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SpirE-Journal 2006 Q3

The Great Leap Forward: ASEAN’s Telecoms market is set to boom as mobile overtakes fixed lines

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The huge mobile telecommunications potential within Asian emerging markets has begun to materialize in the past decade. This article discusses the rise of mobile phone usage in the region, the challenges facing service providers, as well as how telco carriers and other kinds of companies can benefit from the current mobile boom. It also includes a case study of the mobile telecoms industry in the region’s largest economy and its most exciting telecoms market at this time, Indonesia.

Mobile telecoms take off

In just under two decades, mobile phones have moved from being a costly piece of business equipment to an affordable everyday device. No longer is the mobile handset the exclusive province of business users. Old and young adults and even children carry mobile phones.

The mobile telecommunications market in Asia has been gathering momentum as national governments invest in their info-communication infrastructure to boost economic competitiveness. A wide range of products and services have sprung up, such as Internet telephony and virtual private networks, to cater to various mobile segments and applications.

As a result, many emerging markets in Southeast Asia (ASEAN) are bypassing traditional land lines and moving straight into mobile technology. This is particularly striking in Indonesia and the Philippines, two of the region’s large economies which have seen low fixed line penetration because of the high costs of developing copper wire infrastructure connecting the hundreds of islands in each country. This phenomenon is expected to swing the doors wide open for service providers and related industries. Future competition will lie not in increasing the number of consumers but in exploiting customer niches and value-added services.

The numbers game

In Asia, mobile penetration is higher than that of fixed lines (see Fig 1).

In emerging economies, the under-developed fixed-line infrastructure is the key factor explaining the quick uptake of mobile technology. It is far easier and faster to build cellular towers in rural and remote areas than to install copper wire or fibre-optic cable.

Within the Asia Pacific region, the consensus among telco carriers is that the greatest growth in mobile going forward will come from the under-served Indian and ASEAN markets.

This article will focus on opportunities in ASEAN. The countries of Southeast Asia have seen robust economic growth in the region of 5%-6% annually. They have also seen the release of new hardware models and services offerings at economical prices. However the region is also home to heterogeneous populations with differing cultures, income levels and technology levels, fuelling the emergence of highly segmented telco markets.

More than just a handset

This segmentation has created fertile ground for new products and services in ASEAN, as the telco industry rethinks its strategies in light of the convergence of IT, broadcasting and telecommunications:

Short message service, or SMS, has been spectacularly successful in ASEAN, particularly among students, youth and young adults attracted by low costs and carrier promotions.

– The Philippines’ National Telecommunications Commission (NTC) estimates that an average of 250 million SMS messages was sent per day in 2005.

– Indonesian mobile users have a passion for SMS text to voice usage with a ratio of 10:1, resulting in a total of 60 to 70 billion SMSes a year.

The worldwide ringtone market alone is estimated to be worth US$2.5 billion to US$3.5 billion. Downloadable ringtones are wildly popular among urban youth in cities like Singapore and Kuala Lumpur, with ringtones available for popular Malay and Chinese songs.
Known as the next generation e-commerce, m-commerce will allow the trading of goods online through wireless handheld devices. i-Mode users in Japan, for example, are able to purchase drinks from vending machines on the spot and pay for it via their phone bills each month. In ASEAN, the potential for m-commerce was demonstrated by G-Cash, the first cashless and cardless payment platform in Philippines. G-Cash is a transaction service through which subscribers buy goods and services, transfer money, receive domestic fund transfers and international remittances via the mobile phone

Greater segmentation will arise as technological advancement allows carriers to offer ever more specialized service offerings. Mobile technology is advancing at a rapid rate from the initial 1 Generation (1G) prototypes to the recent 2G phones and now the upcoming 3G, which includes options such as video conferencing, mobile Internet access and more, which have yet to take off in a big way in ASEAN.

However the ASEAN region as a whole is still characterized by emerging country income levels co-existing alongside developed country standards of living in some urban pockets. The IMF recently highlighted the fact that economic growth in Asia has been marked by increasing inequality since the late 1990s, in contrast to growth in the three decades prior to the 1990s which saw falling social inequality indicators. Telco firms have struggled with these realities as they decide the appropriate timing to launch value-added services.

