The winners:

Best Achievement Award (Fixed Line): Bakrie Telecom, Runner up: PT Telkom
Best Achievement Award (Cellular): PT Indosat, Runner up: Excelcomindo Pratama
Award of Appreciation (Print Media): “Bisnis Indonesia”
Award of Appreciation (Broadcast Media): Metro TV
Award of Appreciation (Online Media): detikcom (detikINET)
Lifetime Achievement: Arnold P. Djiwatampu

(Reported by Juni Soehardjo in Jakarta)

What is the number of operators needed in the mobile market to trigger price competition? This question has been posed by regulators and others and there seems to be no definitive answers. What is certain is that by increasing the number of players it becomes harder for operators to collude. In Indonesia, the mobile market is highly concentrated with Telkomsel having more than half the subscriber base and a significantly larger share of revenues. The HHI for Indonesia’s mobile market is 5082, confirming that it is a highly concentrated market.

Hutch is a new entrant with significant experience in other emerging markets and comes in with deep pockets, especially after selling its India stake to Vodafone for more than $11 billion. Hutch is starting with 0 subscribers in Indonesia and is most likely to be the “disruptive” competitor by actively raiding the customer base of existing operators by offering lower prices and innovative service offerings.

Telecoms war hots up as ‘Hutch’ joins the fray

Andi Haswidi, The Jakarta Post, Jakarta April 6, 2007

With the services on offer mostly the same, the tight competition in Indonesia’s crowded wireless telecoms market has led to a no-holds-barred price war and massive ad spending. This month, the war is about to get even fiercer with the established operators set to react to the arrival of upstart Hutchison Charoen Pokphand Telecom (HCPT), dubbed “Hutch” in the business[.. ]

Local calls to other “3″ users cost Rp 150 (1.6 U.S. cent) per minute, while calls to other operators cost Rp 1,000 per minute. The new kid on the block is also running a “buy one, get three” promotion, meaning that if you buy Rp 10,000-worth of prepaid credit, you can make Rp 30,000-worth of calls. This promo means that a one-minute local call only costs Rp 50, which is the same price as a one-minute call from Esia, the CDMA operation of Bakrie Telecom

Telecoms war hots up as ‘Hutch’ joins the fray

Andi Haswidi, The Jakarta Post, Jakarta, April 6, 2007

With the services on offer mostly the same, the tight competition in Indonesia’s crowded wireless telecoms market has led to a no-holds-barred price war and massive ad spending.

This month, the war is about to get even fiercer with the established operators set to react to the arrival of upstart Hutchison Charoen Pokphand Telecom (HCPT), dubbed “Hutch” in the business.

HCPT is a subsidiary of Hong Kong-based global cellular giant Hutchison Telecommunications International (HTIL) and Thai agroindustry group Charoen Pokphand.

Through its GSM-based “3″ brand, HCPT offers wireless access throughout Java, to be followed soon by other areas, with promo tariffs so cheap that they make a mockery of the generally accepted price distinction between GSM and fixed wireless CDMA — CDMA has to date been cheaper due to its coverage limitations.

Local calls to other “3″ users cost Rp 150 (1.6 U.S. cent) per minute, while calls to other operators cost Rp 1,000 per minute.

The new kid on the block is also running a “buy one, get three” promotion, meaning that if you buy Rp 10,000-worth of prepaid credit, you can make Rp 30,000-worth of calls.

This promo means that a one-minute local call only costs Rp 50, which is the same price as a one-minute call from Esia, the CDMA operation of Bakrie Telecom.

Hutchison has also been spending big on advertising, including running full-page color ads in the country’s largest daily, Kompas, every day since the launch of “3″ on March 29.

The other operators have hit back by running similar ads and promos. For example, Indosat’s Mentari is offering a promo price of Rp 50 per 30 seconds until Aug. 31, while Excelcomindo’s XL Bebas is offering a flat rate of Rp 25 per second for all calls, Rp 40,000 in free credit upon SIM card activation, and 50 percent discounts on credit top-ups.

On its initial startup, Hutchison has so far invested $400 million, said president Rajiv Sawney during the launch of 3 on March 29, and said he expected the figure to increase to about $1 billion next year.

