Online Extra: Telkom: Redefining the Rules

The Indonesian phone company got around government regulations to secure an early toehold in international calling via the Net

By Michael Shari

When Indonesia fell into financial crisis in 1998, the government's domestic telecommunications company, Telekomunikasi Indonesia (TLK ), barely skipped a beat. Even when the Indonesian rupiah depreciated more than 90% against the U.S. dollar that year, Telkom, as the company is known, was still expanding its fixed-line network across the vast Indonesian archipelago and building an undersea fiber-optic network for Internet and broadband services. It's now linking to networks in neighboring Malaysia and Thailand.

And when Parliament passed a new telecom law in 1999 declaring that the government's international operator, Indonesian Satellite (Indosat), would have to surrender its monopoly on international calls on September 1, 2003, Telkom decided it couldn't wait. It found a detour around Indonesia's cumbersome regulations and broke into the international-call market in May, 2002, with voice-over-Internet-protocol (VoIP), which uses Net-based technology to make voice calls.

"Our business has to become more creative," says Telkom CEO Kristiono (his full name). "The room to grow is huge." It's already so strong that the Indonesian telecom is No. 4 on BusinessWeek's 2003 Info Tech 100 list.


  Investors have been warming to Telkom ever since it unwound cross-shareholdings with Indosat (IIT ) two years ago. "It was very messy," says Devan Kaloo, investment manager at Aberdeen Asset Management in Singapore, which holds Telkom stock. "We don't like cross-shareholdings. They always lead to a misalignment of capital." Telkom's stock is up 55% since Mar. 11 and is expected to keep rising after Indosat loses its monopoly on international calls in September.

The invaluable lesson Telkom took from VoIP is that a determined player can find legal ways around a government's sometimes stifling rules -- while increasing revenues and cutting costs. "This is the thing we learned from the market," says Adeng Ahmad, head of Telkom's multimedia division, which runs the VoIP service. Telkom is applying this lesson again by finding a gap between regulations governing fixed lines and cellular networks. In several cities, it's marketing a kind of digital wireless technology as an "enhanced cordless phone" that customers can take off the hook and carry anywhere within their own urban area code -- across the sprawling capital of Jakarta, for example -- at lower fixed-line rates.

By the end of 2004, Telkom plans to install 700,000 such lines using Samsung and Ericsson (ERICY ) equipment in the cities of Surabaya on Java, Denpasar on Bali, and Balikpapan on Borneo. At first, Telkom was calling the service a "wireless local loop" to fit more easily into Indonesia's strict regulations. But Kristiono has dropped all such pretenses and is now branding the service "CDMA 2001x," in reference to the technology standard it uses.


  The future of CDMA looks bright in Indonesia. A voice heard over a CDMA line is said to be as clear as that over a landline. But Telkom's motive is financial: The company's profit margin on cellular services is about 70%, vs. 50% on fixed lines. "CDMA will save them money," says Tjandra Lienandjaja, a telecom analyst at the Jakarta office of Singapore-based brokerage G.K. Goh.

Telkom may not have to work as hard to introduce this hybrid product in Indonesia's immature cellular market -- only 4.5% of Indonesians have cell phones, half the Asian average -- as it did to pry open a back door into the international-call market. The state-owned company bought VoIP technology from Cisco Systems (CSCO ) in a standard package that included routers, training, even a business plan back in mid-2001 for total investment of $6 million. That strategy allowed Telkom to fill up the unused capacity on its fiber-optic pipes.

Phone calls, however, don't travel across the Web. They're transmitted over Telkom's fiber-optic lines using the digital computer code of the Internet. Customers don't need a computer or a cool gadget -- they just dial direct from a public or private phone using a universal three-digit access code. And Telkom has rounded up telcos in other countries to serve as partners to complete calls. Telkom is marketing the service aggressively, competing with several government-licensed Internet voice services in Jakarta and a few unlicensed ones that are marketed door-to-door.


  The VoIP foray is starting to pay off. Telkom's international calls -- through the Net-based technology -- brought in $6 million in revenue from January to March, vs. just $324,000 during the first quarter in 2002. And while Telkom doesn't disclose breakdowns of its profits, Ahmad points out that revenue on international calls is already equal to its investment in VoIP and insists the service has contributed to earnings. And as Kristiono points out: "The investment is not as much as conventional technology."

Government-owned Indosat is poised to enter the VoIP field on Sept. 1, under the same law that will allow Telkom customers to make conventional international calls. Then, the two will be in genuine competition. Telkom stands to rake in $11 million from international calls this year and up to $36 million next year, says Lienandjaja. Meanwhile, Indosat has installed its own fixed lines and started selling them to customers in late 2002. Prices won't plummet anytime soon under current regulations that fix call rates from land lines, but Kristiono says he expects gradual deregulation will bring fixed-line rates "in balance" with VoIP rates.

Telkom says it will maintain existing VoIP services to cater to households while offering higher-quality international-call services to corporate clients even after Sept. 1. Indosat estimates that VoIP accounts for 15% of all international calls made from Indonesia today and doesn't anticipate a big change in the percentage. "We recognize and understand that VoIP has specific regulations which differ from international calls," says Wahid Sutopo, investor relations manager at Indosat.


  Of course, Telkom isn't without issues. An attempt to forge joint ventures with multinational telcos from the U.S., Japan, and Europe in five Indonesian provinces ran into trouble after the Indonesian rupiah depreciated 90% in January, 1998, and the government capped call rates. Four of these deals ended last year.

One of the joint ventures, in which AT&T Wireless (AWE ) owns 30%, is suing Telkom for $1.4 billion in damages at the International Court of Commerce in Geneva. Kristiono, who was promoted to CEO in June, 2002, says he's negotiating a new settlement with AT&T Wireless. A spokesperson for AT&T Wireless says the suit is still pending. "My concern is that if Telkom is successfully sued, there would be a liability there," says Aberdeen's Kaloo.

Nevertheless, it's hard to deny that Telkom has distinguished itself from many Asian telcos -- if not many Asian companies in general. Telkom gets it. Unlike its counterparts in Europe, it never pressured its balance sheet by investing in expensive licenses for next-generation wireless services. As a result, it wound up in prime shape to break out of Indonesia's domestic market. "They recognize that growth in the fixed-line business is hard to come by," says Alistaire Scott, a telecom analyst at Merrill Lynch in Hong Kong. And now the Indonesian telecom is really connecting.

Shari is BusinessWeek's Singapore bureau manager

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