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.

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