CDMA fast becoming GSM challenger; Which will prevail?

Teguh P. Hartanto, Senior Analyst

With the number of wireless telephone subscribers in Indonesia hitting 76 million people at the end of March 2007, how will the cellular landscape evolve going forward?

Indonesia is one of the world's fastest growing wireless markets. As only 34 out of 100 people use cellular phones in Indonesia, still relatively low, the number of wireless subscribers looks set to grow significantly over the next few years. Meanwhile, the competition in securing slices of this growing domestic wireless market has intensified as between GSM and CDMA service providers.

In Indonesia, the wireless industry currently operates both GSM and CDMA technologies. The earlier introduction of GSM technology, first offered commercially in 1991, has enabled it to dominate the industry, as opposed to CDMA, which is relatively new on the country's wireless scene.

At the end of March 2007, GSM accounted for approximately 89 percent of total wireless subscribers, while the remaining 11 percent were signed up to CDMA services. Nonetheless, despite GSM's dominance of the market, the market share of CDMA has shown solid growth compared to the 9 percent market share booked a year earlier.

Apart from its earlier introduction, GSM boasts a variety of added features, i.e., 3G, international roaming and affordable handsets. But these additional features are also now available from CDMA.

CDMA third generation technology has recently been introduced through CDMA2001xEVDO, an evolutionary technology that supports peak download speeds of up to 2.4 Mbps. This enables subscribers to enjoy broadband internet, advanced multimedia and customized data applications.

International roaming is now also available from CDMA, although it is worth noting that domestic roaming users only account for a mere 20 percent of total wireless subscribers; this means that the remaining 80 percent do not avail of roaming services.

Meanwhile, the CDMA handset pricing issue has also been resolved. Consumers can now easily find CDMA handsets for only Rp 300,000. In fact, reports indicate that there are nearly 1,500 different CDMA handsets models, supplied by 86 manufacturers, currently on the market.

In the light of these developments, we believe that GSM and CDMA are now operating on a par, which leads us to the issues of coverage and prices. Unlike CDMA, most GSM providers operate nationally.

Currently, Telkom and Indosat are the only nationwide CDMA operators.

As part of the liberalization of the telecommunications market, the government recently granted nationwide licenses to an additional two CDMA operators.

This will subsequently accelerate the penetration of CDMA outside Jakarta and West Java, and may allow CDMA operators greater flexibility to expand further.

They anticipate an additional 7 million new CDMA subscribers in 2007, representing one-third of the expected total additional wireless subscribers. Meanwhile, GSM is expected to pick up the remaining two thirds.

We believe that the strong growth in CDMA will remain at the forefront as potential new subscribers are likely to come from the mid to low income segments, which tend to be price sensitive.

Looking at their lower cost structure, CDMA fixed wireless services offer more competitive pricing schemes than GSM cellular-based services in general, and, to a lesser extent, CDMA cellular services -- the licenses for CDMA operators are divided into full mobility (cellular) and limited mobility (fixed wireless).

Although the fixed wireless service was originally intended to replace fixed wire-lines, people have come to regard fixed wireless as an alternative product to cellular. Despite its limited mobility, such services offer the flexibility of making calls from different prefix numbers.

The uneconomically high cost of investment for traditional fixed lines should provide tremendous potential for fixed wireless growth going forward, particularly in sparsely populated rural areas.

Furthermore, its 800MHz operating band is tailor-made for such areas, as signals on this bandwidth travel farther and require fewer relay towers, enabling wider coverage.

By comparison, a tower relaying signals on the 800MHz spectrum can cover an area of up to 2,700 km2, vis--vis 553 km2 on the 1900 MHz spectrum. This consequently lowers the average investment cost per subscriber to an estimated US$35-$50.

Taking the above rationales into account, there are solid reasons for the expansion in CDMA's market share to approximately 11 percent of all wireless subscribers in 2006 vis--vis 1.4 percent in 2003 (following the debut in the market by Telkom).

We project that CDMA will secure an additional 7 percent share of the total wireless market, gaining up to 19 percent by the end 2008. This will translate into a total CDMA subscriber base of over 20 million. Nonetheless, GSM will continue to dominate the market, serving 81 percent of all subscribers.
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