3G spectrum auction: Will consumers win?
David O'Brien, Jakarta

The telecommunications field continues to dominate the headlines. Whilst other sectors seem to battle inertia in implementing reforms, deregulation and attracting investment, telecommunications seems to be setting the benchmark. Whilst all appears rosy from the outside, looking a little harder provides a view of the sector as a benchmark for risk assessment in doing business in Indonesia.

The recent auction of 3G spectrum seems like a big success story for the government. It will reap over US$1 billion over ten years across the five operators. These are the incumbent GSM operators of PT Telkomsel, PT Excelcomindo Pratama and PT Indosat along with the existing 3G licence holders PT Natrindo Telekomunikasi Sellular and PT Cyber Access Communication will likewise be required to meet the same obligation as the lowest bidder in the auction.

The controlling shareholders at Maxis (51 percent owner of Natrindo) and Hutchison (60 percent owner of Cyber Access) must be scratching their heads. They paid US$100 million and $120 million respectively for control of companies that one assumes they believed had met all regulatory and financial commitments to begin rolling out 3G services. However shortly after the acquisition from the original "beauty contest" winning companies the government announced a retendering of 3G licenses.

The original beauty contest process was less transparent than the current auction process and it is unclear what fees were required for the licensees granted in this manner. The message that it pays to do your detailed due diligence and risk assessment when investing in Indonesian assets is reiterated by this whole process.

Maxis as the cash rich number two from Malaysia would seem to have been a hasty response to Telekom Malaysia's acquisition of XL. From Hutchison, owned by Li Ka Shing the acquisition seems part of his ambitious global push in to 3G. With issues associated with his previous acquisition of the international container terminal at Tanjung Priok, it will be interesting to see if super man (his nick name amongst Hong Kong investors) prevails or Indonesia is his kryptonite.

At present they are still digesting the facts and the feeling they may have fallen for the old 3 card trick. They are potentially facing a liability of twice the GSM incumbents. The original 3G winners were granted 10 MHz of frequency in their initial licence agreements, as opposed to the 5 MHz each incumbent tendered for in the auction.

It is unlikely that there will be sufficient demand capacity to use this additional spectrum as growth will take time and they are facing strong incumbents. Larger licence fee costs will place them at a disadvantage if trying to attract new customers with lower pricing than incumbents. To justify the expenditure there would need to be development of bandwidth intensive applications for use via handphone and customers willing to pay for such.

The licence fees appear reasonable when benchmarked against recent other auctions. The bidders have enough experience from their major international shareholders to ensure the irrational exuberance of the early European auctions was not repeated. The fee was still sufficient that the more budget CDMA plays of Bakrie and Telkom were unwilling to follow thee high bids as they were beyond their low cost business models.

It is unclear now if the consumer will be a winner or not. To date the consumer has not particularly benefited from so called "competition" in the GSM sector with charges amongst the highest regionally. All players now have a common shareholder in Temasek Holdings which ultimately owns 5 percent of Telekom Malaysia (majority owner of XL), 65 percent of Indosat and 35 percent of Telkomsel.

In the Indonesian market there has been little evidence of innovative marketing offers that impact pricing. Margins remain at nearly 60 percent, whereas they have fallen to around 40 percent in more mature markets.

It will be difficult for operators to make an early 3G return. The most optimistic estimate of users is 10 million by 2010. The licenses granted require each licence holder to develop its own network. This is great for equipment suppliers but it is unclear how it will help consumers.

The total build cost to service this customer base could be another $5 billion on top of the licence fee to be recaptured. It is becoming more common inn other countries for competing operators to share infrastructure in order to limit individual capital expenditure requirements. This has already occurred in Indonesia with Bakrie and Star One which will plan to share their networks in West Java and East Java respectively.

A new entrant will need an innovative approach to wrest control from the incumbents that have all the existing high revenue customers on their books. There is one regulatory change which is now slowly gathering pace and should assist new entrants. This relates to a cost based approach to interconnection charges.

Presently interconnection charges are set by network operators and it is viewed as a prime revenue source. This is particularly the case for Telkom which owns the fixed copper networks and collects a fee every time a fixed line phone is used to make or receive a wireless call.

The move to a regulated return on the audited long run incremental cost of participants will add transparency to the cost base. Such an approach may also be applied further to a potential open access regime as the sector is further deregulated. This would allow new players to access infrastructure of the incumbents at competitive price levels and deliver innovative services.

The next round of events should prove enlightening and hopefully consumers may be the winners and the lessons learned may be applied to other sectors.

<i>The writer is a technical advisor at CSA Strategic Advisory. CSA helps businesses through a combination of "soft" behavioral and "hard" financial advice. He can be reached at dobrien@csadvisory.com.
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