Lower Mobile Prices: Through Profit Regulation or Competition?

Posted on January 10, 2007  /  0 Comments

By Divakar Goswami (LIRNEasia)
Bisnis Indonesia (Leading financial paper of Indonesia): OpEd (In Bahasa)
January 10, 2007

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.

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