,” Mohammad Chowdhury, a technology, media and telecoms leader at PwC Indonesia, told OBG. “And they have been very successful with this so far, though of course an enormous amount of work remains to be done.”
HISTORY: The history of ICT in Indonesia dates back to the telegraph, which was introduced to the country by the Dutch colonial government late in the 19th century. During this period telegraph services – and in 1882 the country’s first telephone services – were owned and operated by private companies with close ties to the Dutch state. This situation changed in 1906 when colonial authorities nationalised the emergent telecoms sector. When Indonesia gained independence in the 1960s the new national government retained control over the industry, though it set about modernising and reorganising the sector. The first move in this direction took place in 1965 and involved the formation of two state-owned firm: Posdan Giro to oversee postal services and Telekomunikasi to manage telecoms.
Over the subsequent three decades these entities were renamed and reorganised several times. Finally, in the early 1990s the state organised share sales for its telecoms assets as part of a far-reaching privatisation effort. A significant percentage of each of the government’s two telecoms firms, Telekomunikas Indonesia (Telkom) and the Indonesian Satellite Corporation (Indosat), was sold to private citizens and investment bodies, though the state retained controlling interests in both entities. Telkom, which manages domestic telecoms services, and Indosat, which is in charge of international connectivity, remain state-controlled.
Beginning with the introduction of the nation’s first analogue telecoms networks in the 1980s, private telecoms operators moved into Indonesia. By 1995 the nation was home to around 120,000 mobile subscribers, which was equal to just 0.01% of the total population, according to data provided by the UN’s International Telecommunication Union (ITU). By 1998 these figures had jumped to 941,000 mobile subscribers, or 0.5% of the population, and by the end of 2000 some 3.7m Indonesians subscribed to mobile services, which was equal to nearly 2% of the population. At this point some seven mobile operators were active in the country, including one owned and operated by Telkom.
NETWORK DEVELOPMENT: Meanwhile, the provision of early internet services was ramping up across the region. Indonesia’s first internet service provider (ISP), Indonet, launched dial-up services in 1994, and by the end of 1996 some 20 ISPs were up and running across the country, though primarily clustered in and around Jakarta. The government acknowledged the growing importance of internet services in 1998 when it established a dedicated oversight body, the Ministry of Communications, to oversee the industry. Prior to this decision telecoms regulation was implemented by the Ministry of Tourism, Post and Telecommunications. In 2005 the government once again changed the name of the ICT sector oversight body to the Ministry of Communications and Information Technology (MCIT) in a move that was widely regarded as a reflection of the rising importance of the internet at the time. This name remains in place today.
Since the creation of the MCIT, and particularly over the past five years, the government has taken a proactive stance towards the ICT industry. Licences issued to mobile telecoms providers, for example, require that these companies build out their networks to provide high-quality services across the country so as to ensure reliable access to communications for all of Indonesia’s population. As the current data indicates, in practice this has proven to be difficult.
IN FIGURES: As of the end of the first quarter of 2016, Indonesia’s six mobile telecoms operators reported a total of 333.6m subscribers, which represented a penetration rate of nearly 130%. According to the ITU, this figure has grown rapidly over the past five years. Indeed, as recently as the end of 2013 the country was home to only 313.2m total mobile subscribers, and three years prior to that just 211.3m. From 2006 through the end of 2015 Indonesia’s mobile sector was among the fastest growing in the world, posting overall expansion in excess of 600%.
As this figure indicates, many Indonesians own multiple handsets and/or SIM cards, likely in an effort to take advantage of variable pricing on different networks. As the high mobile subscription penetration rate also suggests, future revenues in mobile are expected to come primarily from a shift from talk to data services. This transition is already well under way in Indonesia and across the region. According to a 2017 report by the market research firm GFK, as of the end of 2016 smartphone penetration in the country was at around 38%, and is forecast to grow to 50% through 2022.
Similarly, in 2015 eMarketer reported that Indonesia was home to 55m smartphone users, but that this figure was expected to rise to 92m as soon as 2019. As smartphones become increasingly normal across the country, mobile operators will likely see considerable growth in data subscriptions.
Internet access and usage has also grown rapidly in recent years. According to data published by the Indonesian Internet Service Provider Association (APJII), as of mid-2016 the country was home to 132.7m internet users, which was equal to just under 52% of the population. This figure represents growth of more than 50% since the end of 2014, when there were just 88m internet users, according to APJII statistics. The data is illustrative of the trend towards mobile data internet access in Indonesia and across the region. As of mid-June 2016 some 63.1m Indonesians accessed the internet via their mobile handsets, while around 67m logged on either through mobile handset or computer. Meanwhile, just 2.2m people logged in solely via computer. Furthermore, the single largest groups of people who use the internet in the country are students, private sector employees and people employed in the health sector (see analysis).
