When 6,000 Islands Work From Home, Expect the Urge to Merge

(Bloomberg Opinion) -- “It’s time for us to work from home, learn from home, worship at home,” Indonesia’s president announced in the early days of the pandemic in March. What Joko Widodo couldn’t have known back then was how social distancing would bring rivals in the country’s competitive telecommunications industry closer together. Credit for consolidation must go where it’s due: to the sprawling geography of the world’s largest archipelago.

The investment required to serve Asia’s third-biggest population spread across 6,000 inhabited islands — out of a total of at least 17,000 isles and atolls — is already large. But with 197 million Internet users spending more time at home guzzling data, it’s pointless and wasteful for five mobile operators to seek to duplicate expensive infrastructure in a nation stretching from the Pacific Ocean to the Indian Ocean. And sure enough, Hong Kong’s CK Hutchison Holdings Ltd. is nearing a deal with Qatar’s Ooredoo QPSC to combine their Indonesian mobile operations in a cash-plus-stock deal, Bloomberg News reported this week.

A merger will be welcome news. A smaller industry will be less likely to become a casualty of what's likely to be a slow post-Covid-19 economic recovery next year. Fitch Ratings expects the Indonesian telecom sector’s leverage to increase toward 2 times funds from operations in 2021, from 1.7 this year, “amid rising network investment to meet demand in mobile data and fiber broadband services.”

There’s a lesson to be learned from India, where the three top operators’ combined debt burden is more than twice as high as Indonesia’s. There, profitability has bled to a point where an early rollout of fifth-generation mobile services looks doubtful.  Allowing Hutchison’s 3 Indonesia to combine with the Qatari-controlled PT Indosat, the No. 3 player, might help Widodo’s administration avoid inordinate delays in introducing 5G. Rapid digitization, which has helped the commodities exporter withstand the end of a Chinese demand-led boom, will spread faster to newer applications like the Internet of Things. Indonesia will be able to build on its success in being Southeast Asia’s premier breeding farm for tech unicorns — startups valued at $1 billion or more. 

Consolidation is inevitable, given the unique — and uniquely challenging — geography. You can already see that in 4G coverage.  The differences in network quality can be pretty stark outside of Java, the most-populated island. Telkomsel Indonesia, the dominant state-run operator, was recently rated 8.3 in nationwide 4G coverage experience by Opensignal Ltd. on a scale of 0 to 10. Hutchison’s 3 Indonesia scored just 4.4. Telkomsel users enjoy 4G coverage in many more locations than subscribers of other networks. 

The pandemic has put pressure on other carriers to raise their game and make heavy investment. No. 2 player XL Axiata’s download speed of 11.3 megabits per second is now within striking range of  Telkmosel’s 12.7 Mbps, according to Opensignal. But where XL Axiata appears to have missed out is in striking a partnership of its own — so as to lighten capacity expansion load.

In 2019, the Malaysian-based parent Axiata Group Bhd., controlled by the country’s sovereign wealth fund Khazanah Nasional Bhd., tried unsuccessfully to merge its Asian operations with Norway’s Telenor ASA. Then, in May this year, Axiata Chief Executive Jamaludin Ibrahim told Reuters that he was talking to all Indonesian players, except the largest. But if Hutchison and Indosat consummate a deal, then the Malaysian telco’s options for doing an Indonesia-specific transaction are going to be rather limited. That will once again mean looking for a regional partner. That’s easier said than done when all global networks are looking to serve their own core customers’ heightened hunger for data in the post-pandemic world. 

Indonesia’s appetite is just getting whetted. In a McKinsey & Co. survey of the country this year, 28% of respondents said they streamed more online content than they did before lockdown, and 68% said they would continue to watch streamed content once the crisis had passed. Then there’s fintech and commerce. Just this month, Gojek, the most valuable startup,  paid about $160 million to increase its stake in PT Bank Jago to more than 22%. Also this month, e-commerce giant PT Tokopedia said it has hired Morgan Stanley and Citigroup Inc. as advisers to speed up its plan to go public.

Good things are happening to Indonesia. The key to sustaining the enthusiasm is to make sure that the carriers of digital bits and bytes don’t get overwhelmed by the nearly 3,200 miles of geographic breadth — or customers who’re glued to their phones more than ever before. A little less social distancing between rival networks won’t be a bad thing at all.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

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