“Analysts are predicting some 30 million new subscribers in Indonesia in the coming years. We believe we can secure a good share of that market,” Sawney told the press during the launch ceremony.

At present, Telkomsel leads Indonesia’s mobile market, with some 35 million subscribers, followed by Indosat with 16 million and Excelcomindo with 9 million.

Telkomsel, with its pre-paid product Simpati, charges Rp 1,500 per 30 seconds during peak hours and Rp 300 during off-peak hours, while its other product, As, costs Rp 1,500 per minute during peak hours and Rp 300 per minute during off-peak hours.

For advertising in all media, Telkomsel was the biggest spender in 2005 on Rp 93 billion, followed by Rp 223 billion in 2006, and is expected to fork out even more this year as competition increases, according to a survey by AC Nielsen.

Meanwhile, Indosat’s other GSM product, IM3, costs Rp 500 per 30 seconds for local calls during peak hours and Rp 250 during off-peak hours. Last week, IM3 announced that it would invest up to $1 billion this year.

Following Hutchison’s arrival on Indonesian shores, major Russian conglomerate, Alfa Group, is set to invest up to $2 billion on setting up yet another wireless telecoms operation later this year.

“We see that a lot remains to be done in Indonesia in order to increase mobile penetration. The telecoms market is overly concentrated. There’s not enough competition in that sense, and that severely limits the development of the sector,” said Alfa vice president Andrei Zemnitsky.

LIRNEasia researcher, Divakar Goswami, was also interviewed. The interview is featured in the online edition here. The interview is in bahasa. The English text of the interview is below:
1. How’s the growth of ICT in Indonesia for along 2006 (as we see from regulations, infrastructure development (hardware and software), human being, ICT industry etc)?

Information and Communication Technology sector (ICT) in Indonesia is one of the most dynamic sectors of the economy contributing most to GDP growth rate (around 16%) than any other sector. The ICT sector in Indonesia is dynamic, growing and profitable. Compared to the past, the regulatory environment is more transparent, pro-market, pro-growth and therefore pro-poor.

ICT Sector

Wherever competition has been introduced, growth has been spectacular; those sectors lacking competition have grown more slowly. Take the example of the mobile sector that has added 6.6 million subscribers during the first half of the year and where operators have aggressively invested in infrastructure. For the year 2006, we may see an investment of more than $2.5 billion dollars made in the mobile infrastructure as the existing operators gear up to face the challenge from Hutch and Maxis who are rapidly rolling out their infrastructure. The mobile operators have been expanding their network at a frenetic pace: Since the end of 2005, Telkomsel has increased its number of base stations from 7,741 to 12,156 a growth of 57 percent; Excelcomindo’s base stations during that same period have grown from 3,620 to 6,052, a growth of 67 percent. Despite making substantial investments, mobile companies continue to be profitable. Excelcom and Bakrie Telecom that had losses in 2005 have made profits this year.

The fixed sector’s performance on the other hand is poor. The growth of fixed line phones per 100 inhabitants will probably be negative this year as the number of fixed phones remain stagnant and the population increases. Because of Telkom’s de facto monopoly in the fixed line market it is unlikely that the company has any incentives to invest in this sector and nor can investment come in from other operators if the sector is not fully opened up to competition.

Many have argued that why bother with fixed if mobile is doing so well. Since most of Internet service provision is currently relying on fixed infrastructure, the lack of fixed line growth means that there is also no growth in Internet subscribers. According to BPS’ survey from 2005, there are an estimated 10.3 million Internet users who access the Internet from home, office, warnets etc. For a country of 222 million that is less than 0.05 percent of the total population that use the Internet. If one looks at Telkom’s broadband subscribers, it stands at a pathetic 35,000. What are the reasons for this and how can we bridge this digital divide?

The significant cost components of an Internet Service Provider (ISP) in Indonesia are its leased line and international bandwidth costs. As my WiFi study on Indonesia (available on www.lirneasia.net/projects) has shown, leased line prices in Indonesia are around 48 time the price in India for a comparable link. International bandwidth costs are also a couple of times higher compared to countries in the region. Both the domestic and international leased lines have limited competition and hence the prices tend to be high. This translates to nearly $4000 in monthly leased line and internet connectivity costs (512 Kbps) for an ISP. Taking into consideration the average income of an Indonesian, it is astronomical sum! No wonder Internet access in Indonesia is unaffordable to the vast majority and will continue to be so unless competition is introduced in the “big pipes”—in the domestic and international backbone infrastructure markets.

