Indonesia cellular telco business overview

I plan to write a series of articles focusing on Indonesia cellular telecommunications industry. Before I go into the specifics of the industry, I want to provide a perspective on Indonesia as a country.  Indonesia is the 4th most populous country in the world and represents a large consumer market with 200m+ population.  Indonesian consumer spending power is roughly 15x lower than US.  Fixed broadband penetration rate is extremely low where majority of the people know internet for the first time from mobile phones as opposed to from a computer email client/web browser.

Indonesia United States
Population 240m 310m
GDP $700B $14.5T
GDP growth rate 6.10% 2.80%
GDP per capita $2,900.00 $47,000.00
Mobile phone subscription 220m 280m
Fixed Broadband (adsl/cable) subscription 3m 81m

Now that we have a bit of perspective on the country and population, here is an overview of the Indonesia cellular telecommunication market size and notable players. Cumulative gross revenue in the cellular and fixed wireless (limited mobility) industry is $10B+ USD with over 220 million subscribers.  As a comparison, AT&T by itself generates $125B of revenue.


Telkomsel is the dominant service provider with 94m+ subscriptions at end of 2010 where most of the subscriptions are prepaid.  Postpaid services are typically more expensive and targets the affluent/business people.  Postpaid subscribers represents 2-3 % of all subscribers for all service providers.


Overall, the government handed out licenses to 8 different operators to stimulate competition.  Price wars between the operators have been going on for a number of years.  2 smaller CDMA operators just recently merged and there is public rumor about the merger of Telkom-Flexi and Bakrie Telecom to save on operational cost and network capacity investments.  Here is the Average Revenue Per Subscriber (ARPU) of Telkomsel that tells the story.


Here is an overview of the 2010 gross revenue distribution Telkomsel.  Operation and maintenance of the cellular network represents 21% of operating revenue which includes item such as Radio Frequency usage tax that is ~5% of revenue.  Another 20% is spent on depreciation and amortization which is mainly driven by Base Transceiver Stations (BTS) purchases and network equipment expansions.


Construction of each BTS unit is extremely cost intensive which requires the installation of high tower to mount the antennas, power generation for the BTS, and rack mounted networking equipment manufactured by Huawei and ZTE to enable the mobile phone service.  At the end of 2010, 80,000+ BTS units have been installed by the industry.  Each BTS costs USD $80k-$100k to install and represents roughly $6.4B of capital expenditures over the life of the industry.   This is one of the most capital intensive industry.


Following the trend in developed countries, mobile service providers in Indonesia will rely on the demand for mobile data service for revenue growth in the near future and get more out of their existing subscribers.

Indonesia cellular telco regulation – a brief history

To understand how Indonesia’s cellular telecom industry shapes up, it would be beneficial to get a quick intro on the history.  Telecommunications services (fixed line, long distance, and cellular) in most emerging countries is generally a highly regulated industry due to the strategic importance of telecommunication services on a country’s economic development.  The government through its various departments regulates the industry by issuing licenses, allocating spectrum, determining tariffs, imposing taxes and fee on frequency allocation, and requiring operators to contribute some portion of income on development of telecommunications systems in remote and rural areas.

Before the Asian economic crisis in 1998, all telecommunication services in Indonesia were provided by 2 state owned enterprises, Telkom and Indosat.  Telecommunication services responsibilities were split between these 2 entities. Telkom owned fixed line network including Public Switched Telephone Network (PSTN) and Domestic Long Distance (DLD) service.  Indosat was given the responsibility to operate the satellite network and International Direct Dial (IDD) service.  Around year 2000, the new democratic Indonesian government wanted to encourage more competition and sped up the development of national telecommunication systems (Indonesia had its version of Arab spring in 1998 that resulted in the fall of President Suharto who ruled for 30 years).  As a result of the new regulation, these 2 entities lost their monopolistic rights and other players were allowed to enter the market the telecommunication services market.

