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ndonesia's mobile phone industry has grown very rapidly during the past five years, making it one of the fastest growing businesses in the country.

Indonesia has 11 mobile phone providers with total subscribers of about 160 million. The industry has, however, been marked by an intense price war during the past several years as most providers have chosen to use "low price" strategies to increase their market share.

Telkomsel president director Sarwoto Atmosutarno said that the intense competition in the industry could lead to mergers between small providers because their revenues may no longer be able to cover their high operating costs.

"In less than three years from now, there will be only five or six mobile phone providers as compared to 11 providers at present," he said during an interview with The Jakarta Post last week.

In the interview, Sarwoto also explained about Telkomsel's strategy to cope with cutthroat competition and the company's expansion into broadband wireless Internet services. Below are excerpts from the interview.

Question: Competition in the Indonesian mobile phone sector has been intense lately as providers have offered low prices to be able to increase their subscriber base. What are the real conditions in the market?

Answer: The Indonesian mobile phone market has grown very rapidly in recent years and has also provided a significant contribution to the country's economy.

The number of mobile phone subscribers has also increased significantly as services are becoming more affordable.

The average penetration rate has reached more than 65 percent (of the total population). In big cities the rate is far higher than that. In Jakarta, where many people often have more than one handset the penetration rate is exceptionally high reaching 140 percent. If the subscribers include fixed line users, the penetration rate could reach 170 percent. With such high penetration rates, providers have been forced to reduce their profit margins as low as possible in order to be able increase their subscribers.

With such intense competition, is still there any room for future growth?

The high penetration indicates that the potential for market expansion is getting smaller.

But, despite the high penetration rate, there is still room to grow especially for high value-added services such as broadband wireless Internet services.

The truth is that with the decline in overall market potential, existing providers will (have to) be more aggressive in their efforts to increase or at least maintain their market shares. It means competition will become more intense.

There are rumors about mergers and takeovers taking place in the industry. What is really happening out there?

There are now 11 providers competing in the country's mobile phone market. Most of the providers have tried to offer their best prices in order to be able to win new subscribers or maintain the existing ones.

This has triggered price wars among them. This is intensifying until now. With this background the consolidation of the industry cannot be avoided.

A number of providers have planned to merge in order to be able to cut operating costs. Two CDMA providers, for example, are negotiating possible mergers. We will see, let's say in less than three years, that there will only be a total of five or six mobile phone providers in the country.

With the decline in market potential, the business is becoming more difficult for small players. With an ARPU *Average Rate Revenue per Unit* of less than US$1 per month, it will be difficult for small players to cover high operating costs.

With such a low ARPU, it will be hard for them to survive because with the same service they (will) have to provide the same technology and the same coverage as those offered by big players.

How does Telkomsel cope with such high competition?

Telkomsel is now the market leader in the industry, with a 50 percent market share. The number of our subscribers has reached about 80 million, while our services have covered about 85 percent of the population.

With the level of the competition we are seeing today, it won't be easy to maintain market leadership. We have successfully become the market leader thanks to our achievement in expanding our coverage to almost all parts of the country.

But, to become a market leader was not easy. During the past years, we have spent billions of US dollars to build infrastructure so that people wherever they are can use our services.

Now, we are investing more in broadband infrastructure so in future, users will not only use our service just to talk or to send text messages but also to use our high-speed wireless Internet service.

We hope with new investment in infrastructure, the broadband wireless Internet service will become the main contributor to our future revenue.

For this purpose, this year we will spend about US$1.3 billion on improving broadband infrastructure. At present we have provided broadband wireless Internet services in 24 major cities, but still with limited coverage.

The larger part of the investment will be used to improve the broadband services coverage in these 24 cities.

With this program we hope that within the next two or three years our broadband service will be fully updated. It means we will be able to provide broadband wireless Internet services with a high transmitting capacity in most parts of these cities.

How does the price war affect Telkomsel's revenues?

The price war has affected our profit margin. But the growth of our revenue could be still maintained at about 10 percent or within our target level.

In 2009, we booked total revenues of about Rp 41 trillion ($4.38 billion), about 10 percent up on the previous year's level. We could not indicate our actual net profit because it is being audited now.

But the growth rate is still within our target of about 10 percent. Except for 2008, we have still been able to maintain an annual growth of 10 percent despite the price war. In 2008 we could not manage this because the price war was so intense.

This year, there will be no major change in the mobile phone market. The competition seems to be even more intense as some operators will likely launch more offensive approaches in their marketing strategies.