Broadband penetration will continue to be low as long as there is only one provider of ADSL. Hopefully, in the future, competition from wireless broadband providers will lower the prices and make it more affordable for Indonesian people.

ICT Regulation

The Ministry and BRTI have undertaken a number of pro-growth initiatives in the last year or two. It has successfully conducted 3G auction that has been widely perceived as the most transparent licensing in Indonesia’s history. Two new mobile operators have been introduced and the increased competition will hopefully drive down mobile retail prices and make them more affordable for those in the “bottom of the pyramid.” A new cost-based interconnection regime has been introduced, which mandates cost-oriented interconnection and provides enforcement “teeth” to the regulators. When implemented from 2007, it will hopefully promote fixed-line competition and ensure greater transparency in this contentious area.

BRTI’s regulation to implement a phased reduction of leased line prices based on cost calculations may help lower Internet retail prices and help diffusion of Internet connectivity.

However, there are a number of regulatory barriers that are preventing faster growth of the sector. Indonesia has an archaic licensing framework that may have been relevant 10 years ago, but not anymore. Converged services where voice, data, video may be combined blurs the boundary between traditional fixed and mobile services. Indonesia’s regulatory environment is simply not relevant to converged IP-based networks like the New Generation Network (NGN) that are being ushered in all across the globe. The current licensing framework is not technology neutral and has different rules and licensing requirements based on a particular technology. This has resulted, for example, in a situation where the regulator is trying to prevent Bakrie Telecom and Telkom Flexi from providing full mobility services because their license treats them as fixed operators although the CDMA technology can be used to provide full mobile services that will significantly enhance the utility of the service to customers.

Why Bakrie Telecom is licensed to provide service in only two regions is beyond my understanding. When a country does not have enough telecom infrastructure I would think it is in the interest of the Government and the public if an operator is allowed to build a network throughout the country. There are many other serious problems with the licensing framework which I will not get into, but this by far remains an area where more of the Government’s energies should be focussed.

Most of the operators I have spoken to, with the exception of Telkom, feel that although the current regulatory structure is better than what existed previously, it is still not independent in its decision-making. If you look at the structure of the organization it is apparent that BRTI is embedded within the Government that also controls two of the largest telecom operators in the country, Telkom and Indosat. The credibility of BRTI’s decisions will be considerably enhanced among the operators and other stakeholders if it were reformed and given more independent powers and separated from DGPT. The small degree of independence for BRTI has shown impressive results in terms of investment that has come into the sector. Imagine the investor confidence if a fully independent regulator can be put in place?

2. Is there any progress in 2006 than 2005? If yes, what is the indicator?

The following graph indicates quite clearly the progress of the ICT sector from 2005 till half of 2006:
The number of mobile phones in Indonesia per 100 inhabitants has increased quite significantly from 21.6 in the end of 2005 to 24.32 in the middle of this year. The number will probably go up by the end of the year, although growth from 2005 to 2006 may not be as rapid as from 2004 to 2005. However, with the introduction of Hutch and Maxis in the mobile sector, we should see more rapid growth in the number of mobile subscribers who are added to the network at the end of 2007. More competition in the mobile sector will lower mobile retail prices that are quite high compared to the region and make it more affordable to those on the “bottom of the pyramid.”

Although the penetration of fixed wireless access (FWA: CDMA) seems to grow slowly from 2005 to 2006, it does not reflect the impressive performance of Bakrie Telecom that has grown its network from 0.3 million to 1.3 million in less than a year. The slowing growth of FWA is primarily because Telkom Flexi shed a significant number of non-revenue generating subscribers from its network.

3. If no progress or stagnant, would you please to explain it?

Fixed wireline penetration has been negative because of a lack of competition in that sector. In a country with such low penetration one does not expect to see negative growth rates. Telkom, the monopoly provider, has no incentive to invest in fixed line infrastructure in the absence of competition.

