Govt's new tariffs may benefit Indonesia's cellular industry Teguh P Hartanto, Analyst Lower telecommunication tariffs may

ultimately be beneficial for the industry. In response to a recent ruling by the Business Competition Supervisory Commission (KPPU), the government announced a new set of interconnection tariffs, which will take effect on April 1, 2008. Although controversial, the regulations may actually encourage growth within the cellular industry. Under the new regulations, interconnection tariffs for fixed to mobile and mobile to mobile connections will be respectively cut by 28 percent and 42 percent. Concurrently, mobile to fixed tariffs will be raised by 34 percent. By lowering tariffs, the government expects telecom operators to compete on fairer terms, minimizing anti-competitive behavior while at the same time encouraging new subscribers through greater penetration of the middle to low income market segment. In Indonesia, the wireless industry is currently operating both GSM and CDMA technologies. GSM technology has always been intended for mobile a.k.a. cellular connections. The early entrance of this technology led to its dominance in the domestic cellular market (i.e. an estimated 90 percent market share). Unlike GSM, licenses for CDMA operators are divided into full mobility (cellular) and limited mobility (fixed wireless). The latter is intended to replace the presence of fixed wireline technology, the expansion of which is now considered uneconomical due to the high investment needed. The reduction in mobile to mobile tariffs by 42 percent to Rp 261 per minute will benefit cellular operators as compared to fixed wireless operators. With pricing of fixed to mobile tariffs on par with mobile to mobile tariffs, people will tend to utilize their cellular connection rather than fixed line service due to its mobility. The new price scheme is therefore expected to stimulate growth in cellular traffic volume per subscriber. Cellular industry data suggests that as of 2007, the number of subscribers currently exceeds 90 million. This translates into a total market penetration of around 38 percent. Industry growth is therefore expected to be fueled by additional subscribers from the middle to low income segment. While the expansion of geographical coverage for existing networks will positively impact subscriber growth, reduced tariffs are expected to have a much more catalytic effect. As cellular phone services become more affordable an additional 50 million new subscribers are expected to sign up over the next few years. The new equilibrium between price and demand may push overall market penetration to 60 percent increasing potential annual revenues to an estimated Rp 30 trillion. Concurrently, average traffic volume for existing cellular subscribers now hovers at around 55 minutes per month. One may therefore wonder whether optimum levels have already been reached. We doubt that is the case. Our observation of CDMA fixed wireless usage indicates an average monthly traffic volume of up to 180 minutes per subscriber. The average monthly expenditure on CDMA remains, however, in the vicinity of Rp 50,000 to Rp 55,000 per prepaid subscriber. We therefore believe that unit cost of calls is far more important in determining the monthly usage of prepaid subscribers. Lower tariffs might lead to higher traffic volume.

The reduction in interconnection tariffs may not produce a significantly negative impact on Average Revenue Per User (APRU) as increased volume is expected. Competition in the market, however, is becoming more intense, not only from existing players but also from new operators like Hutchinson Telecom Indonesia. Operators which lose market share due to enhanced competitive pressure may feel a pinch to their ARPU as users begin to switch to alternative carriers. Another impact brought on by the new tariff structure may involve interconnection revenues. The depth of such an impact, however, will depend on each operator's position (i.e. whether it is a net receiver or net payer). The dynamics of traffic volume will play another important role. In general, we believe the impact will be minimal, particularly when we factor in the upward adjustment of mobile to fixed line calls (increased by 34 percent to Rp 203 per minute). At the end of the day, we foresee the new tariff structure encouraging growth for the cellular industry by inducing increased competition in a fairer environment. Deeper penetration rates and heavier traffic volume should enhance economies of scale for all telecom operators, ultimately improving their bottom lines through greater efficiency. Concurrently, consumers will benefit through lower costs for enhanced and diversified services. It seems that the new tariff structure is not bad after all! The writer is a senior analyst at PT Bahana Securities

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