Gamelan telecomm

Indonesia, the world’s fourth most populous nation, is lagging in Internet and broadband penetration. Professor Indranil Bose (University of Hong Kong) studies the role played by Indosat in the Indonesian telecommunications market and how the company hopes to grow Indonesia’s Internet and broadband market.

Launched in 1994, Internet and broadband services in Indonesia were still fledglings as compared to their counterparts in the region. By the end of 2007, the overall Internet penetration was as low as 8.5 per cent of the population; broadband penetration stood at less than one per cent.

The main reason for the low penetration was that the country was spread geographically over many islands- and many people lived in remote and rural areas. Besides, there was paucity of international bandwidth due to low capacity of international fiber-optic cables. But as Professor Bose shows in his case, an Indonesian leader, Indosat, is eager to fill this gap and bring Indonesia more in line with its Northern neighbors.

Indosat’s history
Indosat was established in 1967 as a wholly-owned subsidiary of ITT, serving as the country’s primary provider of international communication. Alongside it, Perumtel was the operator responsible for domestic service. In 1980, ITT sold Indosat to the Indonesian government. Ten years later, in 1991, the domestic operator Perumtel was corporatized under the name Telkom. In 1993, a third company, Satelindo, was set up to provide satellite communications.

Following the 1997 economic crisis, a September 2000 law paved the way for a liberalization of the telecommunications market. Indosat, Telkom and others were now free to compete against each other on the domestic and international fronts. By 2002, Indosat had absorbed all of Satelindo and the Indonesian government reduced its shareholding to 15%.
The years up to 2007 were marked by strong growth in the cell phone sector. Indosat had built a strong position in this market with a 30% market share and 24.5 million subscribers. But by 2007 new entrants, including Hong Kong’s Hutchison were making profitable growth difficult. Indosat’s average revenue per telephone user (APRU) fell by 7% in the first six months of 2007 to $6.52.

More focus on Internet and broadband

Fortunately, Indosat had started establishing position in Indonesia’s ISP market. One axe of its strategy was to provide superior customer service, as attested by its winning the Frontier and Marketing magazine’s top brand award in the ISP category in 2005, 2006 and 2007.

Three factors contributed to Indosat’s decision to increase its Internet presence. First, as mentioned, the need for lesser reliance on cell phone revenue. Second, forecasts that predicted tripling of Internet users from 16 million in 2005 to nearly 50 million in 2009. Finally, the introduction of a high speed mobile technology, High-Speed Downlink Packet Access (HSDPA), making broadband access more widespread and affordable, particularly suited for a country with Indonesia’s exceptional geography

The Internet push took the form of a campaign baptized “Broadband anywhere.” In 2007 Indosat was the first in Indonesia to deploy 3.5G technology, providing speeds up to 18Mbps. A package baptized ECO! offered broadband access for just over $ 17 per month. In April 2007, Indostat had attracted 14,000 wireless broadband users, or 40% of the national total.

What’s more Indosat had the financial muscle to pursue its Internet/broadband strategy. Revenues were nearing the $ 2 billion threshold ($ 1.8 billion in 2007) and had grown 35% in a year. Return on sales stood at 12%. Cellular and fixed-line services provided 71% and 15% of revenues respectively. Internet and data communication services accounted for 14%.

Challenges and questions for Indosat

The case concludes by bringing up a number of the special challenges facing Indosat as well as some of the strategic issues to be addressed. Among the financial challenges generated by the Indonesian environment were inflation and a volatile currency. The former created pressure on consumer spending power, the latter forced Indosat to devote resources to currency risk management. Indosat also had to deal with labor unrest in a context of a lack of skilled personnel.

Among the strategic questions facing the company were technological alternatives, broadband services positioning and partnership. On the technological front, HSDPA used GSM (Global Systems for Mobile Communications) technology but the newer CDMA (Code Division Multiple Access) technology which offered better call quality and greater area coverage per tower. On the other hand, GSM remained far more widespread with 80% of mobile subscriptions.

With regard to positioning, in other parts of Asia (for example Singapore and Hong Kong) movie and content download were high among broadband services demanded. Indosat had to decide whether the Indonesian customer wanted a more basic service or whether she would demand the more advanced features right off. Should Indosat carpet-market the new customer market or would there be more value in cherry-picking customers? These were the challenges and strategic issues facing Indosat’s management and that Professor Bose’s case puts to its readers.

Reference:
ECCH 308-346-1
"Bridging the Digital Divide: Indosat's Drive for Broadband Penetration in Indonesia"
Dr. Indranil Bose, Havovi Joshi
University of Hong Kong

By Sunaina Anand
Published November 2009