Despite its strong long-term growth prospects, 2014 was a challenging year for Indonesia’s telecommunications sector, as operators faced fierce competition and market saturation, while average revenue per user (ARPU) continued to decline. The IT sector, however, showed promising growth, which is expected to continue on the back of the burgeoning data centre, cloud computing and e-commerce segments, with an increasing number of private players benefitting from a tech-savvy consumer base. At the same time, plans to change the licensing model for telecoms operators could expedite ongoing industry consolidation, which gained pace in 2014 with XL Axiata’s acquisition of Axis Telekom, while mobile data demand will continue to soar as major operators roll out 4G long-term evolution (LTE) services to customers. The market’s shift from traditional voice and SMS revenue to data-driven growth should keep operators profitable in the long term, with Indonesia’s sizeable domestic market providing the macro fundamentals for rapid near-term expansion.
Market Overview
Initially, the Ministry of Tourism, Post and Telecommunications regulated the telecoms industry in Indonesia, with the Ministry of Communication assuming this responsibility following the election of former President Susilo Bambang Yudhoyono in March 1998. In 2005 the Ministry of Communications and IT (MCIT) was established and it has since overseen the ICT sector, exercising regulatory authority and formulating relevant industry policies, including radio frequency spectrum allocation.
Indonesia’s telecoms market is one of the most competitive in Asia, with seven operators vying for customers and revenues. Telekomunikasi Indonesia (Telkom), the state-owned incumbent, was first established in 1856, later splitting to create its mobile arm, Telekomunikasi Selular (Telkomsel), in 1995. With ownership of the majority of the archipelago’s copper wire infrastructure, Telkom is the major provider of fixedline telephone services in the country, with a total of 14.1m fixed-line subscribers as of the end of 2014.
The mobile market is dominated by the “big three” operators: Telkomsel, with 140.6m subscribers at the end of 2014; Indosat, which is 65% owned by Qatari operator Ooredoo and had a subscriber base of 63.2m at the end of the year; and XL Axiata, which finalised its $865m acquisition of Axis Telkom in 2014, and reported 62.9m subscribers. The remainder of the market is held by Hutchinson 3 Indonesia, Smartfren Telecom and Bakrie Telecom. Smartfren and Bakrie signed a deal for network sharing in 2014, and are the only two operators offering code division multiple access (CDMA) services, where multiple operators can access the same communication frequency, after Telkom dropped its CDMA platform in 2014.
Fixed-Line Market
Indonesia’s fixed-line market has followed international trends that have seen subscriber numbers plummet since the introduction of mobile technology. Statistics Indonesia, the national statistics agency, reports that the total percentage of households with fixed-line services stood at 13.01% in 2005, before declining to 9.46% in 2010, and hitting a nine-year low in 2013, with just 5.86% of households classified as fixed-line subscribers.
The erosion of fixed internet services was driven by a rise in mobile internet. Indonesia was an early adopter of 3G mobile broadband services, which were first rolled out in 2006, and by 2012 the big three operators were working to commence with 4G LTE services, with consumers increasingly abandoning fixed wireless services in favour of mobile broadband (see analysis).
Mobile Market
Unlike its fixed market, Indonesia’s mobile market has shown tremendous growth in recent years; mobile subscribership doubled in the four years to 2013 to reach more than 300m subscribers, well above the country’s total population. Ericsson Mobility reports that subscribership was almost 330m at the end of 2013, while mobile penetration stood at 122% in 2014, according to research firm BuddeComm, although the presence of so many operators has been a challenge for growth, with price wars that kicked off in 2007 keeping ARPUs at some of the lowest levels in Asia. According to research by Venture Consulting, both pre-paid and post-paid ARPU have declined for all of Indonesia’s telecoms operators since 2007, with blended ARPU now standing at less than $4 for each operator and expected to remain depressed until at least 2016. For 2014, Business Monitor Research reported that blended mobile ARPU declined by 9.8%.
At the same time, the market has been affected by a shift towards data services, with fierce competition keeping voice and SMS revenue growth modest, while data demand has risen sharply. This shift will have an impact on operators’ business models, and the weak performance of many companies in 2014 is indicative of the challenges they face in adapting to changing consumer patterns, with rising operational costs and over-saturation leading to weaker results.
