Indosat’s growing data services business-
Indonesia’s third largest telecom company by subscribers, Indosat recently released its earnings for the six-month period ended June 2014, showing a decline of 0.81 per cent in operating revenues. This comes after the company had reported a 0.3 per cent year-on-year decline for the quarter ended March 2014. Despite this, the company recorded significant growth in profits, but this was due to gains on account of foreign exchange and sale of 5 per cent stake in Tower Bersama in March 2014.
One of the primary reasons for the decline in revenues has been the slowdown in the growth of the traditional telecom business – fixed line and wireless voice services – which still accounts for over 80 per cent of total service revenues. This is an industry-wide trend. Even as adoption and usage of data services continue to increase, there has been a significant drop in volumes in the voice segment, which is hurting operator revenues and profitability.
Indosat, like other telecom companies, is betting on data services to offset the negative growth in the traditional telecom business. The company is also taking several initiatives to pare its debt, reduce interest expenses and improve profitability.
OTT players and high competition affecting voice business
While a significant increase in the adoption of voice services (fixed line and wireless) drove growth for most telecom operators during the 2000s, a sudden decline in their usage in recent years has left telecom operators high and dry. Indosat is no different. Voice traffic on the company’s network came down from 16 billion minutes during January–March 2013 to 13.5 billion during January–March 2014. Similarly, the minutes of usage per subscriber declined from 95 for the quarter ended March 2013 to 79 for the corresponding quarter in 2014. This can be primarily attributed to a shift in customer preferences towards free-of-cost, over-the-top (OTT) applications such as Viber, WhatsApp and Skype.
The highly competitive business nature of the Indonesian telecom market has added to Indosat’s woes. While the market is dominated by Telkom Indonesia, XL Axiata, and Indosat, it includes several small players. Apart from targeting niche customer segments, these players often rely on a low-price strategy to gain subscriber market share. To remain competitive, Indosat has been targeting different customer segments through various brands such as IM3, Mentari, and Matrix. While IM3 targets the price-conscious youth population with attractive voice, SMS, and data usage prices, Mentari caters to professionals and corporate users, who have higher spending power. The Matrix brand has been developed to target post-paid customers and offers several supplementary value-added services.
Unfortunately for Indosat, efforts to attract customers for post-paid services have not yielded dividends yet. The number of such subscribers rose marginally from a low 0.7 million at the end of December 2011 to
0.8 million as of end-December 2013, while the prepaid subscriber base increased from 51 million to 58.8 million during the same period.
These factors explain the weaker operational performance of Indosat in the voice business. The average revenue per user declined by 2.7 per cent from Rp 26,800 during January–March 2013 to Rp 25,800 during the same period in 2014, although the decrease was partly offset by an increase in average revenue per minute from Rp 127 to Rp 140.
Tremendous growth in data services
Higher usage of OTT applications, however, has not been entirely a negative development for the company. Their usage, along with smartphone proliferation, has been the primary driver for the tremendous rise in data traffic. Data usage on Indosat’s network grew by almost 200 per cent from 5,257 terabytes (TB) for the quarter ended March 2013 to 15,372 TB for the same quarter in 2014. This tremendous growth in data usage can also be attributed to improved network coverage and less data traffic congestion. Indosat has already started migrating 3G users in the 2100 MHz band to the 900 MHz band in several areas, including Sumatra and Bali. Given the better in-building propagation characteristics of the latter band, user experience of data services will improve significantly, which will help the operator to retain customers and attract new subscribers. Further, Indosat has upgraded its 3G network with dual carrier high speed packet access technology to offer downstream speeds of up to 42 Mbps in areas like Bali and Java as part of its network modernisation plan.
Also, the company has been using Wi-Fi hotspots in urban areas with high-traffic density to decongest its network. It has so far installed Wi-Fi hotspots at about 4,000 locations in Jakarta, Semarang, Denpasar, and Surabaya.
Indosat is also taking steps to facilitate the development of a mobile applications ecosystem through funding of local internet start-ups. In October 2013, the company partnered with Switzerland-based Mountain Partners to launch a start-up incubator, Ideabox, to provide funds and expertise to local entrepreneurs working in the field of mobile app development. Ideabox has already funded four companies offering mobile services.
There has also been high growth in the company’s fixed line data business (MIDI). Revenues from this business increased by about 10 per cent from Rp 780 billion during the quarter ended March 2013 to Rp 861 billion during the same quarter in 2014. Under MIDI, Indosat offers broadband services to both retail and corporate customers and provides satellite-based services, data centre services and cloud services, through its subsidiaries Lintasarta and IM2. There has been growth in each of these business segments as enterprises continue to demand higher bandwidth and shift their data to the cloud platform owing to the latter’s easy access and lower space advantages.
Reducing foreign borrowings to limit currency fluctuation risks
While Indosat had a relatively low debt-to-equity ratio and debt-to-earnings before interest, taxes, depreciation, and amortisation ratio of 1.46 and 2.32 as of end-December 2013, foreign currency borrowings account for about 45 per cent of total debt. Considering that the Indonesian rupiah depreciated significantly in 2013 against the dollar and other foreign currencies, the company intends to reduce its foreign borrowings to 25 per cent through its bonds buy-back programme. It has already raised about Rp 1 trillion from financial institutions such as Indonesia Infrastructure Finance and PT Sarana Multi Infrastruktur. The company reportedly intends to use some of the proceeds to refinance its buy-back programme. Meanwhile, the company also realised Rp 1,391 billion from the sale of its 5 per cent stake in Tower Bersama, some of which might also be used for reducing its outstanding bonds.
Transitioning to data services business to achieve next level of growth
Indosat, like other telecom companies, is in a transition phase, where the company is increasingly focusing on data services to offset the decline in voice revenues. With several urban areas in Indonesia being underpenetrated and rural areas being totally unpenetrated, the data services business offers several growth opportunities for Indosat. To tap into this opportunity, Indosat has been investing heavily in expanding its networks to improve coverage and capacity. The company has earmarked an investment of Rp 8 trillion to modernise its network to improve data usage experience. It remains to be seen whether these efforts will bring the expected results.