REGIONAL DATA: This data is roughly in line with a broader regional trend towards increased mobile subscriptions, mobile data and internet usage, particularly among South-east Asia’s large youth population. According to a 2017 report from GSMA, by the end of 2016 mobile penetration across the region was at approximately 66%, up from just 51% in 2012 and 40% in 2010. Based on this data, Indonesia has seen more rapid uptake of communications technology than many of its regional neighbours.
According to the GSMA, in 2016 the country’s mobile subscriber penetration reached 79%, compared with 77% in Malaysia, 73% in the Philippines and 47% in Myanmar. Furthermore, GSMA forecasts indicate that between 2016 and 2020 Indonesians will account for 3% of new global mobile subscribers, making it the fastest-growing market in the region after China.
However, Indonesia lags slightly behind the region in terms of 3G and 4G subscribers. At the end of 2016 around 47% of all mobile subscriptions in the Asia-Pacific region accessed only 2G services, whereas in Indonesia the figure was closer to 55%, according to the GSMA. Similarly, some 24% of regional subscribers use 3G services, and 29% use 4G LTE services, while in Indonesia the corresponding figures are 34% and 12%, respectively. Nonetheless, as the GSMA reports, mobile data traffic across the region is forecast to quadruple between 2016 and the end of 2020, driving mobile data revenue growth of 4.2% on an annual basis. According to these projections, by 2020 each subscriber in the Asia-Pacific region will use an average of 6 GB of mobile data per month, up from 1.4 GB currently.
RISING EXPENDITURE: Projected growth in Indonesia is in line with these regional figures. According to data provided by the US-based research firm International Data Corporation (IDC), the country’s overall spending on ICT is expected to increase by 16% during the 2016-20 period. The bulk of this spending will go towards digital devices, including mobile handsets, tablets and, to a lesser extent, PCs. “So far, devices are still the biggest contributor to Indonesia’s IT spending,” Mevira Munindra, the consulting research manager at the Indonesian office of the IDC, told regional media in early 2017. “However, we are seeing more and more companies in Indonesia embracing emerging technologies such as cloud, analytics, managed services [and] data centre management, [which] are provided by tech vendors.”
Corporate software spending is expected to increase by 33% by 2020, according to GSMA data, from an estimated Rp9trn ($678.4m) in 2017 to Rp12trn ($904.5m) by the end of 2020. Driving this growth will be the banking, financial services and insurance (BFSI), retail and manufacturing sectors, which together constitute the top spenders on ICT in Indonesia. The retail industry alone accounted for more than 20% of all ICT spending among Indonesian corporates in 2016, due primarily to rising pressure to invest in e-commerce capabilities. Similarly, demand for digital financial services has pushed BFSI institutions to invest in cloud services. “Most Indonesian banks – around 70% of them – are looking at cloud as a way to alleviate infrastructure costs in the next three years,” said Munindra.
GOVERNMENT SPENDING: Another key driver of ICT expenditure in recent years has been the government. Under the IBP, a five-year initiative launched in 2014 by President Widodo’s incoming administration, the government aims to connect 71% of urban households and 49% of rural households to the internet by 2019. Underpinning this target is the Palapa Ring, an ongoing infrastructure project comprising the installation of some 35,000 km of fibre-optic cables.
In particular, the project is aimed at connecting remote and rural areas that currently suffer from poor connectivity. With funding from a handful of state-owned financial institutions, and implementation being led by Telkom with the assistance of a number of private conglomerates, work on the Palapa Ring began in earnest in 2016 (see analysis). “As of mid-2017, Telkom had passed some 6m homes with new fibre-optic lines – this is quite an achievement given the geographical challenges present in Indonesia,” Chowdhury told OBG. “Of course, to date only around 2m homes have actually been connected to the new network, so there remains a huge amount of work to be done still.”
In addition to connecting the country to the internet, the government continues to invest in upgrading technology in sectors such as transport, and aerospace and defence. “With the size and complexity of Indonesian maritime borders, it is important for the country to always use new technologies that can increase the reach of surveillance, especially within the Global Maritime Axis strategy,” Leonardus Muryono, president director of Laman Tekno Digital, a company providing technology and solutions in the fields of seismology, meteorology and military activities, told OBG.