Recent Performance
Telecoms operators struggled in 2014, with many experiencing financial losses. XL Axiata reported revenue growth of 10.4% for the year, rising to Rp23.56trn ($1.95bn), although the company still saw a net loss of Rp891.06bn ($73.66m) for the year as a result of higher operating expenses, as well as its costly acquisition of Axis Telekom. Indosat cited Rp1.86trn ($153.75m) in losses during the same period, with revenues increasing by a modest 0.95% to Rp24.09trn ($1.99bn). Telkom was the only one of the big three with a positive performance, reporting an 8.1% increase in consolidated revenues to Rp89.7trn ($7.41bn), of which some 70% is attributed to Telkomsel, and a 5.7% growth in consolidated net profits for the year, to reach Rp21.45trn ($1.77bn).
Alexander Rusli, CEO for Indosat, explained to the media that profits took a hit as a result of ongoing price wars for data packages, as well as market uncertainty in the wake of national elections in July 2014, which saw Joko Widodo become the nation’s seventh president. The rupiah’s recent decline has also impacted growth, with XL Axiata reporting its foreign exchange losses grew by Rp935.5bn ($77.33m) during the first nine months of 2014, compared to Rp714.6bn ($59.07m) during the same period in 2014.
Mergers & Consolidation
Although 2014 was a difficult year for many operators, it also marked a major event that will certainly have positive implications for future growth. On April 8, 2014, Axis Telekom officially merged with XL Axiata in a deal worth $865m that reduced the mobile market to seven operators, down from 11 in 2010. The government expects to see mergers continue in 2015 and 2016, with Rudiantara, the new minister of communications and IT, telling media in January 2015 that he would like to see the mobile market reduced to four players.
Recent announcements indicate that the government is serious about consolidation; in February 2015 the MCIT announced it plans to restructure the criteria for telecoms licensure, shifting its focus to quality of service, including broadband speeds and network reliability, rather than the number of telecoms towers in a company’s portfolio. The move could put an end to aggressive price wars that have seen quality of service decline, as well as pushing consolidation that is expected to see at least two more operators leave the market.
Towers
Infrastructure ownership is also shifting rapidly, and a number of mobile operators have moved to release ownership of telecoms towers to independent tower companies, a move which is expected to improve efficiency and quality of service.
In March 2014, Indosat sold its shares in tower operator Tower Bersama Infrastructure (TBI) for some $122m, in part to finance debt repayments. XL Axiata, meanwhile, signed a Rp5.6trn ($462.9m) deal to sell a total of 3500 towers to Solusi Tunas Pratama (STP) in October 2014, joining Telkom, which signed a share-swap deal with TBI in the same month.
In February 2015, Moody’s reported that Indonesia’s three largest telecoms tower companies – TBI, STP and Profesional Telekomunikasi Indonesia (Protelindo) – are expected to further expand their scale and market share over the course of the year.
According to the ratings agency, the telecoms tower industry in Indonesia stands at an inflection point, with major telecoms operators expected to dispose of additional tower assets over the next 18 months, and many expected to use the revenues from the sales to finance new capital expenditure. Tower operators, meanwhile, are expected to see their revenue base increase significantly as operators continue to invest in 3G and 4G LTE network expansion.
Capital Expenditure
Capital expenditure (capex) is expected to remain strong in the short term, with Rudiantara telling media in January 2015 that telecoms operators are set to invest a combined $4bn throughout the upcoming year. Telkom will provide Rp23trn ($1.9bn), of which Rp10trn ($826.6m) will be used to build 12,000 new base transceiver stations for Telkomsel, while XL Axiata will invest Rp7.5trn ($620m). Following its rocky 2014, Indosat has announced it will spend less on capex in 2015, after two years of network modernisation in which capital expenditure reached a total of Rp14.1trn ($1.17bn).
In early 2015, Telkom announced it is considering issuing bonds to support its capex plans, although authorities did not unveil details of the planned issuance. Nonetheless, the company’s debt-to-equity ratio stands at 35%, compared to the industry average of 60%, with the company’s strong recent track record presenting an appealing prospect to investors. With the 4G LTE market representing a significant untapped revenue source, these capex plans should offer considerable return on investment. The near-term industry growth forecast is positive, with Rudiantara projecting that the sector will expand by between 7% and 10% in 2015.
IT
Outside of telecoms, growth in the IT industry is also gathering pace, driven by the country’s strong macroeconomic fundamentals and a young, tech-savvy population, while its emerging middle class is expected to provide huge opportunities to IT companies and investors in the years ahead. The trend of digitalisation is impacting all industries. Local companies are increasingly aware of and preparing for the new era of social, mobile and big data, while multinational firms are expanding into Indonesia and placing a particular emphasis on their digital presence.
