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3G shortfalls continue to slow Indonesia’s mobile growth

Indonesia, with the third largest population on earth, has the potential to be the ‘new China’ in terms of mobile growth opportunities. However, the country has been very slow to enable mobile broadband, and now its auction to open up more 3G spectrum has been delayed for the fourth time in the wake of the bankruptcy of lead telco Telkomsel.

Existing 2G and 3G networks are coming under rising strain as Indonesian consumers start to adopt smartphones and data services, so new capacity is urgently needed. As for 4G, the country made a commitment to WiMAX, but restricted it to the old fixed standard for many years, and LTE is unlikely to start its roll-out until 2014 because the potential bands are all occupied by broadcasters, government agencies or legacy wireless, forcing complex refarming programs.

As for 3G, the third phase auction, in 1.9GHz, originally scheduled for June 2012, has been postponed for the fourth time, this time indefinitely. The immediate reason is that the country’s largest operator, Telkomsel, a 65:35 joint venture between state operator Telkom and SingTel, has been declared bankrupt. The bankruptcy itself is controversial ‘ it was ordered by the courts after the carrier’s prepaid voucher distributor, PT Prima Jaya, said it was owed $557,000, a claim Telkomsel disputes. The firm is appealing the decision and SingTel said the unit was a ‘financially strong company’ with net assets of $3.8bn.

However, a bankrupt firm cannot bid for spectrum under Indonesian rules, but excluding Telkomsel would affect its future competitiveness ‘ many expect it to win its appeal in a few months’ time ‘ and unbalance the whole auction, hence the postponement. But it leaves the 3G industry in limbo once again. Nonot Harsono, a member of the country’s Telecommunications Regulation Committee (BRTI), told Investor Daily: ‘The bankruptcy is a big deal. It’s not just about Telkomsel unable to participate in the 3G tender, but also about the economy of a country.’

The rising popularity of smartphones, especially Android ones, is making the 3G shortage urgent. According to IDC figures, Android overtook BlackBerry for the first time in the second quarter as the most used full mobile OS in Indonesia, taking 52% share. However, BlackBerry remained the top smartphone brand in the country, which is one of its few remaining strongholds ‘ though no longer a growth market, with its sales down 6% quarter-on-quarter in Q2.

About 10 vendors now offer Android models in the huge country, with Samsung, HTC and Sony making the biggest impact according to the analysts. Overall in Q2, the Indonesian mobile phone market grew by 10% quarter-on-quarter (QoQ) and 25% year-on-year (YoY), though smartphones suffered a QoQ decline of 6%, and a year-on-year growth of only 13%. This shows that, unusually, in this country featurephones are still driving handset growth, though sub-$50 smartphones will take over this role after 2012. This is partly because new mobile users are often in the huge rural areas, which are sparsely covered by 3G. In the featurephone sector, local suppliers like Cross and MITO are putting intense pressure on market leader Nokia, says IDC, which forecasts featurephone shipments of over 45m by the end of this year.

Even with its spectrum problems, Indonesia is the world’s fifth largest mobile market and is on track to cross the 200m subscriber mark by year end. If it could overcome its regulatory obstacles and deploy LTE, it could hit 10m users in five years, estimates Wireless Intelligence. Mobile connections are currently growing by around 30% a year, reaching 197m in Q3, and there is further growth potential since mobile penetration is only just above 80%.

The market has eight cellcos and three fixed WiMAX carriers, but the massive leaders are the GSM networks of Telkomsel, Idosat and XL, which account for 85% of connections. Telkomsel has 46% share and could surpass 100m connections this year if it sorts out its bankruptcy issues. It offers 21Mbps HSPA+ in big cities and has been trialling LTE since August with ZTE, working on a system which will be harmonized with the regional holdings of minority owner SingTel ‘ the Singapore operator wants a unified 4G network across its footprint in Singapore, Indonesia, Australia (Optus) and the Philippines (Globe Telecom). Telkomsel also recently hired Telecom Italia to contribute to its 2011-2015 Technology Plan.

Indosat has rolled out dual-carrier 42Mbps HSPA+ in a few markets though has not announced LTE plans. It is majority owned by Qatar’s Qtel but is struggling with falling profits and market share, losing out to third placed XL, which is Malaysian-owned and has the broadest 3G coverage, with over 19% of its base migrated. It is conducting LTE trials with Ericsson.

The two main CDMA operators, Smart Telecom and Mobile-8, recently formed a new joint venture, SmartFren, to share retail and distribution networks and carry out joint marketing. And CDMA fixed wireless operators TelkomFlexi and Bakrie Telecom are seeking regulatory approval for a US$1bn merger.

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