Indonesia's rapid ICT uptake and solid fundamentals point to continued strong ICT growth

In terms of ICT connectivity, Indonesia is currently in the midst of a national transformation. Over the past decade the country has seen dramatic improvements in telecommunications availability; technology awareness and usage; investment in digital infrastructure by both the government and private sector players; regulatory oversight; and development planning. These trends have been driven by rapidly expanding demand for ICT products and services among the country’s large population and thriving business community.

Following on the heels of a challenging year in 2014, Indonesia’s ICT sector recovered somewhat in 2015 and the first half of 2016, primarily on the back of rising investments in data hosting services and e-commerce. On the telecoms side, late-2015 saw the roll-out of 4G LTE high-speed data services by the country’s mobile operators.

Work In Progress 

At the same time, Indonesia faces a wide range of challenges when it comes to ICT development. Spread out over 17,000 islands – some 6000 of which are inhabited – the nation’s geography presents a variety of unique hurdles with regard to the installation and operation of communications infrastructure. While these and other issues are expected to continue to put pressure on the telecoms sector in particular, Indonesia’s information technology industry is widely acknowledged to be on the rise, with positive long-term implications for the country’s leading mobile operators and other ICT players. Indeed, according to a recent white paper published by Huawei, a China-based multinational technology firm, ICT investment in Indonesia is expected to top Rp433bn ($31.6m) in 2016, a majority of which will go towards infrastructure projects. Most of this expenditure is forecast to come from the media and communications sector itself, followed by banks and financial services companies. Capital markets-related firms and insurers; manufacturers; and retail and service industry players. The government, for its part, is expected to play a central role in the future of Indonesia’s ICT industry. Indeed, under President Joko Widodo, who was elected in 2014, investment in ICT has become a key focus. Under the Indonesia Broadband Plan (IBP), the government is working to ensure high-speed fixed-line connectivity across the country, alongside the mobile data services offered by mobile operators. “The implementation of a fibre-optic network throughout the country – increasing internet access outside of Java and in remote areas – can create many opportunities for large and medium-sized ICT companies,” Sudianto Oei, president director of Hypernet, told OBG.

In recent years the government has also introduced initiatives to support the development of a vibrant e-commerce ecosystem (see analysis), to encourage foreign participation in the domestic ICT market, and to facilitate a thriving domestic ICT start-up culture. “Supporting the ongoing development of the technology sector is a key component of President Jokowi’s administration,” Harry K Nugraha, Intel’s Indonesia country manager, told OBG. “The high level of government support bodes well for the future of this market.”

Market History 

The history of ICT in Indonesia dates back to the late 19th century, when the Dutch colonial government established a private firm to provide postal and telegraph services across the region. The country’s first telephone services were launched in 1882 by a private firm under government licence. In 1906 the colonial authorities nationalised the sector. Indonesia’s newly independent government took charge of the sector in the early 1960s. A few years later, in 1965, the state formed two state-owned companies – namely Posdan Giro and Telekomunikasi – to oversee postal and telecommunications services, respectively. Over the following three decades these two firms were subdivided and reorganised a number of times. In the early 1990s the government set out to corporatise the telecommunications industry, selling shares in the state-owned entities Telekomunikasi Indonesia (Telkom), which oversaw domestic telecoms services, and Indonesian Satellite Corporation (Indosat), which managed international telecoms services. A percentage of each firm is owned by the public, while the government continues to hold controlling shares in both Telkom and Indosat.

Beginning in the late 1980s a handful of firms moved to set up analogue mobile networks in Indonesia, including Telkom, which partnered with a number of private operators to set up the nation’s earliest mobile services. By the end of 2000 seven mobile operators were active in the country, serving 3.7m subscribers in total, which was equal to around 1.7% of the population at the time, according to data from the UN’s International Telecommunication Union (ITU). These figures were up from 2.1m mobile subscribers at the end of 1999, which was equal to 1.1% of the population at the time; 941,000 subscribers at the end of 1998 (0.5%); and just over 125,000 subscribers at the end of 1995, for instance, or 0.01% of the population.