Internet penetration numbers from 2006 are not available although growth in the number of Internet subscribers will continue to remain low because Internet prices remain unaffordable to a vast majority of Indonesian. Furthermore, only 3.74 people out of 100 own a PC in Indonesia. Of those PC owners only 27 percent use their PCs to access the Internet. Low PC ownership and low Internet use even among those who own PCs are also other factors that are contributing to stagnant Internet growth.

4. What do you think about the commitment of Indonesia’s government or Information Communication Department (Depkominfo)?

In view of the past year’s performance, I believe that the Minister Sofyan Djalil is someone who would like to reform the ICT sector and bring more competition to develop ICT infrastructure and lower prices. However, as an outsider, one gets the impression that not everyone in the Depkominfo is on the same page as the Minister. Furthermore, since the Indonesian government is dependent on dividends it receives from Telkom, it is probably hard to take decisions that may affect the profitability of the company. It is therefore crucial to separate the policy and regulatory functions. Let the Depkominfo develop policy and leave the day to day business of regulating the ICT sector to the BRTI.

5. What is the important think in this year that must be done by the government but not yet finished?

The Government has been collecting Universal Service Obligation (USO) funds from operators to roll out basic telephone service to 40,000 villages in Indonesia that do not have any connectivity. A least-cost subsidy auction was supposed to be held this year to disburse the USO funds in a transparent manner. However, a Ministerial decree is awaited to launch this very critical program to extend access to the digital “have-nots.” It is hoped that the auction will be held soon and will be open to all network operators (fixed and mobile).

6. What do you think about Dewan Teknologi Informasi (Information and Technology Council) formed by The President SBY? Are you optimist or pessimist with this council?

The formation of the National Information and Communication Technology Council (NICTC) by the President Susilo Bambang Yudhoyono, is a very important development for Indonesia’s ICT sector. It signals the recognition at the highest level of government that the ICT sector is important for Indonesia’s development and growth. Since the lapse of the 1999 Blueprint, the ICT sector in Indonesia is rudderless. Although the Government has good intentions, many of the policy/regulatory actions have been taken on an ad hoc basis without the guidance of a coherent vision. So a number of decrees have been issued that are overlapping and licensing is being done on an ad hoc basis. For infrastructure sectors with high sunk costs and long gestation periods, like for telecoms, there must be continuity and coherence in the Government’s policies.

Clear vision informed by the views of the various stakeholders can make the Council a guiding hand that can lead the sector to a higher trajectory of growth. The leadership can remove many hurdles imposed by bureaucracy and narrow vested interests.

The first meeting of the Council will be key in defining the objectives that the Government and other stakeholders aim to achieve for the ICT sector. The success of the Council will depend on it developing a time-bound road map or action plan that lays out what the Government would like to see achieved and in what time frame. When the Technical Coordination meeting is held every three months, they would be in a position to evaluate the implementation of the action plans. The biannual Council meeting led by the President would ideally evaluate progress of the action plans, make changes when required and bring to task parties that are responsible for delays in implementation. If that happens, watch the Indonesian ICT sector take-off like a rocket!

8. According to you, what must they do to make a good ICT implementation? And what improvement we can do next?

Good implementation of ICT projects must take into consideration sustainability of the projects when funding stops. For example, it is laudable that Qualcomm has provided wireless access to high schools in Way Kanan in Lampung and plans to connect 59 villages with “warcells,” cellular kiosks. However, the key to success to these projects is to develop a financially viable model to sustain this initiative when Qualcomm stops funding this program. As Grameen in Bangladesh has shown with the Village Phone Program, it is possible for a company to provide connectivity to rural villages in a profitable manner. Because Grameen is making profits from providing telephone connectivity to villages it is in its own interest to expand the service to more villages and in turn help bridge the digital divide.

Mobile talk is not cheap in Indonesia. Despite limited competition, mobile calling prices are among the highest in Asia. Only fixed wireline service, where PT Telkom has a de facto monopoly, sees calling prices to be among the lowest in the region as they are rigidly regulated by the government. But as everyone knows, it is difficult to get a fixed line and the quality is poor.

It is therefore not surprising that policymakers and regulators in Indonesia have become impatient with the results of competition and started to voice their resentment of the high profits being declared by the private telecom companies.

