TowerXchange paid a visit to Indonesia over the summer and met with several industry stakeholders to find out what is changing in the country’s mature and yet evolving telecom infrastructure industry. With infra-sharing well entrenched, towercos play a key role in supporting MNOs with their network coverage and capacity requirements. And while they enjoy a healthy mobile market context and solid tenancy ratios, towercos are increasingly diversifying into the provision of additional products and services. With a unique geographical blend of dense urban and remote islands, Indonesian towercos deploy everything from ground-based towers (GBTs), microcell poles (MCPs) and rooftops, to IBS, DAS and fibre. Let’s take a closer look at the changing dynamics of this benchmark Asian market.
The Indonesian MNO landscape
There are currently eight MNOs in Indonesia, who are a mix of local (Telkomsel, Internux, Sampoerna Telekomunikasi, Smartfren Telecom and Berca Hardayaperkasa) and foreign-backed companies (Indosat, XL Axiata and Hutchison 3 Indonesia). Telkomsel remains the market leader, claiming ~45% market share, with an even greater lead on a share of revenue basis.
The Indonesian tower market
Towercos in Indonesia are divided into three categories by size: big entities with 2,000+ sites, medium-sized entities with portfolios between 500 and 2,000 sites and small firms with less than 500 sites.
Five to six years ago, there were an estimated 80+ towercos but the market has since consolidated to 50-60 companies. The four “big” players are Protelindo, Tower Bersama, Mitratel and STP, while players in the middle market include Centratama, Persada Sokka, KIN, and GIHON. There are believed to be at least 40 niche towercos with portfolios between 50 and 100 sites.
Mitratel has been growing steadily with an estimated tower count of 13,000+ and is starting to be a force in the Indonesian tower market. According to one source, Telkomsel awards approximately 50% of its orders to Mitratel, 40% to Tower Bersama, then 10% to the rest of the towercos.
Indonesia sees waves of new towercos emerging but large players are also driving consolidation. For example STP has acquired over ten smaller towercos over the years as part of its growth strategy, on top of organic growth. Some of the new players were civil contractors that have taken on build-to-suit (BTS) to evolve into towercos, in some cases leveraging relationships with local network planners at MNOs, in other cases simply identifying a new opportunity in the space.
While the barrier to entry in the tower market was described by one source as access to the operators, there is a considerable opportunity to operate in local markets, just focusing on a few islands, especially in light of Indonesia’s distinctive geography. In fact, while main cities and islands such as Jakarta might be a crowded and competitive market, new towercos can secure BTS in other parts of the country where coverage might be limited, especially if they are able to offer low prices. Another source also noted that MNOs proactively encourage the creation of new towercos.
Estimated tower count for Indonesia
How do towercos operate in Indonesia?
Replicating the gold standard of the U.S. market, towercos in Indonesia operate under a grass and steel model, owning and operating only the ‘vertical real estate’ to the exclusion of energy equipment, which makes the business model relatively low on risk and complexity.
Building a tower in Indonesia costs between US$70,000 and US$100,000, with an average around US$80,000.
Land rental agreements tend to be for ten-year terms. Site acquisition, like in most markets is challenging, and can take up to 40 days of the typical 60-90 days required to deploy a new site, including securing permits and negotiating with landlords. The tower construction portion is described as the easy component, taking roughly two to three weeks. The full process, from order of BTS to delivery tends to be in the 90-120 day range, going up to 150 days in some cases.
Over the years, towerco portfolios in Indonesia have grown to include rooftops, microcells poles (MCPs), IBS and DAS, especially for densely populated areas where there is simply no land available for traditional ground-based towers (GBTs).
One example is Balitower’s collaboration and partnership with the Jakarta government, for which it received the rights in 2015 to provide microcellular pole infrastructure. Starting with 2,500 poles equipped with CCTV cameras, Balitower continues to seek opportunities to expand its network through similar procurements. Areas that have been installed with CCTV include DKI Jakarta, Pekalongan, Sukabumi, Surakarta, Sleman and Bantul.
How do telecom players manage their energy requirements?
For macro sites, MNOs are responsible for managing their own energy services. However, this tends to be outsourced to the big OEMs. For the last three years, XL has outsourced all operations to Huawei, which provides end-to-end services, including planning, design, optimisation and operation. Hutchison is also said to be a client of Huawei, which is responsible for most of the maintenance.