To allow competition for PSTN service that was dominated by Telkom, government issued fixed wireless licenses that allowed operators to offer basic telephone service using wireless network but limited its service to a particular area (example: within the city of Jakarta).  This was done to differentiate a fixed wireless license from a cellular license that allowed operators to offer full wireless mobility with nationwide roaming service.  Fixed wireless service has the benefit of lower capital investment versus installing a new telephone network and running wires into people’s homes.  Indosat and an entrant, Bakrie Telecom, jumped into the underserved basic telephone service market by obtaining fixed wireless licenses and building a local CDMA cellular network to offer the service.  Telkom also obtained fixed wireless license to grow its basic telephone customer.  Around the same time, Indosat started building its own fixed line network and obtained DLD license while Telkom started offering IDD service.  The government also issued a number of cellular licenses and put in place some new regulations for the emerging cellular phone industry with the intent to encourage healthy competition and provide ubiquitous low cost cellular communications for all Indonesian.  Here are some of the examples and their implications:

  1. Determines cellular call tariffs based on the network cost plus assigned margin – sets a ceiling on the price operators can charge to customers resulting in affordable mobile phone service for all Indonesian
  2. Allows users of one network providers to access users or services on other network providers for a fee – levels the playing field and allow new entrant fair access to competitors’ network
  3. Sets the rule for “operator of the network on which calls terminate” to charge interconnection fee at the cost of operating the network – cheaper cost of service when calls are made within the same operator
  4. Owners of telecommunication towers are obligated to share its tower for a fee – lowers the overall cost of capital expenditures for the industry
  5. Allows foreign investors to participate in Indonesia cellular market – brings in foreign capital to accelerate cellular network deployment
  6. Requires operator to allocate 1-2% of revenue to build cellular network in remote and rural places in Indonesia – connects all Indonesian population even in remote location where cellular network investment does not make sense

The industry also adopted “calling party pays” system that requires the originator of telephone calls to pay for calls.  This created further catalyst for ownership of cellular phones because people can receive calls and communicate with the calling party without paying anything.

Fast forward to 2012 today, there are 8 mobile operators with combined 220m+ subscribers (out of 240m population).  Telkom is still the most dominant telecommunication player and is publicly traded with Indonesian government owning ~50% of the shares plus special veto rights.  Telkomsel, the number one cellular operator in Indonesia, is also jointly owned by Telkom (65%) and SingTel (35%).  Indosat is also publicly traded and Indonesian government owns 15% of the company.  Indosat’s majority shareholder is Qatar Telecom (QTEL) with 65% ownership.  Telkomsel, Indosat, and another successful provider, XL, own 75% of the cellular subscribers in Indonesia.  There are additional 30m+ subscribers of fixed wireless service with Telkom (in addition to Telkomsel, Telkom also owns separate fixed wireless CDMA network) and Bakrie Telecom dominating the fixed wireless market.

Looking at Telkomsel as the anchor, subscribers have grown at 28% CAGR from 2006 – 2010 with growth declining in later years as market reaches saturation point for voice.  The new regulation in 2000 that opened up competition in the industry has done fairly well with respect to what the government wanted to accomplish.

Indonesia cellular telco data set

This is all the data set that I collected from annual reports of publicly traded cellular operators in Indonesia. I have to admit that the data set is not complete as some companies reveal more about their operation/statistics than others. I want to give credit to Horace Dediu and his blog for introducing me to Google motion chart.

Click on this chart to get to motion chart

Why prepaid is so dominant?

Prepaid service is the most popular mobile phone service in Indonesia with 98% of mobile phone subscribers.  To explain this, I want to go through a real example of the life of a blue collar worker (truck driver or factory worker) in Indonesia.  He typically has a family with a wife and at least 2 kids.  He has a monthly salary of IDR 500,000 and additional daily pay of IDR 50,000.  If he works 7 days a week, the total take home pay is IDR 2,000,000 (USD $225) per month.  This is $2,600/year – just ponder that for a moment and compare this with the average engineer salary in Silicon Valley @ $150,000/year plus benefits.  This is a typical income for the blue collar population who are making a living in the city.  The rest of the population living in the rural and villages are mostly farmers who make less than this but with lower cost of living.  At $225/month, he spends $100 on rent, $80 on food, $20 on utilities, $20 kids clothing/book/school.  This is living at the poverty line although there are others worst than him that lives below the poverty line.  He is barely able to meet the basic necessities (housing, food, and clothing) let alone afford monthly phone bills.  Prepaid service allows them the ability to own a mobile phone where spending can be strictly controlled with usage.  They can choose to use the phone for occasional communications with friends and family.  This explains the $4/month ARPU because this is what most of the population can afford.

The other side of the story is related to the service provider.  Majority of the Indonesian population do not have social security numbers or ID card.  As an emerging country, the government can still use a lot of improvements in the system to keep track of the population.  In addition, 15-20% of the city population are living in slums (under poverty line) on land without formal legal title.  How do you do credit check your subscribers for postpaid service? It is such a big hassle to go and collect payment when customers do not pay.