Jos Luhukay, a member of the ICT National Committee tasked to study high Internet tariffs, recently argued that operators’ income is too high at the expense of users. “Is it fair? What if the profit margin is slightly lowered but the distribution of services is more widespread?” he said.

Along similar lines, Heru Sutadi, a commissioner from the Indonesian regulator BRTI suggested in Bisnis Indonesia on July 26 that mobile operators’ EBITDA margin were too high and needed to be reduced. The thinking seems to be that lower prices will come if telecom operators’ profits are cut.

In an earlier era starting from the 1920s, the United States and a few other countries adopted ratebase/rate-of-return regulatory model to regulate profits of telecom providers. This approach was usually applied to telecom monopolies to prevent them from charging excessively high prices. Under this regulation, the operator was allowed to recover all of its incurred costs plus a fair return on its invested capital.
The problem with such an approach was it gave telecom operators incentive to spend more to charge higher prices. However, investment wasn’t always used to develop network. While wiring the United States, AT&T also built hunting lodges to entertain legislators, regulators and others it wished to influence! In effect, the regulation creates disincentives to be efficient and incentives to unduly influence the regulatory process.

The profitability in not one, but most telecom operators in Indonesia is a sign that the sector is healthy. Excelcomindo and Bakrie Telecom, which made significant losses in previous years, turned profits in 2006. The rising net income of Indonesian telecom players and the expectation of continued positive returns have fuelled an investment boom that will exceed $2.5 billion by the end of this year.

Competition has in fact driven the frenetic pace of network expansion in Indonesia. Since the end of 2005, Telkomsel has increased its base stations from 7,741 to 12,156, a growth of 57 percent. Excelcomindo’s base stations during the same period have grown 67 percent to 6,052. The number of mobile phones per 100 inhabitants is expected to double at the end of this year from two years ago.

If the government attempts to regulate the profitability of Indonesian telecom companies, it will drive up the cost of capital and stanch investments that have been flowing in to develop the infrastructure. Such talk, even if not followed by action, harms the investment climate and casts enough doubt in potential investors’ minds to harm future development of the telecom sector.

Those who talk of limiting profits must also consider the flip side — they will be asked to offer safeguards against losses. In the current environment, both profits and losses are the responsibility of the operators, as it should be.

The impression of runaway profits must be tempered with the fact that monthly average revenues per user (ARPU) of all mobile operators in Indonesia are falling from year to year. Excelcomindo’s postpaid ARPUs more than halved from Rp. 517,000 in 2004 to Rp. 222,000 in the first half of this year. ARPUs for prepaid cards, used by most subscribers in Indonesia, have fallen by between 25 and 30 percent for Excelcomindo and Indosat although they remained unchanged for Telkomsel during the same period. Prepaid ARPUs currently range from Rp. 43,000 to Rp. 85,000 per month.

Falling ARPUs despite stable mobile calling prices indicate that more low-income users are being added to the network effectively “diluting” average revenues of the operators and/or that operators are offering promotions, which amount to effective reductions in calling charges.

Indonesian regulators and policymakers should be happy with either possibility. Although operators may not have permanently reduced calling prices, year-round promotions, which are offered on most networks, are tantamount to cuts in mobile prices. If low-income subscribers are being added in large numbers it is a sign that mobile prices are not as big a problem as policymakers or regulators appear to believe.

Mobile prices in Indonesia have remained high compared with other Asian countries because of inadequate competition. The Herfindahl-Hirschman Index, a conventional measure of market concentration, measures Indonesia’s mobile market at 5,082. A score above 1,800 indicates a highly concentrated market i.e., not enough competition. Therefore, it comes as no surprise that prices are high.

Indonesian policymakers have taken the right steps in licensing new mobile players to reduce market concentration. The entry of Hutchison and Maxis next year will almost certainly result in a price war as both will be forced to use pricing as a tool to gain market-share from the three dominant operators. By the third quarter of 2007, we should see significant downward pressure on mobile calling prices.

Like all eager parents, the regulators are impatiently waiting for their eggs to hatch, i.e., competition to take off and prices to drop. However, competition does not yield immediate results. The eggs need some time and careful nurturing before they hatch and loose talk of profit regulation can only stop more eggs from being laid. If the government wants Indonesians connected, they should provide more encouragement for investment, not less.