By seizing the opportunity to invest in mobile and data services, Indonesian telecommunications giant Telkom has placed itself in a growth sweet spot.
By Elliot Wilson
Telekomunikasi Indonesia started life in a privileged position. Telkom, as it is commonly known, dominated its home market from the moment of its creation by the Dutch colonial government in 1856.
Yet in recent years, as it has been forced to compete and adapt, it has performed far better than its history of comfortable monopoly might have suggested.
A domestic landline monopoly within Indonesia kept the competition at bay for decades. That gave the company a head start in mobile as rivals emerged in the late 1990s and early 2000s.
Since 2002, Indonesia’s GDP has more than doubled, bringing telecommunications within reach of more Indonesians and expanding the market for Telkom’s products. As the world’s fourth-largest population gradually becomes richer, that process continues.
So Telkom is thriving. Its mobile subsidiary, Telkomsel, boasted 153.6 million subscribers in March 2016, more than double those of its main rivals, Indosat Ooredoo and XL Axiata. As a semi-privatised corporation, majority owned by the government, Telkom has been able to attract a solid management team while its state owner supports it.
Profits have been substantial – US$1.7 billion (A$2.35 billion) in 2015, up 7 per cent, on US$5.6 billion of revenue. In the same year, Australia’s Telstra made a US$3.22 billion profit on revenues of US$8.14 billion, operating in a country with almost twice Indonesia’s GDP.
It’s little wonder that analysts and investors have a positive view of Telkom. As HSBC pointed out in a May equities report, the combination of a benign regulatory environment and growing consumer demand for more wireless data services makes it an attractive investment.
Camilia Goh, director of equity research at Bank of Singapore (BOS), says Telkom is in “a sweet spot to benefit from the growth in data usage”. Other strengths include its “scale, balance sheet and steady execution”.
Janice Chong, a director at Fitch Ratings, points to the carrier’s “robust credit profile”, solid market position, low leverage and high operating margins after expenses, currently running at north of 50 per cent.
Confronting the threats
Harsh Upadhyay, a Singapore-based analyst at telecoms consultancy Analysys Mason, describes the telco as “one of only a handful of major telcos that truly understand the importance of going digital and expanding beyond its traditional boundaries”. What he likes about Telkom, he says, is its vision.
“They are not myopic. They see the big threats out there two or three years out, and they are preparing for that.”
William Simadiputra, an equity research analyst at DBS Vickers, notes how well Telkom came out of a “price war” between 2010 and 2014, keeping its balance sheet in shape as the industry ploughed capital into new 3G and 4G services. It has overhauled its human resources, infrastructure and IT systems, rolled out new apps and improved its corporate culture – all signs of a company planning for the long term.
Telkom may be a 150-year-old corporation, but in terms of its ability to create services and products that cater to an aspirational middle class, it is looking younger by the day.
There are, however, some failings. BOS’s Goh notes that despite vowing to diversify its revenue base, Telkom remains no more than a connectivity provider: income from data and call minutes made up 96 per cent of its revenues in 2015, with less than 4 per cent coming from non-core services such as tower leases, call centres, property development and the sale of terminals.
Perhaps, more significantly, the telco giant has made slow progress in growing its fixed-line service.
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The data world
In recent years, Telkom has moved its sights to consumer data services. Its flagship service, IndiHome, combines high-speed broadband, landline and pay TV – the classic telco trifecta.
IndiHome’s subscriber numbers rose by 250,000 to 1.1 million in 2015, cementing it as the country’s largest home broadband provider. Telkom plans to boost that beyond 3 million by the end of 2016. It also aims to grow its share of the pay-TV market – another fast-growing slice of the telecoms business, currently dominated by Global Mediacom’s Indovision – to 50 per cent.
In a May research note, HSBC highlighted the rising importance of data to Telkom and rivals XL Axiata and Indosat. Voice and SMS volumes and revenues were declining quickly, HSBC noted, but that was “more than offset” by strong growth in internet data.
Such data made up 40 per cent of Telkom’s services revenues in 2015, and HSBC expects the trend to continue. That would reduce the chances of any new price war, HSBC’s team concluded.
In the quest to grow data and pay-TV revenues, Telkom has been chasing partners, both foreign and domestic. Rarely a week goes by without Telkom announcing a joint venture or partnership, each designed to lure new people to its broadband or pay-TV services, or to convince existing customers to shell out a little more for extra content.