According to the US Chamber of Commerce (USCC), retail hardware, enterprise software and cloud computing will be key mid-term growth drivers for Indonesia’s IT sector, while the nascent e-commerce industry is expected to achieve double-digit growth in the next several years. The start-up environment is slowly maturing, supported by government and private sector plans to establish new technoparks and incubators, and the country’s large consumer base and high social media usage are expected to drive future investment. This investment is much-needed, with cloud computing uptake limited at present and internet penetration low by regional standards (see analysis). Cyber security presents another significant challenge, although the recent establishment of a national cyber security agency is expected to mitigate the problem.
Engaged Consumers
Internet penetration and online engagement are growing fast in Indonesia; estimates of internet users in the country range from 40m to 74.8m. The World Bank reports that internet users as a percentage of the population has more than doubled since 2009, rising from 6.92% to 15.8% as of 2013. Meanwhile, the Association of Indonesian Internet Providers reported that the total internet user base expanded by 20% in 2013, to reach 71.2m.
The country’s internet users are also some of the most engaged in South-east Asia, particularly in social media, with the USCC stating in late 2014 that Indonesia has been among the top-five markets for Facebook and Twitter since 2010, and Singapore’s SP eCommerce reported in 2014 that Facebook user numbers stood at 69m in 2014, while the Twitter user base was roughly 20m. In 2012 mobile app developer Rovio, which is responsible for the popular game Angry Birds, declared Indonesia the “social media capital of the world”, with the country’s young, tech-savvy population expected to drive digital growth in the mid-term.
Social & E-Commerce
Social commerce in particular is expected to bolster overall growth in e-commerce activities. Indeed, more than 25% of the country’s entire e-commerce transactions were carried out on social media in 2014. SP eCommerce reported that Indonesian consumers themselves are pushing for new purchasing platforms, and this is creating considerable opportunities for online retailers. An e-commerce report published by Japanese internet services provider Rakuten in 2013 found that 78% of internet users in Indonesia are willing to share purchase recommendations via social media, higher levels than in Japan, Malaysia, the UK and the US. Further, the average Indonesian shopper spent a total of $239 on online purchases in 2012. A growing number of companies are now offering business-to-business social commerce services, including local firms such as LakuBgt and Onigi, and these are offering services ranging from upgrading Facebook pages into online stores to creating product catalogues and online payment platforms. These services are expected to soar in the coming years, on the back of tremendous growth in e-commerce activities.
The number of online shoppers jumped by 28.2% in 2014, rising from 4.6m to 5.9m, with SingPost estimating the country’s online consumer base will reach 8.7m in 2016. Of these, 20% prefer traditional shopping sites such as Zalora or Lazada, while 26.6% use online forums and classified sites such as Kaskus and OLX. A further 26.4% use social media to make online purchases, according to a December 2014 report by Tech In Asia. Total online sales grew by around 44% in 2014, rising from $1.8bn to $2.6bn, and SingPost projects that this will reach $4.49bn in 2016.
Start-Up Potential
Recognising the opportunities in Indonesia’s burgeoning start-up market, investors have rushed to capitalise on funding gaps, with investment gathering pace after a landmark deal announced in October 2014, when local online retail services provider Tokopedia received $100m in funding from Sequoia Capital and SoftBank Corp – the largest start-up investment in the country’s history.
Since then, investment in local start-ups has skyrocketed. The first few months of 2015 saw a flurry of new deals, including a $1.5m investment in online fashion group Vela Asia, more than $1m of investment in online wedding marketplace Bridestory, unspecified investment in Jakarta-based travel and leisure activity auction start-up Grivy, and a round of seed funding sourced from investors in Indonesia, Singapore and the Netherlands for online contact lens retailer Lenza.
Existing ICT firms are also moving to cash in on the fast-expanding start-up segment, with Indosat launching a $50m venture capital fund for growth-stage start-ups in 2014. Rolled out in partnership with Japanese telecoms operator SoftBank, the company’s incubator seed fund programme welcomed its first graduates in February 2015, selecting local start-up Dealoka as one of the first recipients of $15,000 in seed funding. The firm offers e-vouchers tailored to users’ specific interests and locations, enabling retailers to push online traffic into brick-and-mortar businesses.
Cloud Computing
Small companies are able to expand rapidly as a result of the growing prevalence of cloud services, and outside of e-commerce, the cloud computing and data centre segments are also expected to be major growth drivers for the IT sector in the next several years. “The interest from the business community in cloud computing is still low, as business owners do not always understand the long-term benefits of this service. It is growing, although at this point we need greater investments in IT infrastructure and preventive maintenance,” Neil Cresswell, the president-director of Indonesian Cloud, told OBG.
In its 2015 study “SMEs in Asia Pacific: The Market for Cloud Computing”, the Asia Cloud Computing Association reported that only 14% of Indonesian small and medium-sized enterprises (SMEs) have adopted cloud technology so far, and by some measures only 3% of them really understand what it is. Growth in the segment remains robust, however; the study found that adoption of cloud computing among local SMEs increased by 100% in 2013 alone.
