Indonesian telcos could enjoy better margins as more take up home and mobile broadband bundles

TELCOS in Indonesia, such as Telkom and XL Axiata, have begun introducing fixed and mobile broadband bundles to capitalise on growing demand for video streaming. As takeup rates improve, analysts said companies could enjoy reduced customer churn and higher margins.

While fixed broadband infrastructure has expanded slower than mobile broadband infrastructure in the past, Maybank Sekuritas Indonesia analyst Etta Rusdiana Putra said telecoms operators have been expanding their fixed networks rapidly in recent years.

“Two decades ago, communication was only voice and SMS; and the cellular network is more mobile and convenient than a fixed phone line. Hence, demand for mobile services was higher than for fixed lines,” he said.

“However, since the 2010s, Indonesians have been adopting video streaming. Hence, customers demand fast, stable, and cheaper Internet access.”

According to Putra, fibre-to-the-home (FTTH) has become the favourite as it offers unlimited data quota, albeit with a fair usage policy; is faster than mobile networks; and has a fixed price of roughly 300,000 rupiah (S$26.30) per month.

As demand for fixed broadband grows, the opportunity to bundle fixed and mobile broadband services has also emerged.

RHB analysts predict that such a bundling strategy could lead to lower churn rates, as such contracts tend to last for a minimum of one year.

XL Axiata was the first to offer such bundles in October last year. RHB said it remains to be seen how profitable such bundles will be, but subscribers are expected to move to larger data bundles.

XL Axiata and its Malaysia-listed parent company, Axiata Group, acquired 66 per cent of Link Net, a fixed broadband and cable TV provider, in June last year.

In October 2022, both companies began offering packages that bundle fixed and mobile broadband service as well as other cable TV and over-the-top streaming services at prices starting from 300,000 rupiah.

Similarly, Telkom has partnered with Singtel associate Telkomsel to sell such bundles. Singtel has a 35 per cent stake in Telkomsel.

Telcos may have been hesitant to introduce such plans in the past due to worries over the impact on margins.

Steven Hall, a partner for communications, media and technology at consultancy Oliver Wyman, said that in certain markets, incumbent operators may have been concerned about such plans raising expectations of discounts and contributing to lower average revenue per user (ARPU).

Still, Putra is confident that the telcos will be able to improve their ARPUs with their bundles.

“For Telkom, the cellular margin is higher at 34 per cent versus fibre-to-the-home (FTTH) at 30 per cent in the nine months ended September 2022,” he said. “But bear in mind that this is due to the low network utilisation rate in IndiHome.”

Roughly 25 per cent of IndiHome’s installed network is in use, and Putra sees upside as network utilisation rate increases.

Furthermore, he noted that fixed broadband is cheaper to run as it does not require active radio access network equipment that mobile broadband requires. Companies can also save on capital expenditure on their mobile networks as some network load is shifted to fixed networks.

While XL Axiata was a first mover in the FMC space, Putra believes Telkom will benefit the most as it plans to merge IndiHome and Telkomsel by the end of this year.

“We believe (there will be) no internal competition when IndiHome is under Telkomsel, as both can integrate the marketing strategy, and we expect higher efficiency in IndiHome,” he said.

RHB analysts, too, expect Telkom to be the greater beneficiary as it has a larger network infrastructure than XL Axiata.

Pricing upside

Analysts also expect telcos in Indonesia to raise prices this year.

Citi analysts Arthur Pineda and Luis Hilado noted in a Jan 17 note that telco Indosat raised pricing for its Hutch Tri sub-brand in January this year.

The company raised the price of its entry-level 3GB monthly plan to 25,000 rupiah, from 15,000 rupiah, while the top-end 18GB monthly plan saw its price raised to 65,000 rupiah, from 60,000 rupiah.

“This opens room for other operators such as Telkom and XL to revive their price tweaks, after having taken a pause for most of H2 2022 against the backdrop of weakened consumer spending amidst inflationary pressures,” the Citi analysts said. Citi has “buys” on Indosat, XL Axiata and Telkom.

Putra sees the repricing by Indosat as positive for the industry: “We expect ARPU to improve as the operators aim to get higher ticket sizes. We think ARPU and the number of subscribers are more important than the data yield.”