Development 

In 1998 the Ministry of Communication took over from the Ministry of Tourism, Post and Telecommunications as the sector regulator, in what was seen as an acknowledgement on the part of the government that the burgeoning ICT sector was undergoing enough growth to warrant a dedicated oversight body. This was followed in 2005 by the establishment of the Ministry of Communications and Information Technology (MCIT), which continues to serve as the sector regulator today. Under the terms of the licences issued by the MCIT, beginning in the mid-2000s, Indonesia’s operators were required to build out extensive telecoms networks, which would eventually host the high-speed data services that are standard across the country.

Indonet, Indonesia’s first commercial internet service provider (ISP), set up shop in the capital, Jakarta, in 1994. By the end of 1996 the country was home to more than 20 ISPs. That same year the rapidly expanding commercial IT industry banded together to form the Indonesia Internet Service Provider Association, which continues to serve as the country’s primary ISP industry group today. Internet uptake grew rapidly during this early period, from 134,000 subscribers at the end of 1998 to 256,000 by the end of 1999, 400,000 by the end of 2000, and 581,000 by the end of 2001. Indonesian internet subscriptions via ISPs topped 1.08m in 2003 and rose to around 1.5m by the end of 2005. ISP’s primarily provided dial-up services during these early years, although by the mid2000s a limited number of operators had begun to offer basic broadband packages as well.

Current Status 

By the end of 2015 there were 338.43m mobile subscriptions in Indonesia, according to figures from the ITU, up from 325.58m at the end of 2014, 313.23m at the end of 2013 and, by way of comparison, 211.29m at the end of 2010. Indeed, over the past decade – up through 2016 – the number of mobile subscribers in the country has grown by more than 600% in total, making it one of the fastest growing telecoms sectors in the world. Notably, in 2015 there were considerably more mobile subscriptions than there were residents in Indonesia. Indeed, according to ITU data as of that year there were 132.35 mobile subscribers per 100 inhabitants in the country, which indicates that a significant percentage of the population owns more than one mobile phone. This is in line with other mobile markets in South-east Asia.

In terms of usage, meanwhile, data compiled by We Are Social, a UK-based digital media agency, shows that as of January 2016 Indonesia was home to 88.1m active internet users, which represents an overall penetration rate of around 34%. This figure, which is up by around 15% from the same period in 2015, includes both fixed and mobile connections. Meanwhile, some 43% of the country’s adult population owned a smartphone as of end-January 2016, while 79m people were active social media users. Indeed, Indonesia has one of the largest user bases on a handful of leading social media platforms, including Facebook, Whatsapp and Twitter.

Fixed-Line 

Like most other rapidly developing South-east Asian telecoms markets, mobile subscription growth has eclipsed fixed-line growth in Indonesia in recent years. Indeed, over the past half decade, in particular, fixed-line subscriptions have declined dramatically across the country, in line with rising mobile subscriptions.

According to ITU data, the fixed-line segment was growing strongly during the decade following 2000, when fixed subscriptions increased from 6.6m, representing 3.19 subscriptions per 100 inhabitants, to 40.91m in 2010, which was equivalent to 17 subscriptions per 100 inhabitants. However, since this time the segment has declined substantially, with total subscriptions falling to 30.7m by the end of 2013 and just 22.39m by the end of 2015, the most recent year for which data was available. This latter figure, which was equal to just 8.75 fixed-line subscriptions per 100 inhabitants, is expected to continue to fall in the years to come, as mobile service provisions continue to expand across the country.

Mobile 

As mentioned previously, Indonesia’s mobile market has grown exponentially over the past decade, driven by the nation’s rapidly growing population, rising incomes and steadily improving awareness of and access to ICT networks and hardware. In 2015 and 2016 two key trends have propelled mobile-segment development, namely steadily increasing mobile data uptake (as registered primarily by rising smartphone usage) and, in late 2015, the introduction of 4G-LTE services by domestic operators. According to statistics compiled by We Are Social, as of January 2016 mobile phones accounted for approximately 70% of total web page views in Indonesia, up 41% on the same period from the previous year. In the same period, web page views on laptops and desktops dropped from 41% to 28% of the total.