TELKOMSEL: The mobile sector in Indonesia is heavily concentrated, with the four largest mobile operators controlling around 90% of all subscribers at the end of 2016, according to Indonesia Investments, a subsidiary of Netherlands-based Van der Schaar Investments. The largest player is Telekomunikasi Seluler ( Telkomsel), which had 173.9m subscribers at the end of 2016, or more than 52% of the total market. Some 60m of Telkomsel’s subscribers had mobile data packages at the end of 2016, and most all of the firm’s total subscribers were on prepaid plans. Telkomsel has been publicly listed since 1995, though the government retains control with 51.19% of its total shares. Telkom Group, Telkomsel’s parent company, relies to a large degree on revenues from its mobile subsidiary. In recent years Telkomsel has contributed 60% of the group’s revenues.
In 2016 the Telkom Group as a whole posted total revenues of Rp116.33trn ($8.8bn), up significantly from Rp102.47trn ($7.7bn) in 2015 and Rp89.69trn ($6.8bn) in 2014. Indeed, the group has seen rising revenues consistently over the past decade, driven by the rapid increase in mobile subscribers. In addition to mobile, the Telkom Group is active across a wide range of additional ICT business segments. The firm reported 10.7m fixed-line subscribers at the end of 2016, down from almost 27m as recently as 2012. Conversely, between 2012 and 2016 Telkom’s fixed-broadband subscribers almost doubled, increasing from 2.3m to 4.3m, and almost quadruple from the 2009 figure of 1.1m.
INDOSAT OOREDOO: Indonesia’s second-largest mobile network operator is Indosat Ooredoo, which was established in 1967 and from the 1980s through the mid-2000s was owned by the government. In 2008 a controlling share in the firm was acquired by Qatar Telecom, which is owned by the Qatari government. Recent media reports indicate that as of late 2016 Qatar was considering selling its stake in Indosat, which could translate into a major opportunity for another mobile operator looking to move into Indonesia.
By year-end 2016 the firm reported total subscribers of 85.7m, up significantly from 69.7m at the end of the previous year, and almost double the subscriber base of 44.3m in 2010. Like Telkomsel, almost all of Indosat’s subscribers were prepaid customers. Also like its larger competitor, Indosat has worked to diversify its business activities in Indonesia in recent years. In addition to its mobile business, it operates fixed-line broadband and telephone services. In 2016 some 83% of Indosat’s revenues came from its mobile phone business, followed by fixed data (14%) and fixed telecoms (3%).
XL AXIATA: XL Axiata, the third-largest mobile operator in Indonesia, is a private operator that was initially established in 1989. Today its parent company, the Indonesian firm Axiata Investments, holds controlling stakes in mobile operators across South-east Asia, including in Malaysia, Cambodia, Sri Lanka, Bangladesh and Pakistan. The investment firm also has other interests in countries including India, Thailand and Singapore. Taken together, these assets have made it into one of the largest telecoms holding companies in the South Asia and Asia-Pacific regions.
XL Axiata obtained a mobile licence in Indonesia in 1996. As of the end of 2016 the operator reported 46.5m mobile subscribers in the country, up from 42.1m at the end of 2015. XL Axiata has had a challenging time in recent years, which is due primarily to rising competition from other operators in Indonesia. The company saw declining subscriber numbers in the 2013-15 period, before the recent uptick in 2016. In September 2013 XL Axiata announced it would acquire Axis Telekom Indonesia at a price of $865m.
In line with this recent history, the firm has seen a slight dip in revenues. In 2016 XL Axiata reported gross revenues of Rp21.34trn ($1.6bn), down from Rp22.96trn ($1.7bn) in 2015 and Rp23.57trn ($1.8bn) in 2014. Similarly, the company’s total assets dropped to Rp54.9trn ($4.1bn) at the end of 2016 from a high of Rp63.71trn ($4.8bn) in 2014. However, given the rapid rate of growth in the mobile data market, XL Axiata expects these figures to recover in the near future. As of mid-June 2017 XL Axiata was in the midst of a major expansion of its 4G network, which was seen necessary in order to ensure future revenue growth (see analysis).
HUTCHISON 3 INDONESIA: Hutchison 3 Indonesia, which operates under the brand name Tri, was also in the midst of a major expansion effort in 2017. The firm, which is controlled by the Hong Kong-based company CK Hutchison, announced in March 2017 that its 4G LTE network was available in some 227 cities and districts across 25 Indonesian provinces, including most of the nation’s major urban areas. “Digital and multimedia services are expected to experience rapid growth this year,” Randeep Sing Sekhon, Hutchison 3’s president director in Indonesia, told local media in March 2017. “And in the future the success of these services is reliant on [Tri rolling out] mobile internet infrastructure to support growth, as it is expected to become the main channel to carry such services.”