Prepaid service combined with “calling party pays” system, text messaging and low end $30 mobile phones imported from China were the catalysts for broad adoption of mobile phone service in Indonesia.


Why Dual SIM cards mobile phones?

Most operators run promotional campaigns to attract new subscribers by offering free calls when calls are made within the same network.  They run this type of campaign because the cost of a cellular call to a phone number that belongs to another operator requires the operator that originates the call to pay interconnection fee.  Other reason is to get the most of out of their existing subscribers by providing incentives for their family and friends to subscribe to the same service.

With prepaid service, there is no additional cost to use multiple different providers at the same time.  The real hassle is in keeping track of multiple different phone numbers from different providers.  Since your friends and relatives are subscribers of various different service providers and you want to take advantage of the free calls, low cost handsets that come with dual SIM cards become popular.


This is a real example of triple radio handsets (2 GSM and 1 CDMA).  You can insert up to 3 SIM cards from 3 different operators into the phone.  There are 3 blue buttons on the phone that represents different provider (the blue button on the right side is fading away).  Before you make a call or send text, you have to press one of the blue buttons to instruct the phone which SIM card you want to use.  All 3 SIM cards are active at the same time to receive calls or SMS.  And this phone can also receive analog broadcast TV.

The other solution is to carry multiple phones.  Each phone uses SIM card from different providers with different mobile numbers.  When you want to call friend A use phone #1, call relative B with phone #2 and match the operator to avoid paying for the calls.  This is an example of entrepreneurs seeing a shift in the market and coming up with a handbag that can carry multiple phones.


Since there is no monthly cost associated with owning multiple prepaid subscriptions, switching cost is extremely low and generated high churn rate in the 10% range for Indonesian operators.

How mobile phones are sold in Indonesia?

Mobile phones in the US are typically sold at retail locations owned by service providers where highly trained sales people guide the users to buy a heavily discounted phone with 2 years contract.  As an example, unlocked iPhone 4S retails at $650 while the price with 2 years contract is $199.  With 2 years contract and the most basic phone and data service, AT&T can collect $60/month for 24 months which comes out to $1440.  After taking into account the $450 discount for the phone, AT&T will be able to make $1000 for 2 years per subscriber.

Postpaid service is extremely limited as I mentioned in my previous article.  So the US distribution model of selling mobile phone service does not work.  Prepaid service decouples sales of mobile phones and mobile phone service because the mobile phone you purchase can work with multiple operators.  People can first purchase the mobile phone and then choose the operator(s) they want to use by simply obtaining a SIM card with new phone number from their operator of choice.  Therefore there is a separate market that just sells mobile phones regardless of operators.  Operators never developed expertise in building nation-wide retail network because this is not how their service is sold.

It is estimated that only 10-15% of mobile phone service sales are generated from operators’ direct sales force (through trade shows, kiosks, and some other retail presence).  However, the rest of sales are done via dealers and mobile phone distributors.  There are a few large mobile phone distributors that are publicly traded such as Trikomsel and Eraphone.  As an example, Trikomsel is one of the largest and operates 800+ retail stores all over Indonesia.  They own some stores and partner with major grocery stores, general merchandise stores, and convenient stores.  In addition, they are also a major phone distributor for 10,000+ dealers and retail stores.  They generated annual revenue of USD ~$600m in 2010 with thin net profit margin of 2-3%.

Trikomsel’s own retail store

Roxy Mas trade center in Jakarta is the largest mobile phone trade center in Indonesia with roughly 30% of aggregate mobile phone sales in Indonesia (retail and wholesale).   The trade center building hosts thousands of mobile phone retail stores selling a variety of mobile phones.  This may sound peculiar for someone from the US who could not begin to think how thousand of stores selling almost the same goods can survive.  This is how trading works in Indonesia.  Each product category (lamps, bulbs, cell phones, fabrics, clothing, etc) have a trade center location where each building hosts thousands of similar stores.  People living in Jakarta know that these are the places they need to visit to get the best deals and lowest price on each product category.  For example, people would tell you to go to Tanah Abang trade center for fabrics or Kenari trade center for lamps.

