The Indonesian telecoms sector has been expanding fast for over a decade; growth in subscriber numbers, data services and revenues have been strong, and recent changes in regulation are helping the industry to evolve. According to GSMA Intelligence, Indonesia has 341.8mn subscribers, making it the fourth largest mobile market in the world. It’s population of 259.1mn has a SIM penetration of 132%, and the GNI per capita is US$4,000. As a result of this high penetration rate, MNOs are increasingly shifting their focus to arresting the decline in ARPU.
The fact that prepaid is the dominant payment model with 98% of the market adds to price competition. The practice of subsidising mobile devices by bundling their purchase with service operation contracts remains largely unexplored in Indonesia, which makes it easy for customers to switch providers as soon as a better offer comes their way. Moreover, many Indonesians have multiple SIM cards in active use, allowing them to take advantage of lower call rates to specific numbers, free texts or bonus data volumes at certain times of the day. It can be challenging to generate revenue under these conditions and this partly explains why average revenue per user (ARPU) is low in Indonesia when compared to other countries in the region.
Indonesia has a young population that moved straight to mobile and has embraced data services; mobile broadband penetration is at 37% and climbing, and handheld devices are the preferred method of accessing the Internet. Indonesia is still predominantly a 2.5G market, and leapfrogging from there to 4G is a huge task that will require substantial investment in infrastructure and equipment.
While the mobile market in Indonesia has experienced tremendous growth for several years, it is becoming more and more competitive and margins have been shrinking. MNOs have been bracing for change as growth rates have levelled off and pricing wars have intensified. The market is still dominated by Telkomsel with its 45% share, but the landscape has changed with the addition of a number of newer operators backed by foreign partners: Indosat, XL Axiata, and Hutchison 3G. The market is rounded out by several other local players: Internux, Sampoerna Telekomunikasi and Smartfren, making a total of seven MNOs. Telkomsel was the first to launch 4G in December 2014, followed shortly by XL Axiata’s launch in three cities later the same month. Indosat received a 4G concession in the 800MHz, 900MHz and 1800MHz bands in early 2015.
The MNOs in Indonesia are employing different strategies to deal with their competitive environment. For the most part they are very focussed on interconnection, spectrum and network sharing, and the recent introduction of SIM card registration last year. Telkomsel holds the dominant position in the market and has the most comprehensive coverage of the country, and as a result they limit the amount of network sharing they do and are very choosy about which sites they share with their competitors. At this point tower sharing isn’t mandated by the government, but there are indications that the regulator is serious about network sharing and it is thought that this will be enforced at some point. If this happens there is a possibility that when there are two or three towers close together the one with the lowest tenancy would have to be decommissioned, which would of course have a major impact on the owner.
Estimated tower count for Indonesia
In addition to the main towercos, there are up to 35 independent companies that partner with MNOs in Indonesia to provide towers. Although dominated by three large independent towercos, Protelindo, Tower Bersama and STP, plus Telkom’s Mitratel, many of the rest are extremely small organisations with fewer than fifty towers and in some cases only single digit tower portfolios. Already subjected to considerable rollup, there may be the potential for further consolidation in the market, but many of these smaller companies have existing contracts with the MNOs that offer extremely favourable conditions that would make it nearly impossible for a larger towerco to make profitable. In general the MNOs in Indonesia are happy with the status quo and wouldn’t want to see too much consolidation of the tower industry as it could limit their options and their negotiating power.
Indonesia is a large country with population centres spread out across several smaller islands; achieving coverage of the whole country requires the MNOs to have partnerships with some of the small local towercos in some cases, and close relationships with the local governments. There are thirty smaller cities across the country that have their own local government, and they reserve the right to approve or reject proposed developments.
MNOs are also preoccupied with changing technology and the impact it has on their business. Demand for smaller, more efficient towers in urban population centres is growing, as well as smaller base stations, and there is increasing pressure to provide more efficient energy solutions. Indonesia is also promoting the development of smart cities initiatives, creating opportunities for all the country’s MNOs and towercos. The demand for connectivity in urban centres continues to increase, and the number of cells is growing as a result. However, the cost of building new towers, especially in urban centres, is very high, and rents in some locations are becoming prohibitively expensive. This leads to MNOs increasingly trying to get more out of existing sites with equipment upgrades instead of new builds, while Indonesia is also home to some of the most expansive and impressive microcell and small cell deployments by towercos.
In terms of fixed services, for those operators that provide this in addition to wireless, competition is also increasing. There are some small, agile fibre providers that have had some success identifying blank spots in coverage and making strategic land purchases. They then quickly roll out fibre in the area to provide connectivity for future occupants. Some operators, such as Indosat and XL Axiata, have joined forces to pool their fibre resources to support backhaul for their wireless services, and collaborate on rollouts, especially in areas with lower population densities outside Java. Some towercos are responding to the increased demand for fibre to support the growth of data by acquiring companies with fibre assets. Protelindo acquired iForte in mid-2015, and STP acquired a company named Bit which also owned fibre assets.
RANsharing is another form of partnership between MNOs that is becoming increasingly common. Indosat and XL Axiata have been engaged in RANsharing for some time, and this has also been extended to include co-operation on the rollout of some sites for LTE services. Partnerships like this can greatly reduce opex and help smaller operators to remain competitive, and keep shareholders happy. The model is so successful that Indosat and XL Axiata are in the process of creating a separate entity to manage their networks outside of Java; the process is underway and it should be up and running in 2016.
Another possible step in terms of partnership for Indosat and XL Axiata would be the creation of a joint venture towerco to pool and optimise their tower assets. At this stage, however, the tower industry in Indonesia isn’t open to foreign companies, and both Indosat and XL Axiata are both controlled by foreign companies, Ooredoo and the Axiata Group respectively. While there have only been unconfirmed rumors of the prospective opening of the tower industry to foreign ownership, if this were to change it could have a huge impact on the market.