Meanwhile, tablets accounted for approximately 2-3% of total web page views in January 2016. Furthermore, according to a study carried out in early 2014 by the MCIT in conjunction with UNICEF and the Berkman Centre for Internet and Society at Harvard University, nearly half of Indonesia’s internet users are between the ages of 10 and 19. As this population – estimated to be in excess of 30m internet users – grows older, mobile data usage in Indonesia is also expected to grow rapidly.

Indonesia’s mobile market has traditionally been dominated by the so-called “big 3” operators, namely Telkomsel, Indosat and XL Axiata, which together accounted for around 80% of total mobile subscribers as recently as 2013. However, in 2015 and the first quarter of 2016 the market changed somewhat, with Telkomsel, the largest player, adding 12m users to take its total user base to 152m, which was equal to around 45% of the total mobile market. Indosat, the second-largest player, added just under 7m new users in 2015, bringing it to 69m users in total, which was equal to around 20% of total users. Finally, XL, which had been the third-largest mobile player in the country for some time, lost around 10m subscribers in 2015 and the first quarter of 2016, resulting in the operator falling below its close competitor Hutchison 3 Indonesia to fourth place, with 41m subscribers, as compared to Hutchison’s 51m subscribers in the same period. Other mobile operators currently active in Indonesia include Smartfren, with 12.5m subscribers; Bolt, with 2.4m subscribers; and Cerie, with just over 68,000 subscribers. A number of other firms hold mobile operator licenses issued by the MCIT, but have yet to launch mobile services.

Performance Under Pressure 

In late 2015 the country’s five largest mobile players launched 4G LTE networks across the country, in a long-awaited performance upgrade. By the end of the first quarter of 2016, according to data from GSMA Intelligence, an international telecoms trade group, Telkomsel had become the market leader in terms of 4G subscribers, with around 3.5m in total, as compared to Indosat’s 3m and XL’s 3.4m. Given rising demand for high-speed mobile data services across Indonesia, these figures are expected to rise considerably in the short-term future. Given Telkomsel’s size and market dominance, the leading operator has been able to invest more in rolling out new technologies – such as 4G – than its rivals.

For instance, according to the international ratings agency Fitch, as of the end of 2015 Telkomsel had more than 103,000 base stations across Indonesia, some 54,000 of which were 3G/4G sites. Indosat and XL, meanwhile, reportedly have fewer than 56,000 base stations each. Furthermore, Telkomsel recently announced that it plans to invest Rp13trn ($949m) in capital expenditure (capex) in 2016, the bulk of which has been earmarked for improving and expanding its network, as compared to planned capex of less than Rp8trn ($584m) each on the part of Indosat and XL.

Consolidation 

Given the large number of mobile telecoms operators in Indonesia, and the wide disparity in size and subscriber numbers between the largest and smallest operators, the government is in the midst of a long-term push to encourage consolidation in the mobile market. Indeed, according to the MCIT, the state expects the number of mobile operators to have fallen to four by 2019. While a round of operator-led consolidation or mergers and acquisitions is the government’s preferred means of achieving this goal, the state has taken measures to enforce its plans if necessary.

Indeed, in 2015 the MCIT announced that it planned to restructure the licensing criteria for mobile operators, whereby the state would require firms to achieve a set level of quality of service, which would be measured by metrics related to network reliability and data transfer speed. Currently Indonesia’s mobile operators’ performance is measured primarily by size of their respective base station networks. In January 2016, Rudiantara, Indonesia’s Minister of Communication and Information Technology, announced that if necessary the government had the power to get involved in shrinking the number of mobile operators. “Each permit has requirements for the operator to invest and to build,” he said in a media interview. “So if they don’t built anything, I can revoke their permit.”

