Telkomsel and IndiHome to Merge Their Broadband Business But the Road Ahead Calls for Telkomsel to Tread Carefully

Indonesia’s Telkomsel and Telkom Indonesia’s broadband arm, IndiHome, have entered an agreement to merge, whereby the fixed broadband (fiber) and mobile broadband (cellular) will form one entity that is Telkomsel. This merger will position Telkomsel as an IDR58.3 trillion (~US$3.9 billion) corporation and will see Indonesia’s largest Communication Service Provider (CSP) and fixed broadband provider come together. Presently, Telkom holds a 65% stake in Telkomsel, while Singapore Telecommunications (Singtel) holds a 35% stake in the company. Meanwhile, Telkom owns 100% of IndiHome. Upon completion of the merger, it has been agreed that Telkom will own 69.9% of Telkomsel, whereas Singtel’s shares in Telkomsel will decrease to 30.1%.

The integration of IndiHome into Telkomsel is part of Telkom Group’s Fixed Mobile Convergence (FMC) initiative, which sets out to promote digital inclusion and a digital economy in Indonesia, through providing broader coverage and more reliable broadband connectivity. Indonesia had a fixed broadband penetration rate of 4.54 subscriptions per 100 people as of 2021. Explaining the rationale behind this initiative, this merger will seek to beef up Telkomsel’s standing in the market as a solution provider with a range of comprehensive broadband solutions among its competitors. The Telkom Group demonstrated that Average Revenue per User (ARPU) for fixed broadband of ~US$17.71 (IDR270,000) is significantly higher than its mobile ARPU of ~US$2.88 (IDR44,000), suggesting the high growth potential of broadband services in Indonesia.

Aside from fixed broadband through traditional means, such as fiber, one of Telkomsel’s service offerings includes Telkomsel Orbit, a fixed wireless broadband service. Indonesia has been marked as one of the countries where Fixed Wireless Access (FWA) can help reduce the digital divide. Considering that the geography of the country is spread across 18,000 islands, ensuring widespread broadband coverage proves to be a challenging task. Moreover, there are limitations with setting up fiber across a country like Indonesia, namely the higher costs of deploying fiber in rural areas than less densely populated areas with terrain constraints on islands. More recently, the sinking rate of major cities in Jakarta makes fiber more challenging and perhaps unsustainable to deploy in the long term. By integrating IndiHome into Telkomsel, the combined Telkomsel will look to benefit from economies of scale and save costs on network infrastructure towers from the greater usage and convergence of networks.

Moving forward with the support of IndiHome behind Telkomsel, Telkomsel will admittedly be better positioned to enter the fixed broadband market. Considering that Telkomsel holds the largest market share in the Indonesian telecommunications market (~66%) as of 2022 and IndiHome holds 75.2% of the broadband market, the formation of the new entity will provide the company avenues for greater revenue growth in broadband. Other factors, such as geography, government initiatives, the increasing dispensable income in the country (inferred from rising Gross Domestic Product (GDP)), and the increasing adoption of FWA services in the country will arguably impact the rate of broadband penetration in the country, though it will be interesting to observe how Telkomsel tackles the challenge.

The market in Indonesia has continued to be increasingly competitive, with multiple options for broadband connectivity at various price ranges and data rates. CSPs have also been faced with the challenge of offering unique services due to the affordability of data packages compared to neighboring countries. With low commitment and easy management, Telkomsel Orbit allows users to access Internet connectivity on a “no fixed subscription” basis and allows users to purchase data according to their needs. CPE prices range from US$38 (IDR579,000) to US$72 (IDR1,099,000), with a free 150 Gigabytes (GB) for 6 months and additional data packages cost between US$1.37 (IDR21,000) for 10 GB and US$8.60 (IDR131,000) for 100 GB. On the other hand, IndiHome’s Fiber Broadband plans are cheaper, ranging between US$16.70 (IDR255,000) and US$30.80 (IDR470,000) monthly for broadband packages depending on speed (30 Megabits per Second (Mbps) or 50 Mbps) and type of plan (normal or bring your own device).

However, while it may be beneficial for Telkomsel to offer fixed broadband services through both fiber and FWA services, it should be cautioned that there is a risk of one service cannibalizing the business of the other. With Orbit at Telkomsel in the midst of making significant developments to enhance services for consumers now, Telkomsel should caution that its fiber business should not contribute to the loss of its FWA business just before its FWA business can fully reap the fruits of its labor. Perhaps Telkomsel may decide to adopt the following to mitigate the risks of one service eating the other:

• Telkomsel may consider focusing on targeting specific geographies with its FWA services, such as the smaller, underserved, and unconnected regions, whereas the fiber business may be directed toward areas that are more densely populated, such as East and West Java. This way, the digital divide is reduced and fixed broadband rates begin to improve.
• Telkomsel may also evaluate the use of IndiHome’s fiber-optic network to connect more cell towers to enhance its mobile broadband coverage. With Orbit tapping into the cellular networks as well, this shift of using fiber to power Telkomsel’s celular networks could ensure that both businesses don’t cannibalize each other. Furthermore, an advantage of this would be that Telkomsel can provide consumers with more competitive rates for mobile broadband and FWA plans.

Ultimately, it is expected that this merger will bring about a new horizon for the broadband market in Indonesia. Telkomsel will be presented with a new set of opportunities and possibly even challenges to boost its business revenue and its brand as a whole.