Indonesia Telecommunication Sector Economics
The growth story of consumer business in Indonesia has always been fascinating. The 4th largest population in the world, with 270 million people with a relatively high proportion of younger generation — a proxy that Indonesia will not be lack of manpower in the future. Not to mention the rising low-socioeconomic class and growing middle-class society.
In Goldman Sachs Report: The path to 2075, Indonesia is projected to be the 4th largest economy by 2050 — a very optimistic view given Indonesia is nowhere in top 15 countries today (according to the table above).
How does this reflected into telco industry? From the population standpoint, Indonesia has a fascinating potential with its massive population of 270 million people. However, about 150 million people are living in Java Island, the most populated island in Indonesia which only represent about 7% of Indonesia’s area, are saturated. All telco players have planted their Base Transreceiver Station (BTS) and sales people are aggressively acquiring customers, resulting in commoditized pricing.
The worldwide mobile data pricing research in year 2022 showed that Indonesia’s cost of mobile data pricing per 1 GB is about 0.46 USD. it is pretty cheap compared to USA (USD 5.62), while it is still comparable with UK (USD 0.7) and Malaysia (USD 0.45).
To expand the coverage outside Java, all telco operators seemed hesitant given the complexity of the uncharted territories and very low population density that may reflecting back to the Return on Investment (ROI). Not really a good story here right?
If the expansion of users are a potential bottleneck, what about the profitability per user? Unfortunately, the commoditized pricing is also reflected into how much is our user spend for their telecommunication services. the Average Revenue per User (ARPU) from two players are ranging from USD 3.1 (Telkomsel) to USD 2.7 (XL). A very far number compare to USA based ARPU; taking sample from USA’s T-Mobile, the prepaid ARPU is USD 37.9.
To have a more contextualized ARPU analysis, we made a ratio between ARPU vs GDP per capita, a proxy on how much people are creating economic value:
- Indonesia’s Telkomsel ARPU: USD 3.1; Indonesia’s GDP per Capita: USD 360 per month. Hence, the ARPU to GDP Per capita ratio is 0.9%
- Indonesia’s XL ARPU: USD 2.7, Indonesia’s GDP Per Capita: USD 360 per month. Hence, the ARPU to GDP Per capita ratio is 0.7%
- USA’s T-Mobile Prepaid ARPU: USD 37.9. USA’s GDP Per Capita: USD 6.4k per month. Hence, the ARPU to GDP Per capita ratio is 0.6%.
From the ratio perspective, although USA’s T-Mobile seems to have a very lucrative ARPU, the ratio to the GDP per Capita is relativey the lowest compare to Indonesia’s ARPU ratio to GDP per capita. We can imply that the ARPU increase in Indonesia may be a bit challenging to improve given the high ratio. However, the other factors such as spending behaviour, needs to be socially connected, improvement in OTT & other online-based entertainment may drive even higher ratio for Indonesians.
Pivoting to the extended telco business: Fiber-to-Home (FTTH) services or home broadband, the service seems promising. The holy grail of telco business is the continuous connectivity, hence the mobile operator who is able to not losing its customers’ connectivity, from dusk till dawn, will gain the most. In FTTH arena, the market seemed to be very underpenetrated. The total of home broadband subscribers are approximately 10.7 million, of total potential 60 million household in Indonesia.
Although the number of subscribers are lesser than Vietnam and Thailand, Indonesia has the most attractive growth story. The penetration rate is only 18% while Vietnam has reached 69% of the household (assuming 24.3 million household) and Thailand has reached 65% of the household (assuming 11.6 million household).
However, the return on investment seems to be an obstacle in this area. In high density area, such as Java Island, the price war is happening — not to mention that only certain affluent population are willing to pay for the home internet. The home broadband price is about USD 25 per month. If we look into the mobile ARPU data that shows only USD 3.1 and USD 2.7 per month, it is a bit difficult to expect the majority of population are willingly to spend USD 25 per month.
On the low density area, certain challenges such as difficult terrain (archipelago), less population density, and low buying power in non-Java area made the operators are unwilling to invest in expanding their fixed broadband network.
Glass Half-Full
With all doubt, some investors are still optimistic with Indonesia’s future. We see the evidence of growing middle class numbers, improving policy and regulatory system to be more favorable to business, digitalization of SMEs, and a more affordable education in both formal and informal format.
From the technology perspective, we see the Fixed Wireless Access (FWA) combined with 5G technology may be a the answer to network expansion in non-Java (less dense, difficult geography area).
These improvements are not perfect yet, we still wait and see how it can further accelerate the economy, but it is going to the right direction.
