The evolution of Indonesia’s highly successful tower industry

At the first TowerXchange Meetup Asia, executives from Komet Infra Nusantara (KIN), Solusi Tunas Pratama (STP) and Sarana Menara Nusantara (Protelindo) joined us and shared their views on the status of the Indonesian telecom and tower industries, how burgeoning data demand and a favourable competitive and regulatory environment stimulated infrastructure sharing, and how the Indonesia’s tower companies are supporting their customers’ requirements for BTS projects and co-locations.

KIN was the smallest towerco in terms of portfolio to join the panel discussion but they have become renowned for their entrepreneurial flair.. The company started operating in Indonesia in 1995 and was created on the basis of the simple notion of introducing infrastructure sharing in a relatively virgin market by its CEO, David Burke, who was then employed by Telkom (David was credited as being one of the architects of Mitratel). David was one of the few expats to work for the state-owned company, to whom the whole concept of tower sharing was very new. To date, KIN enjoys a portfolio of 600+ towers built thanks to both organic and inorganic growth.

STP, represented by its President, Nobel Tanihaha, announced a deal to acquire 3,500 towers from XL Axiata a few weeks before the TowerXchange Meetup Asia and took stage as third largest towerco in the country. Starting with a very regionalised, Jakarta-based approach, the company is now expanding into twenty-nine Indonesian provinces out of thirty-four. The company has been diversifying its revenue stream since 2012, with its move into fibre and is now focusing on value-adding opportunities such as small cells.

Protelindo is currently the second largest towerco in Indonesia with a strong portfolio of over 11,000 towers. Steve Weiss, CFO of the company, joined us in Singapore and shared his precious insights on the company’s evolution since 2008, year of its initial financing.

Over the past five years, the evolution of the mobile market in Indonesia has been exceptional. In fact, the country moved from a market over-supplied by by a plethora of operators, of which just a handful were actually offering GSM services, to a fiercely competitive mobile broadband-driven market led by three key players, namely Telkomsel, XL Axiata and Indosat, with Hutchison being a strong fourth rival.

One interesting aspect that was discussed during the panel was the necessity for top MNOs to rethink the way the do business and fully understand the usage pattern of their customer base. The country is number four worldwide in terms of Facebook usage and Jakarta is the number one in the world for Tweets. A recent study showed that people use such technologies for as long as nine hours a day and in a country where the rural population is still very high, data usage tends to be concentrated in a few metropolitan hubs.

While most of the population doesn’t have internet at home, data usage through their phones is sky-rocketing, forcing MNOs to come up with creative bundles, offers and propositions to attract the ever-growing mass of users to their brand.

Declining ARPUs combined with new content-led demands are driving MNOs to reassess their business models which were traditionally focused on pre-paid offers that didn’t necessarily motivate operators to push new innovative services and content. This is where a change of mindset is needed and where operators can generate new and creative revenue streams.

A successful case study is represented by Hutchison who were thinking about exiting the market a few years ago but focused their attention on data at a time when demand was experiencing a tremendous increase. Thanks to a few smart moves, combined with tower transactions dating back 2008 and 2010, the company was able to restructure its business to position itself as the second largest data operator. This illustrates how disruptive and exciting data has been for the industry as a whole.

The growth of the Indonesian tower industry, which didn’t exist in 2008 but which currently owns ~51% of the country’s towers, has been a result of the swift increase in mobile internet usage which forced MNOs to rethink their capex/opex models.

There remains plenty of room for growth in mobile internet penetration rates and usage. Considering that cable TV hasn’t boomed, it is safe to say that Indonesians are and will keep opting to use the mobile platform to enjoy most entertainment services. And although the market is still filled with a variety of smaller operators, our panellists noted that only five out of the ten operators have been consistently investing and upgrading their network and services. As a natural consequence, the other operators are falling further behind – Indonesia is one market where the total number of licenses differs from the effective number of active operators.

One factor to take into consideration is that in a market with plenty of MNOs, only the top two of three can afford the luxury to own any towers. The 2008 deal between Hutchison and Protelindo was a landmark transaction that contributed to other smaller players realising that there were alternatives to owning passive infrastructure. Towercos constantly inject capital into the market whether they build towers for MNOs or they acquire existing portfolios.

At the outset, the Indonesian tower industry looked closely at the Indian model and used it as a benchmark. However, the two countries ended up taking very different paths with Indonesia being able to allocate risks and rewards more evenly between towerco and MNO and more closely replicating the American tower industry model. And the profitability of the Indonesian tower industry is one very obvious measure of its success.

It’s interesting to note how panellists agreed on one very simple and yet often understated point. In a market where 80% of the revenue of the top towercos comes from four MNOs, it’s not only important but fundamental that these operators keep thriving. While towercos will keep looking at new market entrants and different revenue streams, the solidity of the industry as a whole very much depends on the top MNOs performances.

