Macquarie believes that the leaders, Telkomsel (in which Telkom Indonesia, majority-owned by the Indonesian government, has a 65% holding and Singtel the remaining 35%) and Indosat face difficult times ahead, ôwith capex remaining stubbornly high, market shares declining and profit growth slowingö. It argues that competition has become ômulti-prongedö, as well-capitalised contenders are emerging from amongst the 11 wireless licence holders, most of which are well funded and backed by foreign telecom companies.
The majority of those licences were handed out only in the last five years. Low network utilisation and a high-tariff regime currently enjoyed by the incumbents have allowed challengers to take market share through an aggressive pricing strategy.
The key is likely to be how the regulators behave. Tigor Siahaan, country business manager, Citi Markets and Banking Indonesia, points out that the top two mobile companies, Telkomsel and Indosat, have a more than 70% market share, and the top three, which includes Excelcomindo (67%-owned by Telekom Malaysia), have 90% of the market.
And for a bit of a look at the psyche of a nation, Siahaan also says that for JakartaÆs thousands of domestic workers, who are increasingly addicted to texting but earn as little as $50 a month, mobile top-up cards are becoming a substitute good û for cigarettes. Last December, KPPU (the antimonopoly commission) launched an investigation into alleged price fixing of text messages among the mobile phone operators, citing high SMS prices as possibly indicating a cartel at work.
Separately, SingaporeÆs Temasek has been forced by the KPPU to sell its holding in either Telkomsel or Indostat within the next two years, on the basis that its cross-shareholdings in both companies breached Indonesian competition rules. Temasek is appealing against the decision, but it nevertheless highlights the intense scrutiny the incumbent telecom companies are under.
Against this backdrop, subscriber net adds should remain high at 30 million this year (compared with just 5 million in 2002), but Macquarie favours the challengers to the current champions, who have to balance finding the optimum level of growth without compromising their profitable existing subscriber base and fighting competition while fending off further regulatory scrutiny.
ExcelcomindoÆs divestment of 7,000 tower locations (in order to raise cash) this year should also allow the better competitors to achieve 90% population coverage immediately, with minimal capex.
But the future of the telecom towers is wrapped in intrigue. Last year, the Minister of Communications and Information announced that foreign investment in the telecom towers should be reduced to zero. There is pressure on him to retreat because foreign investment rules do not fall within his ministry (itÆs within the Minister of TradeÆs brief), which means the decision would be hard to enforce. There is a also suspicion that a powerful local group wants these key assets, and is influencing officials to muddy the waters in order to put off foreign investors.
Anyway, Mirza Adityaswara, head of equity research at Credit Suisse in Jakarta, points out that regional governments have said that wireless towers must be shared by the mobile operators. A major issue is competition and the regulator argues that the penetration rate is still too low, meaning there is a need to build many more towers, especially in rural areas.
This story is part of an Indonesia Report that was published in the April issue of FinanceAsia magazine.
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