In Malaysia for example, whose mobile market appears saturated, the 3G growth rate has been low compared to countries like Korea or Singapore. As at the first quarter of 2006, only 0.6 percent of all mobile lines in Malaysia were 3G, compared to eight per cent in Singapore and over 33 per cent in Korea. At the opposite end of the spectrum, innovative pricing and distribution in the Philippines have pushed up penetration to more than 40 per cent in a country with an average income of just US$1000.

However, the biggest obstacle faced by mobile operators in Southeast Asia is the inability to fully capitalize on economies of scale. Cross-border interoperability beyond basic voice service remains poor. There is also a risk of
further market fragmentation with the emergence and adoption of different technology standards. This is why leading mobile service providers in the region are banding together.

Bridge over troubled waters

On November 2004, seven leading Asia Pacific mobile operators signed an agreement to form a regional union called the Bridge Mobile Alliance, which will operate through a Singapore-incorporated company, Bridge Mobile Pte Ltd. It has become the largest mobile joint venture in the region.

The operators with a combined base of over 80 million subscribers on hand are:

Bharti (India)
CSL (Hong Kong)
Globe Telecom (Philippines)
Maxis (Malaysia)
Optus (Australia)
SingTel (Singapore)
Taiwan Cellular Corporation (Taiwan)
Telkomsel (Indonesia)

Their goals are to improve voice and data roaming services as a single source of mobile service providers in the Asia Pacific for multinationals and large corporate customers, as well as other joint product development initiatives. The arrangement mirrors airline alliances where groups of airlines cooperate to leverage an optimized and extended network, reducing cost and, in turn, offering improved savings and convenience for the traveler.

Growth trajectories for ASEAN’s mobile market

Indonesia offers a compelling illustration of these trends. Indonesia is the ASEAN region’s largest economy as well as being the world’s fourth largest country in terms of population. It has attracted intense interest in recent years from international telco cariers such as Hutchison Whampoa, Telkom Malaysia, Maxis and Singtel, and for good reason. Indonesia’s mobile telecoms market is booming and witnessing intense competition in all parts of the spectrum – from “low-end” pre-paid services to “high-end” corporat Virtual Private Network (VPN) and Voice Over Internet Telephony (VOIP). Indonesia’s explosive telcom market also illustrates the challenges faced by telco carriers as they strive to grow profitably in an environment of fierce competition.

CASE STUDY – INDONESIA

Islands of opportunity

All Indonesia providers posted revenue growth in the end of 2004, the average being US$0.93 billion while the average revenue growth in cellular industry was 30 percent for the main cellular providers. With these figures, it is not difficult to see why Indonesia looks set to embrace the mobile service technology with open arms.

Most Valuable Players

The biggest service providers in Indonesia’s mobile line industry are currently PT Telkomsel, Indosat and PT Excelcomindo Pratama (XL).

PT Telkomsel is the market leader in phone cellular market, with around 54 per cent market share in the cellular industry that consists of over 40 million active users. Over the last five years, operations have grown substantially as it launched new services and built its network infrastructure which now covers more than 90 per cent of Indonesia populated area, including all of the provinces, cities and regencies.

Indosat is the second largest cellular operator in Indonesia and the primary provider of international telecommunications services. After merging with its two subsidiaries, Indosat is well-positioned as the provider of a comprehensive range of products and services in Indonesia. In May 2005, Indosat recorded 13 million subscribers and targeted another million by the end of the year.

PT Excelcomindo Pratama, established in November 1995, is the first privateowned cellular provider in Indonesia and began its commercial operation in late 2005. XL’s business today in consumer solutions deals primarily with dual band cellular networks, prepaid cards and Xplor postpaid subscriptions. XL has built one of Indonesia’s highest quality mobile networks and associated transmission infrastructure which covers all the major cities in Indonesia. By the end of 2005, XL laid claim to 6.98 million subscribers.

Not surprisingly given the structure of the economy, Indonesia’s mobile phone service providers are more focused on the prepaid card segment. Telkomsel and XL provide two types of prepaid cards each, while each has only one postpaid card product. Generally, the prepaid card is targeted at middle- and lowincome income population, while the postpaid card appeals to business users.

