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.

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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.

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