In recent years this process of market consolidation has been under way in Indonesia. In 2014 – after a year marked by financial losses for many operators due to price competition – XL merged with another domestic operator, Axis Telekom, in a deal worth $865m. As a result of the deal the number of active mobile license holders fell by one, to seven in total. While average revenue per user (ARPU) figures have recovered somewhat in 2015 and early 2016, continued economic pressures are widely expected to lead to further mergers and acquisitions in the coming years. Indeed, the MCIT’s recent push to encourage mobile operators to invest in capex in order to improve network reach and quality of service, for instance, has the potential to be a major driver of consolidation.

Data In Droves 

Indonesia is home to one of South-east Asia’s most vibrant internet markets. The country was an early mobile data adopter, with 3G broadband initially made available in 2006. The late-2015 introduction of 4G LTE high-speed mobile broadband, meanwhile, has been in development at some operators as far back as 2010. More recently, both the government and the ICT industry alike have focused their efforts on improving access to broadband, which is relatively common in urban areas but largely unavailable in rural Indonesia. As of early 2015 the average internet connection speed in Indonesia was 2.2 Mbps, according to Akamai Technologies, a US-based digital content delivery provider, down from 2.4 Mbps in 2014, and significantly lower than most other countries in East Asia. According to Akamai, Indonesia’s average internet speed ranked the lowest in the region, behind the Philippines (2.8 Mbps), Vietnam (3.2 Mbps), Malaysia (4.3 Mbps), Singapore (12.9 Mbps) and South Korea (23.6 Mbps), the latter of which was home to the fastest average internet connection speed in the world.

In 2014 the government launched the five-year IBP, under which the state has set a number of targets for broadband performance. These targets include increasing the reach of fixed broadband to 71% of urban households and to 49% of rural households by 2019, up from only around 15% of all Indonesian households as of the end of 2013. Similarly, the plan calls for increasing fixed broadband speeds considerably, from around 1 Mbps at the end of 2013 to 20 Mbps in urban areas and 10 Mbps in rural locations by 2019.

Under the IBP mobile operators are expected to improve both the geographic reach and quality of mobile broadband. Beginning from coverage of just 12% of the country’s population – with average speeds of around 512 Kbps – at the end of 2013, the government has coverage targets of 100% of urban areas and 52% of rural areas, with an expected average speed of 1 Mbps. The nation’s broadband programme also includes price targets, where the state has set a maximum monthly broadband price of 5% of average monthly income.

Perhaps the highest profile IBP initiative currently underway is the Palapa Ring project, a massive infrastructural undertaking that involves installing 35,000-km of submarine fibre-optic cables. The so-called Palapa Ring is meant to eventually connect Indonesia’s 34 provinces and 514 districts, effectively enabling high-speed connectivity across the entire country, including rural areas like Maluku and Papau. As of the end of 2015 the MCIT had completed the planning process for Palapa Ring, and was preparing to launch the tender process.

In addition to the Palapa Ring project and the consumer-facing service targets described above, the IBP includes a number of goals that are related to integrating ICT into government services. Indeed, the authorities have laid out a number of priority sectors in this regard, including health care, education, logistics and procurement.

In conjunction with the relevant ministries – for instance the Ministries of Health, Education and Trade, among others – the MCIT, the Ministry of Bureaucratic Reform, the Ministry of Finance and the Ministry of Home Affairs are in the process of launching a comprehensive e-government programme in Indonesia, with the objective of integrating all government institutions in order to more efficiently communicate and share data both within the government itself and with the population at large. As of midway through 2016 the details of the e-government programme were in development and had yet to be released.