Each store in Roxy Mas trade center is about 9 ft x 15 ft and costs about $12,000/year to rent.  Most of the owners operate their own stores and compete based on price, references, and reputation.  They work very hard 7 days a week to serve their customers.  Due of the size of demand for Indonesian 240m+ consumers, if they can average 10 mobile phone sales per day with $10 profit each, they would have made $500 net profit per month after lease.  The rest of the cost is extremely small.  The store owner generally gets the most profit when there are wholesale deals.

retail store in Roxy Mas

Once a mobile phone is sold at one of these retail stores, the sale is typically completed with an activation of a mobile phone service from one of the operators.  Mobile phone service is selected based on completely different metric such as perceived network quality, speed of data connection, how many friends/families I have on that operator’s network (to get free calls), and call/sms/data tariffs.  These stores are agnostic as far as which operator gets the sale.  Sometimes, they will push whatever operator is running a distributor promotion that would allow them to get rebate.  They sell a variety of different phones with almost no promotional incentives from OEM – they will try to stock whatever product is in demand.  Blackberry products have become dominant mobile phones in Indonesia recently (I will write more on this).  RIM does not need to spend any marketing promotion dollar to advertise the Blackberry brand.  The store owner actually promotes Blackberry on the store’s sign to attract customers.

Blackberry brand free promotion

3G mobile broadband in Indonesia

In the first 9 months of 2011, XL (one of the notable mobile phone operator – see my article on Indonesia wireless telecom overview) reported their mobile data revenue increased by 50% and represents 22% of total revenue while total mobile data traffic increased from 1.7 TB to 6.6 TB (288% increase in 1 year).  Mobile data consumption is mostly driven by the availability of low cost 3G capable smart phone (such as Samsung Galaxy Y that retails around USD ~$100 un-subsidized).  Smart phones enable a broad range of new use cases for non-connected apps such as games and a vast improvement in connected applications such as video streaming (Youtube is popular Indonesia), social networking (faster photo download and upload), and cloud related business application such as Google Docs and Apps.

3G UMTS/WCDMA network utilizes a completely different radio access network than 2G GSM/GPRS/EDGE network.  3G WCDMA radio interface can offer high speed mobile data connection up to 14.4 Mbps compared to 200 kbps for 2G GPRS/EDGE .  To maintain backward compatibility with existing 2G service, operators must obtain new spectrum license and operate the 3G network on separate frequency range than their existing 2G service.  Although most of the network equipments in the Core Network and Mobile Switching Center can be shared between 2G and 3G network, installation of new 3G BTS equipments (also called Node B) are required to offer 3G service.  To ensure broadest service coverage for 3G subscribers, mobile phone operates both 2G and 3G radios simultaneously so it can switch between 2G BTS and 3G BTS depending on availability.

image courtesy of ZTE

XL is one of the operators that received the license to operate 3G networks at 2.1 GHz frequency range.  XL is perceived to be the leading operator for high speed mobile data due to its intensive investment in Jakarta’s 3G network recently.  They have 3900 Node B units installed in 2011 (~15% of their total combined 2G and 3G BTS).  This represents a 60% increase from previous year.  Their plan is to add 2000 additional Node B units by end of 2012 (another 50% increase).  As voice reaches market saturation point, operators are relying on the demand explosion of data service to fuel growth.

As more people realize the number of new use cases and applications that smart phone and mobile broadband offers, adoption is going to increase exponentially for the next 4-5 years.  LTE will not be deployed for a while since operators are still in the capital expenditure cycles to upgrade to 3G and have not been able to realize return on those investments.  However, as explained in XL’s financial report, they are migrating to the Single Radio Access Network (RAN) architecture to save operational cost and future-proof their LTE migration. Single RAN architecture allows a single BTS to support multiple radio access technologies (GSM/UMTS/LTE) that lowers overall energy requirements and upgradable to future new radio access technology.

Other operator such as Telkomsel has also built their 3G networks since 2006 with Node B deployment that matches XL’s strength.  Some CDMA-based fixed wireless operators (such as Bakrie Telecom and Smart Fren) were also given licenses and frequency spectrum to offer mobile data service.  They want leverage their investment in the 2G CDMA network and market 3G data service (1x EVDO rev A – up to 3.1 Mbps download speed) with incremental investment.

Example of 3G data plan offered by XL in 2012

Rate Quota
Monthly $2.50 500MB
$10.00 2.5GB
$20.00 6GB
Weekly $1.00 50MB
Daily $0.20 5MB