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Telkom Indonesia sets out on steep road as 'telco-tech hybrid'

State company lifts Netflix ban, expands broadband to reverse slow growth

Telkom Indonesia has begun a quest for new sources of growth as mobile subscriptions are saturating in the country.   © Reuters

JAKARTA -- Indonesia's state-owned telecoms operator Telekomunikasi Indonesia, better known locally as Telkom, has begun a quest for new sources of growth, as intensifying competition in a saturated mobile phone market erodes the company's revenue and local dominance.

Part of this includes its recent decision to lift its block on content from U.S. streaming service Netflix across its platforms. "Telkom appreciates Netflix's changing approaches in the Indonesian market, thereby allowing Telkom Group subscribers to access a variety of entertainment content," Arif Prabowo, Telkom's vice president for corporate communications, said in a statement on July 7.

Telkom is the largest telecoms company in Indonesia, a country which, with a population of nearly 270 million, has the largest such market in Southeast Asia by far.

Telkom's embrace of Netflix is a notable shift for the company. In 2016, the government banned the U.S. streaming service on the basis of nudity and violent content.

In announcing the company's new position, Prabowo said Telkom had made the decision after Netflix pledged to restrict access to its content to underage viewers and offer increased parental controls.

The announcement came just a week after Telkom posted earnings for the quarter ended in March that showed a further slowing of growth compared with its main rivals, Indosat Ooredoo and XL Axiata. Telkom's revenue fell 2% year-on-year, to 34.2 trillion rupiah ($2.4 billion), while XL's earnings grew 9% and Indosat's 8%, to reach about 6.5 trillion rupiah each.

Netflix has been gaining subscribers in the country since the coronavirus outbreak and regional government restrictions in April and May have been keeping many people at home.

Indosat and XL have carried Netflix programming all along, giving them a competitive advantage. Telkom expects its deal with the streaming service to buoy its sluggish revenue growth.

The former monopoly remains the dominant telecom in Southeast Asia's largest economy, particularly in the mobile sector, where subsidiary Telkomsel, a joint venture with Singapore Telecommunications, or Singtel, counted 162.6 million subscribers at the end of March. Indosat had 56.2 million subscribers and XL 55.5 million.

However, Telkom's era of double-digit growth between 2015 and 2017, which came thanks to its booming mobile data business, has ended. The carrier posted revenue increases of less than 5% in 2018 and 2019 and a 2% drop in the first quarter ended in March this year. Telkomsel, which has been contributing to roughly 65% of Telkom's revenue, reported growth of just 1% during the same period.

For many years Telkomsel has been the dominant player in the Indonesian islands outside Java, which is home to more than 100 million people -- more than the total population of the Philippines, Southeast Asia's second-most populous nation.

The state-owned company was often the only service available, especially in remote regions, due to the high cost of setting up networks across the sprawling archipelago -- an advantage that has allowed it to charge premium rates.

Telkom President Ririek Adriansyah (center) has revealed the company's new theme for growth by transforming into a 'digital telco'. (Photo courtesy of Telkom)

But the company's position might be less comfortable from now on. According to Singapore bank DBS Group, "Telkomsel faces growing competitive pressures within and outside Java." Analysts have noted rival XL Axiata's aggressive expansion in particular. The mobile network operator has more than doubled its 4G base stations, from around 20,000 in early 2018 to 43,600 as of March.

As a result, Telkomsel's average revenue per user, while still the highest in the domestic mobile industry, fell 1% year-on-year in the first quarter, to 45,000 rupiah ($3), compared with XL's 9% rise to 36,000 rupiah and Indosat's 11.5% growth to 29,600 rupiah.

Telkom is under pressure to find ways to speed up revenue growth, which has slowed over the past two years, dragged lower by market share losses at mobile subsidiary Telkomsel.

Telkom President Ririek Adriansyah recently unveiled the company's big new theme: a transformation into a "digital telco." Adriansyah said this included a significant expansion of its cloud business and the development of more partnerships for digital services.

Given that the coronavirus is still spreading in Indonesia, "there is room for Telkom to expand its digital business," Adriansyah said in late June.

To bring this transformation about, Telkom last month named Muhamad Fajrin Rasyid, a co-founder and president of Indonesian e-commerce unicorn Bukalapak, as its new director for digital business.

"Seeing his track record and experience despite his young age, Fajrin is the right figure to lead Telkom's digital business development," State Enterprise Minister Erick Thohir said after Telkom's shareholders meeting on June 19.

Telkom is keen to develop fixed broadband services, as well as its big data and cloud businesses.

Fitch Ratings expects Telkom's growth prospects to be driven by its fast-growing fixed broadband services under the IndiHome brand, thanks to the proliferation of video streaming services such as Netflix. Another plus for the company are the coronavirus movement restrictions, which is encouraging a shift from mobile traffic to home broadband.

Indonesia's fixed broadband penetration is around 15%, among the lowest in the Asia-Pacific region, offering a good deal of room for growth. "This, coupled with relatively benign competition, puts Telkom in a favorable position relative to domestic peers, particularly given its extensive [optical] fiber network," said Janice Chong, director for Asia-Pacific corporate ratings at Fitch.

The state-owned company's subsidiary Telkomsigma runs 22 small data centers covering 36,500 sq. meters, according to Lee Young Jun, research and development manager at Mirae Asset Sekuritas Indonesia. Its asset size far exceeds that of XL and Indosat.

And Telkom on July 9 kicked off the construction of its first "hyperscale" data centers outside Jakarta -- which will be one of the largest data centers in Indonesia. It will span 65,000 sq. meters with a power capacity of 75 megawatts, and is slated for completion next year.

However Telkom's road to digitization will be steep.

For Indonesia's public cloud market, the Boston Consulting Group has forecast compound annual growth of 25% -- to $800 million in 2023 from $200 million in 2018. But Telkom will have to compete in this segment with major global players such as Alibaba Group Holding, Amazon and Google, which are expanding in Indonesia.

And a lack of government support for the development of 5G services means Telkom is not able to fully develop that part of its business, unlike neighboring countries where 5G is a pillar of many local operators' growth strategies.

In Singapore, operators including Singtel are pursuing 5G with operating licenses awarded in June. Singtel will begin rolling out 5G services in January 2021, aiming for nationwide coverage by the end of 2025.

In Indonesia, by contrast, although local operators are making preparations, a lack of spectrum for 5G is hampering technology and network development.

Fitch Solutions notes that "over the short term, Telkom will face considerable financial pressures as it attempts to transition from being a traditional telco to a hybrid telco-tech business."

Additional reporting by Ismi Damayanti.

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