Already this year, Telkomsel, the group’s mobile division, has joined forces with a slew of other carriers to bring Hooq, a multilingual Singaporean video streaming service, to its smartphone users.
It’s also announced a tie-up with US studio Dreamworks Animation and a new partnership with Future TV, a division of Chinese state broadcaster CCTV. Another new service, CatchPlay, pioneered in Taiwan, allows it to stream Hollywood blockbusters to its customers.
This proliferation of data-rich services is clearly designed to grab the attention of young and increasingly wealthy Indonesian customers, and convince them to sign up to IndiHome.
An attractive target
Viewed from afar, Telkom’s position at home may look assured, but few big telcos are happy to remain purely domestic players anymore: a narrow focus often leads to financial strain.
At home, Telkom’s main rivals are busy signing their own attention-grabbing deals. XL Axiata has teamed with Astro Malaysia Holdings to roll out Tribe, a video streaming service; Indosat has signed an exclusive music streaming deal with Sweden’s Spotify. Indosat and XL have also joined forces, unveiling a pan-Indonesian high-speed internet service designed to compete directly with Telkom.
Globe Telecom, an alliance between Singtel and Ayala Corporation of the Philippines, also hopes to break into one of South-East Asia’s fastest-growing economies.
Then there are the global players keenly eyeing Indonesia’s broadband and pay-TV market. From his vantage point in Singapore, Analysys Mason’s Upadhyay warns that Telkom’s biggest threat will come from beyond the Indonesian archipelago, through the so-called “over-the-top” content providers such as Amazon and Microsoft, who invest in cloud computing and data centres.
“In future, data will underlie everything,” he says. “Telcos are in a great place, as they remain the pinch-point between the provider and the consumer – but they need to continue to invest heavily.”
One of Telkom’s responses to these threats – both real and present, and implied and future – has been to channel more capital into start-ups. It has set up an internal Silicon Valley unit, MDI Ventures, to incubate ideas and then transform them into companies and innovations that boost data usage and increase customer stickiness.
In 2016, Telkom set aside IDR300 billion (US$22.5 million) to invest in start-ups, a fourfold rise from the previous year’s figure.
Some wonder if this is the right approach. At DBS Vickers, Simadiputra queries the sense of burning “excessive cash” in “new, unproven ventures”, especially at a time when investors – after five years of heavy capital investment and price wars – should be expecting a dividend windfall.
"They are not myopic. They see the big threats out there...and they are prearing for that." Harsh Upadhyay, Analysys Mason
For Telkom, one solution to the threat of rising competition at home is to take on the enemy in its own backyard. However as Chong from Fitch Ratings says: “Telkom has ambitions to pursue growth outside Indonesia, but only a few [of its expansion attempts] have materialised.”
She points to the failed US$1billion bid for South-East Asia’s largest undersea cable operator, Pacnet, in 2012, and a fruitless 2013 attempt to break into Myanmar’s telecoms market. Then there was its US$300 million bid for Guam-based telecom and pay-TV operator GTA, which collapsed in June 2016.
Chong notes that where Telkom has succeeded in establishing overseas outposts – as it has in Australia, Malaysia, Timor Leste and the US – it has limited its scope to offering low-margin mobile network virtual operator services, using network capacity leased from local mobile network operators.
n Australia, the company has invested in call centres and business process outsourcing.
In growth’s sweet spot
Yet a burgeoning market such as Indonesia offers enough opportunities to make foreign growth less important. Equity analysts still love Telkom as an investment. In May, HSBC stated in a research note that it was adding another 13 per cent to its forecast on the firm’s 2016 EBITDA (earnings before interest, taxes, depreciation and amortisation).
Despite Telkom operating in an ever more crowded market, analysts see plenty of upside in the carrier. Goh at the Bank of Singapore says Telkom’s stock remains “one of our preferred picks in South-East Asia”, with the firm continuing to benefit from “positive structural tailwinds”.
In a June research note, Citi said Telkom was “benefiting from benign competition in the mobile space and untapped growth opportunities in the fixed broadband space”. Using the same language as Goh, Citi described Telkom as being “in a sweet spot”.
For the moment, at least, it’s hard to disagree.