Indosat handed its end-to-end power management over to ZTE, which handles most operational aspects from planning to design and implementation. Where necessary, they will also take care of the dismantling. ZTE supplies the battery, rectifier, diesel genset and power monitoring system.
Vendors also generally take care of the electricity payments (pass-through with a fee). Historically the MNOs simply paid the bills that came from PLN, the national grid company. However, the bills needed to be verified and validated, and the scrutinising work of Huawei and ZTE over the accuracy of electricity bills has generated considerable cost savings.
For micro sites, towercos tend to procure, set up and maintain everything to minimise need for site visits, which in densely populated Jakarta (and Java in general) can be an issue.
Around 10-15% of the country is off-grid and sites on remote islands are usually powered with gensets and batteries. MNOs have been trialing renewables to build green sites, reportedly with the support of government-linked initiatives and incentives.
Indonesia’s fibreisation
MNOs as well as major towercos have all been investing in fibre, including Protelindo’s acquisition of iForte back in 2015. Fibreisation has been key especially as operators transition their networks from 3G to 4G and data consumption grows exponentially.
As of H1 2017, STP reported 2,823km of fibre optics backbone in its network to support “aggressive urban 3G and 4G LTE rollout by mobile telecommunication operators.” It also noted potential new business opportunities for providing wholesale fibre connection to broadband and pay TV operators in its second quarter investor presentation. For the same period, Protelindo reported 2,386km of installed fibre, with another 1,357km under-construction.
The activity of towercos is collateral to that of pure-play fibrecos that serve the market place, such as FiberStar and Moratel.
Downward pressure on lease rates
Tower lease agreements are typically for ten years, however MNOs have started requesting new BTS orders with a 5+5 model. Most contracts are denominated in local currency. The contracts now do not offer discounts to the anchor tenant as additional tenants onboard, which used to be a trend seven to eight years back when lease pricing was higher. The contracts also typically do not include escalators on the lease rate, but rather on the maintenance portion, which is between 25-35% of the total.
Over the last eight to nine years, some towercos have seen lease rates per month drop from the highs of IDR18mn (US$1,325) per month to as low as IDR10mn (US$735) per month now.
As MNOs continue to put downward pressure on pricing, some of the larger towercos have been able to hold firm, however smaller towercos struggle. MNOs prefer to pay the same price across the board, but the scale of larger towercos allow them to hold rates steady. Estimated monthly rates charged by large towercos range between IDR13.6mn (US $1,000) and IDR16.3mn (US$1,200).
The squeeze is not only coming from MNOs and tower lease rates, but also ground rental agreements, which like most other markets, have seen increases over the years. One mid-sized towerco estimated an increase of 300-400% in the last ten years, though in general land lease rates are not increasing faster than cumulative inflation.
One source noted the MNOs in Indonesia use India as a benchmark, which has one of the lowest lease rates in the world at approximately US$600 per tower. On the other hand, MNOs are also sharing their own towers on a commercial basis and often charge each other more than the towerco market rates.
Consolidation among towercos in the cards
One of the big news over the summer was the refinancing of STP and KIN, who retained Morgan Stanley and HSBC respectively for the process.
Carlyle and Southern Capital who together hold ~69% stake in STP are looking to exit, while Providence Equity Partners who effectively owns almost all of KIN (through a unique structural set-up) is exiting the Asian market, having shut down its operations in Singapore and India.
Carlyle entered the Indonesian market in 2012 acquiring ~25% stake in STP for a reported US$100mn. In early 2015, there were reports STP was looking to raise up to US$400mn from a further share sale, which might be what Southern Capital paid for its shares.
Protelindo and Tower Bersama are said to have expressed interest in the STP portfolio valued at US$1bn, with the former better positioned financially to undertake the transaction; Mitratel was also mentioned as a potential buyer. Regional towercos and global pension and infrastructure funds are also part of the pool of potential buyers. At the time of writing, the first round of bids has been submitted.
Where is the growth in Indonesian towers?
There is still demand for both coverage and capacity in Indonesia.
Two or three MNOs still have coverage requirements to meet, with focus likely outside of Java. Organic growth prospects are generally positive, with Tower Bersama – Telkomsel’s preferred towerco – targeting as many as 600 new towers in the second half of the year, and a yearly target of ~1,250 organic additions.