Price wars

In the past, competition between operators focused on price cuts on starter packs and lower voucher denominations, rather than cheaper minutes pricing.Customers fall into a few segments and may choose from different value plans. Postpaid card subscribers can choose a plan with free SMS, free roaming, or others according to their preferences. Prepaid card users, on the other hand, face varying tariffs that extend to end caller, zones and time periods. Promotions abound as well, for both prepaid and postpaid mobile phone subscribers. They may be free tariff, prizes, point rewards, quizzes, and the likes.

Of course, pricing alone is insufficient to succeed in this business. Features and value-added services (VAS) provided by the local mobile phone operators have to be appealing and innovative in order to stay ahead.

Goody bags

Features and VAS are crucial advantages that differentiate one telco from another. Much of the competition in the Indonesian mobile market revolves around innovation in this space. Prominent features include:

Ring Back Tone

– Telkomsel: commenced in August 2004, this service covered the whole Java island with more than 200,000 active users and selection of more than 2,000 songs by the end of that year.

– Two other major operators, Excelcomindo and Indosat, are following suit and have launched similar features.

Mobile Message Board by Telkomsel

– A service that enables all customers to create facilities such as quiz organizer, polling or other activities related to the promotion and distribution of information through pre-assigned short numbers.

SMS 800 by Indosat

– An information service about the company’s products through SMS. Users can access information, such as cards, vouchers, features, SMSes, MMSes, international roaming, new innovations, and such.

Three Location Based Services (LBS) by XL

– I Near You in XL Directory helps users to locate nearby public amenities;

– Where Are You in XL Update enables users to find out where their personal contacts were located; and

– Safe Trip in XL Travel features information that helps users to travel safely

Notify Me by XL

– This is a notification service by via SMS to inform the user that there has been a missed or unsuccessful call.

Call Me by Telkoms

– A new innovation that offers services to prepaid card users. Subscribers can keep their connection even when they run out of their reload voucher or when they are in the grace period. By simply sending a toll-free SMS to 808 (Telkomsel’s number), subscribers can ask other subscribers to give a call back.

Latest Developments

Indonesia finally became the third Southeast Asian nation, after Singapore and Malaysia, to launch 3G services commercially. Telkomsel rolled out its W-CDMAbased 3G service in August 2006, marking the first commercial introduction of 3G to Indonesia. It was quickly followed by Excelcomindo with its 3G launch in September 2006.

The transition from 2G or 2.5G to 3G will enable subscribers to send and receive advanced features such as high speed data services and video sharing.

Indonesia has emerged as a new hotbed for CDMA2000 deployments due to the high number of operators, the variety of services offered and the market’s positive response, according to the CDMA Development Group.

CDMA2000 is a family of 3G mobile telecommunications standards that uses a multiple access scheme for digital radio to send voice, data and signaling data between mobile phones and cell sites. It is a technology that can be easily and affordably deployed in rural areas.

Big operators (GSM) are not targeting the rural areas because of staggering costs. With CDMA technology, however, outlay can be lowered so that profit from rural operations is not only feasible but enticing.

Conclusion

Without a doubt, mobile technology in Asia is taking off. In contrast to China’s high penetration rate, the best days of ASEAN’s mobile market probably lie ahead. The leapfrogging of mobile over fixed lines has opened up a window of opportunity that is big in scale but small in time frame. As the example of Indonesia demonstrates, investment opportunities abound – for example in terms of pushing penetration in the rural sector and fully exploiting the potential of 3G – and imminence is the key success factor.

The greatest challenge telco carriers and other companies will face in ASEAN is the segmentation of the market. ASEAN embraces a huge spectrum of cultures, income levels and geographic locales, including some of the least accessible
places on earth. Firms playing in the mobile market will have to grapple with a pyramid-like demand structure, one that is likely to persist for some time given an environment of rising income inequality. Middle-class users and international corporate customers demanding the most advanced services on offer are perched atop a large base of low to-middle income consumers in both urban and rural zones who tend to prefer pre-paid services.

Differentiated and innovative services are needed, not simply low prices. The example of Indonesia shows how rapid innovation in features, rather than cheaper call minutes, can be the real differentiator for mobile carriers.

As mobile telephony connects more and more citizens in Southeast Asia, content application providers will also benefit alongside telco carriers – if they learn these lessons well.

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