Indonesia Gets Hip To Cell Phones

Its market is finally taking off, even as operators fret about regulation

After Indonesia plunged into financial crisis in 1998, the country largely missed the cellular boom. While phone companies across Asia signed up subscribers by the millions, the rupiah fell more than 90%, leaving Indonesia's telcos barely able to pay their dollar-denominated debts, let alone fund much expansion. Meanwhile, the government capped call rates, which further limited revenues. Six of the nine cellular carriers on Indonesia's original roster failed, and foreign players such as AT&T Wireless Services Inc. (AWE ) and the Netherlands' KPN bailed out. By early 2001, only 1.7% of Indonesians had cellular phones, compared with 6% of Thais and 8% of Filipinos.

Today, Indonesia's cellular market is finally heating up. New licenses are being issued, and old players are coming back to life. The market has grown 58% this year -- to 18 million subscribers -- but there's still plenty of headroom: Even today, only 8% of Indonesia's 230 million people own a mobile phone, compared with 21% of Filipinos and 32% of Thais. By 2007, Indonesia will likely have 42 million cellular subscribers -- about 18% of the population -- according to researcher Gartner Inc. "The Indonesian market has a lot of growth potential," says Gartner analyst Foong King Yew.

Some of those new subscribers will likely be using third-generation, or 3G, phones, which offer superfast transmission of text and video as well as voice. In October, the Directorate-General of Posts & Telecommunications awarded Indonesia's first 3G license to Cyber Access Communications, a new entrant led by TelecomAsia Corp., which runs the Orange cellular network in Thailand. Cyber Access will be required to roll out its service within three years, and if it's successful the ministry may issue another 3G license, though no deadline has been set.

Many other callers will use so-called fixed-wireless services, which work much like cellular but offer cheaper rates. Bimantara Mobil-8 Telecom, a consortium of Qualcomm Inc. (QCOM ) of San Diego, Samsung Electronics Co. of Korea, and four Indonesian carriers that once operated now-inactive analog systems, on Dec. 9 launched a new fixed-wireless network on Java using CDMA technology. And a company called Ratelindo in September started using CDMA for semi-fixed lines in Jakarta, with a target of 1.8 million subscribers within a year. Ratelindo's big attraction: It costs about 70% less than cellular.


A piece of the No. 3 cellular carrier is also up for grabs, since New York-based Verizon Communications (VZ ) is selling off its 23% stake in Excelcomindo Pratama. Although Excelcom has just 16% of the market -- 2.7 million subscribers -- it hopes to add an additional 1.5 million by next December. Telekom Malaysia and China Telecom are bidding for Verizon's share, and the Philippines Long Distance Telephone Co. is interested, say securities analysts in Hong Kong. All three companies declined to discuss the issue, and Excelcom would only confirm that the stake is for sale.

The state-controlled market leaders, Telkomsel and Indosat, haven't been slowed by the renewed competition. Telkomsel, which has 8.8 million subscribers and 53% of the market, has no debt and is building out rapidly. Indosat, which has 5 million customers, has restructured its debt and consolidated its subsidiaries to create a national brand.

New entrants should be wary, as the rules of the game may soon change. In January, the government plans to create an independent regulator, though its exact role remains unclear. And, though Parliament has balked at the idea, the government has said it will lift controls on prices, which are currently capped at 7 cents a minute for local peak-hour calls. "There is some uncertainty," says Yasmin Wirjawan, associate director at Standard & Poor's (MHP ) in Singapore. What is certain, though, is that Indonesia is no longer sitting out the cellular boom.

By Michael Shari in Singapore

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