Infrastructure 

The expansion and update of physical infrastructure is a key component of Indonesia’s plans for the telecoms sector moving forward. According to data collected by Statistics Indonesia, the government’s data agency, in 2014 some 91% of the country’s total population had access to a cellular signal. Breaking this figure down, around 68% of the population reported a strong signal, while 23% had a weak signal and 9% did not have a mobile signal at all, due to a lack of nearby base transceiver stations (BTS). Given that more than 60% of Indonesia’s 5.07m-sq-km area consists of marine waterways and coastal sea areas, the country has worked to encourage passenger and cargo seagoing vessels alike to operate BTS on board, in order to extend coverage into waterways. In terms of land coverage, mobile signal strength is relatively weak in the regions of Papua and Kalimantan, both of which are largely covered in jungle.

The number of installed BTS has jumped rapidly over the past half decade. From just 82,457 BTS in total at the end of 2010 – which includes stations owned by all mobile operators – the figure rose to 176,332 BTS in 2014, which represents growth of more than 113% over just four years.

Meanwhile, according to data from the Indonesian Telecommunication Providers Association, the number of base stations jumped by an additional 46%, to reach 257,429 by the end of 2015. The Palapa Ring project is expected to have a major positive impact on overall connectivity in Indonesia, particularly in remote and rural regions in Papua and elsewhere. In the meantime, infrastructure sharing agreements are widely considered to be a potential short-term solution for some operators. In early 2016 Indosat and XL announced a plan to jointly operate a 4G LTE network.

Areas Of Fast Growth 

In line with the increasing levels of connectivity across Indonesia, digital security is becoming more of a concern among domestic ICT providers and end-users alike. According to local media reports, as of early 2016 Indonesia was among the top-three targets worldwide for cyberattacks. The majority of these attacks are relatively simple e-mail, SMS or social media scams. However, a significant number – 54.5% in 2015, according to data published by the Coordinating Ministry of Political, Legal and Security Affairs – were aimed at e-commerce sites, which are expanding rapidly across the country. With this in mind, the government is currently in the final stages of establishing the National Cyber Agency (NCA), which is a public agency with a mandate to protect the state against acts of cybercrime. The agency is also expected to be active in a number of industries, including financial services, air transport and energy. This agency is expected to be operational by the end of 2016.

Outlook 

With some 338m mobile telecoms subscribers at the end of 2015, some 98% of which were on pre-paid plans, Indonesia is the fourth-largest mobile telecommunications market in the world. Growing the number of total subscribers, then, represents a key challenge moving forward. Indeed, fierce competition in the mobile segment has contributed to declining ARPU and related performance challenges in recent years.

In response to this situation, the government has worked to encourage greater consolidation in the mobile market, which has put pressure on the country’s smaller operators in particular. Meanwhile, in terms of IT, the country is home to a growing start-up community, particularly in the e-commerce-related segments (see analysis).

The growth of Indonesia’s e-commerce sector is expected to be driven by the country’s large population, rising incomes and the steady increase in internet penetration and awareness. As e-commerce evolves specific regulations and guidelines must evolve as well. “The government has not yet identified from which angle it should incentivise the e-commerce sector, but a first step would be to implement a payment gateway control, for there are a lot of potential fiscal gains for the government and this ensures a level-playing field for all actors,” Suhanda Djaya, managing director of Prolink, told OBG.

With these trends in mind, as of mid-2016, most local players were broadly optimistic about the future of ICT in Indonesia. “The current offer from local providers in data centres needs to be further developed to compete with international providers who can ensure required volumes and be more cost-effective,” Handy Surya, president director of Packet Systems Indonesia, told OBG.

The nation’s strong demographic fundamentals – it was the fourth-largest country in the world at the end of 2015, with more than 255m inhabitants – growing economy and tech-savvy population are expected to drive demand for steadily improving ICT services in the decades to come.

“Many of the traditional market areas are somewhat saturated at this point,” Bunawan Susanto, the president director of IBM in Indonesia, told OBG recently. “However, there are a substantial number of relatively underdeveloped areas that have a great deal of potential in terms of future growth in this market. These include hardware, analytics, security, data hosting, mobility, financial technology and infrastructure, to name only a few.”

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The Report: Indonesia 2017

ICT chapter from The Report: Indonesia 2017

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