E-COMMERCE: With digital access and literacy increasing rapidly across the Indonesian archipelago over the past five years, in particular, the digital retail segment is experiencing a period of rapid expansion. Indeed, rising incomes and the subsequent emergence over the past decade of a large and growing middle class population have contributed to rising consumer spending in Indonesia, to the point that many analysts forecast that the country is poised to become one South-east Asia’s largest consumer markets in the near future (see Retail chapter). In 2016 around 13-14% of all Indonesian internet users made a purchase online, which is equal to around 18m people in total, according to data from Indonesia Investments. This figure is expected to rise to 19-20% by 2020, or nearly 26m Indonesians.
As of the end of 2016 Indonesia’s domestic e-commerce segment controlled 5% of the nation’s retail market. By 2020 this figure is expected to quadruple to 20%, according to Statista, a research firm based in Hamburg. Similarly, estimated e-commerce revenues in the country were at $8.24bn in 2016. Over the course of 2017 this figure is forecast to expand by upwards of 21%, driven by rising consumer spending, growing use of mobile data services and increased awareness of the benefits of making purchases online.
At the same time, Indonesia’s e-commerce market faces a number of challenges. Credit cards are a relatively new product in the financial sector, which is considered to be a major hurdle to the development of a large-scale e-commerce market (see Banking chapter). Furthermore, the issues that continue to put pressure on widespread internet usage – including the nation’s challenging geography and a lack of awareness and training among some – also threaten the continued expansion of online purchasing. Nonetheless, the development of a thriving domestic e-commerce corporate sector indicates a significant deal of optimism among local retailers and app developers. Local e-commerce platforms such as Blibli.com, Mataharimall.com, Bhinneka, Kaskus, Tokopedia, OLX and Lazada all point to future growth in this area over the coming years.
DIGITAL SECURITY: In line with the development of the e-commerce segment, in recent years Indonesia’s ICT sector has emphasised the development of digital security. This has to do in large part to the rising number of cyberattacks in recent years. According to the “Unlocking Indonesia’s Digital Opportunity” report published in September 2016 by global consulting firm McKinsey, as of early 2017 the nation was “subject to one medium to major cyberattack a day – most of which originate from within Indonesia’s borders.” Common targets for these attacks include e-commerce websites; other online stores of public information, including state-run operations; and a wide range of additional concerns, including the commodity industry and military installations. Another common focus of cyberattackers in Indonesia are social media websites, which are very popular among Indonesian internet users. Indeed, according to APJII data, more than 90% of the country’s internet users have an account on at least one social media service.
In response to this situation the government has made moves in recent years to establish a dedicated cybersecurity organisation. In early 2017 the nation’s coordinating minister for political, legal and security affairs announced that the country would move forward with the creation of a national cyberagency over the course of the year. The state had reportedly been holding regular preparatory meetings on the subject for more than a year prior to the announcement. President Widodo signed the presidential regulation on the establishment of the Cyber Body and National Encryption Agency (BSSN) in early June 2017. The BSSN will be run by the MCIT, the Indonesia Security Incident Response Team on Internet Infrastructure and the Encryption Agency. “The industry is looking forward to learning about the details of the government’s cybersecurity initiative,” Siddik told OBG. “Given the state’s efforts in this area already, we expect the new agency to be in line with international standards.”
OUTLOOK: The establishment of the BSSN is indicative of the state’s efforts in recent years to ensure that the ICT sector is well positioned in terms of a functional, high-quality regulatory framework. In addition to digital security, the government has also recently launched new policies or is in the process of developing new regulations in areas related to e-commerce, cloud computing and digital education and awareness. The private ICT industry – both within Indonesia and internationally – has responded positively to the state’s efforts. However, many challenges remain. “Indonesia is in the midst of a pretty significant economic transition at the moment,” Chowdhury told OBG. “There has been a lot of progress in many areas, including fibre-optic cable installation, e-commerce and digital security. But of course more work needs to be done.”
Given the potential for long-term revenue growth in most ICT segments, this work is already under way. According to McKinsey, Indonesia’s ICT industry has the potential to generate an economic impact of as much as $150bn by 2020, by focusing on mobile internet, cloud technology, the internet of things, and big data and advanced analytics. With this outlook in mind, and taking into account the state’s recent efforts, most local ICT players are broadly optimistic about the future.
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