As smartphone penetration continues to grow, so will data consumption. The big three operators Telkomsel, Indosat and XL Axiata have all experienced significant and accelerated data growth year-on-year and this trend isn’t likely to stop. This translates to tenancy ratio growth due to densification.
Given the number of smaller towercos that exist in the country, larger players always have the option to entertain inorganic growth by acquisition. However, towercos in this mature market increasingly focus more on increasing their tenancy ratio rather than their tower counts. In fact, adding a new tower is a step forward in their portfolio and one back in terms of their tenancy ratio, until additional tenants are secured.
In terms of the “value add” to an Indonesian towerco offering, the last frontier would be energy management, as prominent players are already involved in IBS, DAS and micro-poles, as well as fibre as required by MNOs.
When it comes to the energy side of things however, there are two major challenges. The first being Huawei and ZTE who already control and own a large portion of the energy ecosystem and have found ways to make the financials work, thus are not likely to relinquish it. The second is that the towercos in Indonesia typically do not have experience with energy management and would need to partner with major vendors to define a viable business model to serve the market place. And as local towercos are used to keeping things pretty simple with their steel and grass business model, the energy management business might be too much of a step outside of their comfort zone.
The discussions around small cells is much like the other markets in Asia: who will do it and how, and what business model will satisfy all the stakeholders involved? For the time being, this is a topic of interest for towercos in Indonesia, but with more questions than answers.
Without a doubt, Mitratel, Protelindo, Tower Bersama and STP will continue to remain the key towerco players in Indonesia, though new entrants such as PEKAPE through its partnership with Alfamart could scale quickly while smaller, more nimble towercos could innovate on service offerings potentially swifter than the big players.
Lessons for other towerco markets
As one of Asia’s, and the world’s, largest and most penetrated tower markets, Indonesia provides a valuable benchmark.
Indonesian towercos have leveraged a no-nonsense, relatively simple business model to scale organically and inorganically, rolling up local towercos and engaging in buy-and-leasebacks with MNOs, to the point that the largest towercos in the country are among the world’s largest and most valuable. Protelindo and Tower Bersama have market caps at IDR 43.464T (~US $3.2bn) and IDR 30.814T (~US$2.3bn) respectively, with the latter enjoying a higher earnings multiple (P/E ratio) at 32.70 to Protelindo’s 16.58.
Indonesian towercos also exemplify the diversification of infrastructure typologies beyond GBTs, pioneering the incorporation of fibre, MCPs, IBS, DAS and small cells into their portfolios.
Despite the maturity of the tower market, growth and consolidation is far from finished in Indonesia. And while the country’s largest towercos may claim a lack of interest in expanding beyond the local market – if and when they see opportunities to create a tower market as healthy as they have cultivated in Indonesia, we’re confident we’ll see them invest elsewhere in Asia. But seeking a tower market as good as Indonesia sets the bar pretty high!
Inorganic growth opportunities: which towers could come to market?
Indosat Ooredoo is currently assessing options with its tower portfolio, with potential plans for a sale.
Having sold 2,500 towers to Protelindo in 2016, XL Axiata is said to have the core towers remaining on its balance sheet. No movement is expected here unless XL comes under balance sheet pressure.
Not much is expected to happen now with the Telkomsel/Mitratel towers after the 2015 discussions with Tower Bersama collapsed due to lack of approval by the government. However, this is considered the most lucrative/attractive portfolio in the market, and it could eventually be monetised. Telkomsel and Mitratel’s estimated tenancy ratio right now is 1.2-1.3, indicating plenty of headroom for growth, while the combined portfolios represent the largest and most pervasive network in the country.
Indonesia’s tower association
Unbeknownst to most, Indonesia does have a local industry body that goes by the Association of Tower Infrastructure Telecommunication Developer, or Asosiasi Pengembang Infrastruktur Menara Telekomunikasi (ASPIMTEL). Membership is restricted to only independent tower companies who currently own ~50,000 towers all over the country. Note this does not include all the towercos that exist in the country. Members include Protelindo, Tower Bersama, STP and KIN.
Towerco lessons learned from Indonesia
1. Tap into organic growth (BTS)
2. Rollup smaller towercos
3. Engage in buy-and-leasebacks
4. Diversify product catalogue