According to a 2013 report published by Frost & Sullivan, Indonesia’s cloud computing market expanded by 43% in 2012, to reach revenues of $31.4m. Although the industry is still in a nascent stage, the nation’s relatively untapped market offers considerable opportunity for expansion, particularly in the software-as-a-service segment, which accounted for 95% of the cloud market in 2012. Frost & Sullivan forecasts that the cloud market will reach $120m by 2017.
“The Indonesian market has started to evolve, especially in terms of buying behaviour, and more clients are choosing to manage their data through operational expenditure, rather than capex,” Mohammad Ghozie Indra Dalel, country manager for Global Technology Services at IBM Indonesia, told OBG. “The cloud as a service model is flexible and scalable, allowing for seasonal adjustments – for example, for those retailers whose service demands increase during peak seasons,” he added. “These kinds of benefits are eating up some of the growth from the traditional hardware business. In the future people will prefer to purchase IT as a service offering, instead of through capex, allowing smaller companies to flourish as they pay per use on the cloud as a service model.”
Telecoms operators and data centres are increasingly offering cloud services to clients, and recent developments have been promising for the cloud market in Indonesia. In August 2014, cloud provider Nexmo announced a strategic partnership with Telkomsel to provide cloud-based two-way communication services. The deal will see Nexmo provide business and app developers in the region with access to Telkomsel via an advanced SMS outbound text messaging platform, reducing the number of “hops” for customers by expanding its network of direct carrier connections, which will improve message service quality for local and regional customers. More recently, Indosat launched a cloudbased machine-to-machine platform in partnership with equipment vendor Ericsson in March 2015.
Data Centres
Data centres are expected to be another major growth driver going forward, benefitting from a regulatory change that requires foreign companies to use local data centres. Frost & Sullivan forecasts that spending by domestic companies on data centre services will increase by 317% from 2013 through 2019. While the segment faces significant challenges – a lack of network infrastructure and an unreliable power supply foremost among them – it also offers some advantages as well. Data centre companies in Indonesia can build and operate their own dedicated power plants, for example, and real estate prices remain significantly cheaper than those in regional competitors like Singapore. Some in the industry have also suggested that the government could do more to promote the growth of the segment by introducing incentives for foreign companies to set up data centres locally.
Government Support
The government has recognised the growing potential of Indonesia’s tech and start-up community, announcing in November 2014 that it plans to create a network of technoparks which will support industry development. Andrinof Chaniago, minister for national development and planning, told the media that 100 regencies and municipalities will have a technopark, with each project estimated to require Rp10bn ($826,600) in investment. Each park is expected to develop relevant products and services for the local area. Municipal parks, for example, will be industry-oriented, while parks in coastal areas could focus on developing new technology for the fishery sector. The government intends to build 500 technoparks by 2019 as well as a network of science parks.
More recently, in February 2015, Rudiantara announced that the government aims to raise Rp12trn ($991.9m) to help develop digital start-ups, which is set to be sourced from unspecified national conglomerates. The government has also taken a protectionist approach to the local IT industry, adding e-commerce activities to its negative investment list in 2014, which means that e-commerce is effectively closed to foreign ownership, although companies such as Tokopedia have been able to avoid these restrictions because it is classified as a web portal and does not hold any inventory or execute direct sales.
Cyber Security
Indonesia’s explosive IT growth is not without challenges, however, and cyber security is becoming an increasingly pressing concern. For example, in second-quarter 2013, Indonesia was responsible for 38% of the world’s malicious internet traffic, according to cloud service provider Akamai, surpassing China as the leading source of online attacks. While the level of malicious traffic has since receded, the risk is still there and this presents a significant obstacle to healthy IT expansion. In January 2015, the government announced plans to form a National Cyber Agency, which will coordinate an integrated defence strategy against cyber-attacks, after the MCIT reported 3.6m such attacks have been recorded in the last three years. The proposed agency is expected to be operational from 2016 and is accountable directly to the president.
Outlook
Although the mobile market faces considerable challenges in adapting to shifting consumer trends, Indonesia’s solid economic fundamentals and thriving digital marketplace have created lucrative opportunities for private players of all sizes. A number of factors should see ICT growth continue over the medium term: new regulations and planned consolidation will relieve some of the price pressure on existing telecoms operators, while the nation’s massive, untapped mobile broadband, e-commerce and cloud computing markets will drive future growth. This should see both domestic and foreign direct investment continue their upwards trajectory in the coming years.
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