In a complex market characterised by challenging permitting requirements, community policies to comply with and a very strong local culture, the government has operationally supported the tower industry. The starting point was represented by a 2006 law that forced tower sharing in areas where a tower already existed. This regulatory change opened doors to the sharing concept and represented a major turning point.

Every day, during rush hour, five to six million people travel in and out of Jakarta which makes it complicated to simply plan and cover necessary capacity. Jakarta represents a distinct market of its own within Indonesia and is the region with the highest data consumption. Outside of Jakarta, smartphone penetration is quite low although the market is expected to slowly grow.

David Burke provided an interesting anecdote: “if I drive from one side of the city to the other, I can get cut off as many as six times during one single call. But as soon as I get out of the city, I can speak for as long as I want without getting cut off…”

Jakarta is far from fully covered but the advent of 4G will put even more pressure on cell site densification to improve the quality of service. Small cells and other technologies referred to as “street furniture” such as bus stops and lamp posts will all contribute to a giant leap forward in terms of coverage and capacity.

In the meantime, there is still uncertainty with regards to spectrum and while the 900MHz is expected to be allocated soon, the 1800MHz still needs to be cleared up from 2G congestion. According to the panel, many subscribers are still using 2G but it’s obviously not a profitable business for operators anymore. Switching and clearing spectrum will be a tricky process but a necessary one to correctly work on 4G, which will need more than shared frequency to work properly.

On the towerco side, as operators roll out more 4G, more sites will be needed and, in those areas where towers are already in place, sharing will be the obvious and fastest option. The tower industry has experienced healthy years for both build-to-suit (BTS) and co-locations with BTS often being the last resort as operators were increasingly incentivised to colocate by a combination of regulatory and time to market pressure. To date though, a tower that is 200 meters away from the target area may not be close enough to work with 4G technology, so a new PoS might be the only option.

The panel agreed that while other markets such as Malaysia are generally well covered, this isn’t the case for Indonesia which still has a long way to go to achieve world class services. And while this isn’t necessarily true for Telkomsel which dominates the market, the other operators are left with considerable financial pressure and often see outsourcing as the only option.

Towercos compete differently than other industries as the product they offer isn’t interchangeable and business opportunities arise as a function of an operator looking for a site in a specific location. The towerco that has a presence there wins and often, the operator will only care about the location and the financial conditions offered. In the case of BTS, the situation is different and the primary consideration is speed to market.

Thanks to the existing regulation, Indonesian towercos cannot overbuild and competition keeps rental fees ‘honest’ and ensures speed to market and smart site hunting. However, if a tower is located in the right spot, operators aren’t likely to mind paying higher prices if they know their ROI is safe.

Indonesia’s towercos react differently when BTS projects call for a tower that might initially attract only a single tenant. STP is mainly focused around Jakarta and they are more open to opportunities with medium-term (24 month) potential for additional tenants. Protelindo manages its finances in such way that allows it to build single tenant towers and KIN is open to do so in specific areas.

The government has done a good job in improving the status of the grid and cost of power is coming down as more sites are connected to the grid. The need for backup power is slowly decreasing and overall, the local power industry is moving in the right direction which is surely good news for the telecom sector.

Power is a pass through in Indonesia; operators retain responsibility for power even if they’ve sold or co-located on a towerco site. In fact, a few years ago electricity used to be part of the lease price which meant that any changes in the utility cost would reflect in the final bill to operators. Right now, the two prices are disconnected which seems a win-win situation for both parties.

KIN raised its first debt back in November 2014 and the process was relatively painless. Being the first debt in months, banks were quite open to discussion and this is in line with the growing flow of investments in the country. In fact, as long as Indonesia and its native industries keep doing well, investors will look favourably at injecting cash into the country.

On the currency side, as local banks aren’t involved in the debt business within the towerco sector, offshore banks tend to step up. That said, local banks could potentially get involved by learning and understanding the business model. Smaller towercos which have now been acquired by larger organisations used to borrow from local banks and were being treated like SMEs. Therefore, they often had to securitise everything in order to access any credit. Tough conditions made it very hard for them to do business and when acquired, they were glad to free themselves from that burden.

Protelindo recently issued their first rupiah bond which they defined as an education process. The company has come a long way since its first loan in U.S. dollars back in 2008 and dealing with local bond investors has been easier now that they are more aware of local dynamics.

On the equity side, towercos do have money lined up in case a good deal comes up and conditions to access capital improve as the companies grow and expand – as we’ve seen in the case of Tower Bersama, Protelindo and STP.

In conclusion, the panel once more agreed on one key concept. The tower industry is complementing and working with the telecom industry and needs it to thrive. And although sometimes in disagreement, the basic concept of cooperation between parties and healthy competition appeared very clearly during this insightful debate among key players of the Indonesian tower sector.